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June 11, 2012

Depreciation from date assets are ready to use and not put to use..

Companies Act
As per Para 20 of AS 10 it is written that the cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.

As per Para 3 of AS 16 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use.

As per para 19 of AS 16 Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Thus capitalisation stops when the asset is intended to be used, nowhere does AS 10 or AS 16 refer to date of use as cut of date for capitalisation. Both the AS are unanimous to stop capitalisation on date when the assets are ready for intended use.

But Capitalisation of exp and charging depreciation on assets are two separate things. For date from which depreciation is to be charged we would have to visit AS 6.

As per AS -6, Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

In other hand, Depreciable assets are assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.

Thus depreciation should be charge according to AS-6 if it is ready for put to use in the business.

It has been observed by ICAI expert committee that:-
“Since according to accepted accounting principles, depreciation also arises out of efflux of time, it would be necessary for the purpose of section 205 to provide for depreciation even in respect of assets which are not in use during any financial year”
The Committee also notes that it has been decided by courts in certain cases  that as soon as an item of asset is installed and is ready for use, depreciation can be provided even though the said asset is not actually used for the whole or part of the relevant financial year.

Comanies Act Sec 350 – Ascertainment of depreciation.

The amount of depreciation to be deducted in pursuance of clause (k) of subsection
(4) of section 349 (Section 349 refers deductions to be made from revenue for arriving at net Profit) shall be the amount of depreciation on assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year at the rate specified in Schedule XIV: