📌 Schedule II — Depreciation (what it is, what the schedule requires)

What is depreciation according to the Companies Act?

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Under Schedule II of the Companies Act, 2013, useful lives are prescribed for asset classes; companies should use these lives as a starting point for accounting depreciation, applying component accounting where significant parts have different useful lives.

Key Schedule II rules (practical summary)

• Useful life approach: Schedule II lists useful-life guidance for many asset types. Companies must normally adopt those useful lives for financial reporting.
• Depreciable amount = Cost of the asset − Residual value (residual value ordinarily ≤ 5% of cost).
• Component accounting: Significant parts of an asset with different useful lives must be depreciated separately.
• Shift-use adjustment: Extra depreciation for double/triple shifts (increase by 50% for double shift period; 100% for triple shift period).
• Transitional rules: On adoption of Schedule II, companies adjusted carrying amounts over remaining useful life; if remaining life is nil, immediate write-off rules applied (disclosed in opening reserves).

📌 How to compute depreciation (step-by-step — SLM example)

Use Straight-Line Method (SLM) for Schedule II allocation (unless justified otherwise and disclosed).

Note: Show these calculations in the fixed-asset schedule for audit clarity.

📌 Common asset lives (practitioner quick-reference)

(This is a condensed reference — always check the full Schedule II list for specifics.)

📌 Component accounting — why it's important

If an asset has parts with materially different replacement cycles (e.g., turbine rotor vs tower), you must identify significant components and depreciate them over their own useful lives. This avoids misstatements and provides clearer capex planning and impairment indicators.

Residual value — practical guidance

Residual value should normally be ≤ 5% of cost. Treat estimates conservatively; auditors commonly challenge inflated residual values intended to reduce depreciation expense.

Shift-use (double/triple shift) adjustment

When assets are used in extra shifts, Schedule II prescribes pro-rata increases in depreciation. For a double-shift period, increase depreciation by 50% for that period; for triple shift by 100%. Document the shift pattern and pro-rate calculation.

Transitional & disclosure requirements

On adoption, disclose transitional adjustments clearly in opening reserves if remaining useful life was zero or modified.

Disclose depreciation policy, method, useful lives when different from Schedule II, and fixed-asset reconciliation in notes to accounts (Schedule III layout).

📌 Comparison: Depreciation under Schedule II vs Income-tax Act (why they differ)

Fundamental difference

Companies Act (Schedule II): For financial reporting — uses useful life (SLM commonly).

Income-tax Act: For tax computation — uses block-wise Written Down Value (WDV) rates (front-loaded in early years).

Because objectives differ (true & fair presentation vs tax policy), timing differences arise leading to deferred tax assets/liabilities.

Always compute both: book depreciation for financial statements and tax depreciation for tax returns; reconcile differences and book deferred tax as required by accounting standards.

📌 Schedule III — Financial statements: formats and disclosure expectations

What Schedule III prescribes

• Standardized presentation for Balance Sheet, Statement of Profit & Loss, and Notes to Accounts.
• Clear current / non-current classification for assets & liabilities.
• Specific note disclosures for fixed assets: gross block, additions, disposals, accumulated depreciation, and net block.
• Requirement to disclose depreciation policy, useful lives if different from Schedule II, and reconciliation of carrying amounts.

Notes to accounts — what auditors watch for

• Fixed asset note with gross block, accumulated depreciation, net block.
• Policy note covering method (SLM/WDV), residual value policy, component accounting approach.
• Related party transactions note (AOC-2 reference).
• Cross-reference of Board's Report disclosures with notes in financial statements.

Practical presentation checklist for Schedule III

• Ensure face of the balance sheet follows Schedule III headings.
• Provide robust fixed-asset schedules for audit.
• Disclose changes in estimates, prospective adjustments, and reasons for any deviation from Schedule II.

📌 Schedule VII & CSR — what qualifies and how to comply (link with Section 135)

Section 135 & Schedule VII in short

Companies meeting thresholds (net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore in the previous year) must constitute a CSR Committee and spend at least 2% of average net profit (last 3 years) on CSR activities listed in Schedule VII.

Schedule VII eligible activities (high-level)

Eradicating hunger and poverty; promoting education; promoting gender equality; preserving environment; rural development; healthcare; skill development; support to national causes; disaster relief; contributions to incubators for promoting startups, etc.

Practical tips to ensure CSR spend qualifies

• Map project to specific Schedule VII clause.
• Maintain project documentation: MOUs, invoices, beneficiary lists, progress reports.
• Ensure funds are spent through eligible implementing agencies (NGOs, trusts, section 8 companies, government bodies) and maintain proof for audit.

📌 Common errors, compliance traps, and how to avoid them

Depreciation / Schedule II traps

• Using arbitrary useful lives (not Schedule II or justified Ind AS alternative).
• No component accounting for significant parts.
• Inflated residual values.
• Poor disclosure in notes.

Schedule III traps

• Mixing Ind AS presentation with old Schedule III formats.
• Missing reconciliations (gross block → net block) in the fixed asset note.
• Not disclosing depreciation method or useful-life deviations.

CSR traps

• Spending on non-qualifying activities and treating them as CSR.
• Lack of project documentation or proof of beneficiary impact.
• Missing CSR Committee meetings & board approvals.

📌 Practical templates & examples (how TaxItEazy helps clients)

• Fixed asset register structure: (columns: asset id, description, date put to use, cost, additions, disposals, gross block, accumulated depreciation, net block, useful life, residual value, depreciation expense year-to-date).
• Depreciation policy one-pager: (method, residual policy, component threshold, rounding rules).
• CSR project pack: (project summary, Schedule VII mapping, MOU template, invoice checklist, impact metrics).

Reconciliation, deferred tax & impairment issues

Track timing differences between book depreciation (Schedule II) and tax depreciation (Income Tax) and book deferred tax per accounting standards (Ind AS 12 or AS 22).

For impairment (carrying amount not recoverable), follow applicable impairment standards (Ind AS) — impairment recognition is separate from routine depreciation.

📌 Extended FAQs — integrated People Also Ask (PAA) + practitioner questions

Below are concise, clear answers to all People Also Ask items you provided, plus additional practical queries students and practitioners search for.

📌 Quick practical checklists (repeatable, for compliance)

Depreciation (Schedule II) checklist

• Fixed asset register maintained.
• Useful life assigned from Schedule II or justified with evidence (Ind AS).
• Residual value policy (≤ 5%) documented.
• Component accounting applied where significant.
• Disclosures in notes per Schedule III.

Schedule III checklist

• Financial statements format aligned with Schedule III.
• Notes include fixed-asset movements and depreciation policy.
• RPT & AOC-2 disclosures cross-referenced.

CSR (Schedule VII / Section 135) checklist

• Test applicability (thresholds).
• Constitute CSR Committee & adopt CSR policy.
• Map projects to Schedule VII.
• Maintain execution & beneficiary documentation.

Final practical recommendations

• Use Schedule II lives as baseline; if you deviate (e.g., Ind AS life or manufacturer justification), document and disclose.
• Reconcile book vs tax depreciation every year and book deferred tax entries.
• Maintain a clean fixed-asset register — auditors ask for it first.
• Map CSR projects to Schedule VII clauses and keep MOUs/invoices for audit evidence.