AS-6 (Revised) Provisions and Reserves

AS-6 (Revised), titled “Depreciation Accounting,” is an important accounting standard issued by the Institute of Chartered Accountants of India (ICAI). It deals with the accounting treatment of depreciation for property, plant, and equipment. This standard, which was revised to align with international practices, provides guidance on how to account for depreciation and related provisions.

Objective:

The primary objective of AS-6 (Revised) is to prescribe the principles for the determination of depreciation and its accounting, ensuring that the cost of tangible assets is systematically allocated over their useful lives. This helps in presenting a true and fair view of an entity’s financial position and performance.

Scope:

AS-6 (Revised) applies to all tangible fixed assets, except for:

1. Assets held for sale: Covered by AS-30, “Financial Instruments: Recognition and Measurement.”
2. Assets arising from construction contracts: Covered by AS-7, “Construction Contracts.”

Definitions:

• Depreciation: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
• Depreciable Amount: This is the cost of an asset less its residual value.
• Residual Value: The estimated amount that an entity would currently obtain from disposing of the asset, after deducting the estimated costs of disposal.
• Useful Life: The period over which an asset is expected to be used by the entity or the number of production or similar units expected to be obtained from the asset.

Recognition and Measurement:

1. Initial Recognition: At the time of acquisition, the cost of a tangible asset should include its purchase price and any other costs directly attributable to bringing the asset to its working condition for its intended use.
2. Measurement after Recognition: After recognition, tangible assets are measured at cost less accumulated depreciation and impairment losses.

Depreciation Methods:

AS-6 (Revised) allows for several methods of depreciation, and the method chosen should reflect the pattern in which the asset’s future economic benefits are expected to be consumed. Common methods include:

1. Straight-Line Method: Allocates an equal amount of depreciation expense each year over the asset’s useful life.
2. Diminishing Balance Method: Depreciates the asset based on a fixed percentage of the book value, which results in higher depreciation charges in the earlier years of the asset’s life.
3. Units of Production Method: Depreciation is based on the asset’s usage, output, or hours of operation.
4. Sum-of-the-Years’-Digits Method: Accelerates the depreciation expense over the asset’s useful life, with higher charges in the earlier years.

The chosen depreciation method should be applied consistently from year to year unless a change is justified.

Revaluation of Assets:

AS-6 (Revised) permits the revaluation of tangible assets. If an asset is revalued:

1. The revalued amount should be the fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses.
2. Revaluation Surplus: Any increase in the carrying amount of an asset as a result of revaluation is recognized in other comprehensive income and credited to a revaluation surplus under equity, unless it reverses a revaluation decrease of the same asset previously recognized in profit or loss.
3. Depreciation on Revalued Amount: Depreciation is calculated on the revalued amount over the remaining useful life of the asset.

Impairment of Assets:

AS-6 (Revised) requires that assets should be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount.

Provision for Depreciation:

1. Accumulated Depreciation: Depreciation should be accumulated systematically over the asset’s useful life, ensuring that the depreciable amount of the asset is fully charged by the end of its useful life.
2. Provisions for Depreciation: Entities must ensure that provisions for depreciation are adequate to cover the depreciation expenses.

Disclosures:

Entities must disclose:

1. The depreciation methods used and the basis for their selection.
2. The useful lives or depreciation rates used.
3. The gross carrying amount and the accumulated depreciation at the beginning and end of the period.
4. A reconciliation of the carrying amount at the beginning and end of the period, including additions, disposals, revaluations, and any impairment losses.
5. The carrying amount of revalued assets and the revaluation surplus.