Depreciation under Companies Act 2013 – Practical Guide to Schedule II

The Companies Act 2013 introduced a fundamental shift in how companies compute depreciation. Instead of prescribing fixed rates, the law now focuses on useful life of assets under Schedule II. This framework applies to all companies for preparing financial statements under section 123 and operates alongside the income-tax depreciation regime.

This write-up provides a structured, user-friendly walkthrough of the key provisions of Schedule II, covering:

  • Core concepts of depreciation and depreciable amount
  • General principles applicable to all assets
  • Special rules for intangible assets, especially toll roads in PPP projects
  • Role of Regulatory Authorities in determining useful life
  • Comprehensive table of useful lives for major asset classes
  • Important notes on pro rata depreciation, residual value, shift working, and transition

The intention is to give company management, finance teams, auditors, and other professionals a ready reference while ensuring that the statutory text (as applicable) remains intact where required.

Core Concepts under Schedule II – Part A

Meaning of Depreciation and Depreciable Amount

  1. Depreciation is defined as a systematic allocation of the depreciable amount of an asset over its useful life.

  2. The depreciable amount is calculated as:

Cost of asset (or amount substituted for cost)
minus
Residual value

  1. Useful life of an asset is:
  • Either the duration for which the asset is expected to remain available for use by the entity, or
  • The total number of production units or similar outputs expected to be derived from that asset.
  1. For the purposes of Schedule II, the term depreciation is deemed to include amortisation as well.

Overriding General Conditions – Useful Life and Residual Value

Without affecting the main definition above, the following additional principles apply:

3[(i) Useful life cap and residual value limit

  • A company should not adopt a useful life longer than what is prescribed in Part C of Schedule II.
  • The residual value of an asset should not exceed 5% of its original cost.

Where a company uses a different useful life or residual value (i.e., departs from the above norms), such variation must be clearly justified and disclosed in the financial statements.

(ii) Treatment of intangible assets

  • For intangible assets, the relevant accounting standards in force will generally govern amortisation.
  • However, there is a specific carve-out for intangible assets in the nature of Toll Roads created under:
    • “Build, Operate and Transfer”
    • “Build, Own, Operate and Transfer”
    • Any other public private partnership (PPP) arrangement involving road projects.

In these toll road cases, amortisation can be computed using a revenue-based method, as explained below.

Amortisation of Toll Road Intangibles in PPP Projects

(a) Method of Amortisation

For toll road intangible assets falling in the above PPP category, the amortisation amount for each year may be computed as:

Amortisation Amount =
Cost of Intangible Assets (A) ×
Actual Revenue for the year (B) ÷
Projected Revenue from Intangible Asset (till the end of concession period) (C)

Where:

  • Cost of Intangible Assets (A)
    = Cost incurred by the company in accordance with applicable accounting standards.

  • Actual Revenue for the year (B)
    = Actual toll revenue collected during the reporting year.

  • Projected Revenue (C)
    = Total projected revenue from the intangible asset for the entire concession period, as submitted to the project lender at the time of financial closure or agreement.

The amortisation pattern must ensure that 100% of the cost of the toll road intangible asset stands amortised by the end of the concession period.

The projected revenue needs to be reviewed and revised annually based on actual collections and latest estimates so that, by the end of the concession, total charge matches total cost.

(c) Illustration

The statutory illustration is as follows:

  • Cost of creation of Intangible Assets : Rs. 500 Crores
  • Total period of Agreement : 20 Years
  • Time used for creation of Intangible Assets : 2 Years
  • Intangible Assets to be amortised in : 18 Years

Projected total revenue from the toll road over 18 years is Rs. 600 Crores, with year-wise figures as under (Year 1 actual, others initially estimated):