Accounting Standard 6
The following is the text of the revised Accounting Standard (AS) 6,‘Depreciation Accounting’, issued by the Council of the Institute of CharteredAccountants of India.* Accounting Standard (AS) 6, Depreciation Accounting, was issued by the Institutein November 1982. Subsequently, in the context of insertion of Schedule XIV in theCompanies Act in 1988, the Institute brought out a Guidance Note on Accounting forDepreciation in Companies which came into effect in respect of accounting periodscommencing on or after 1st April, 1989. The Guidance Note differed from AS 6 inrespect of accounting treatment of (a) change in the method of depreciation, and (b)change in the rates of depreciation. It was clarified in the Guidance Note, with regardto the matter at (a), that AS 6 would be revised to bring it in line with the recommendationsof the Guidance Note.Based on the recommendations of the Accounting Standards Board, the Councilof the Institute at its 168th meeting, held on May 26-29, 1994, decided to bring AS 6in line with the Guidance Note in respect of both of the aforementioned matters.Accordingly, it was decided to modify paragraphs 11, 15, 22 and 24 and delete paragraph19 of AS 6. Also, in the context of delinking of rates of depreciation under theCompanies Act from those under the Income-tax Act/Rules by the Companies(Amendment) Act, 1988, the Council decided to suitably modify paragraph 13 of AS6. An announcement to this effect was published in the August 1994 issue of TheChartered Accountant (pp. 218-219).AS 6 is mandatory in respect of accounts for periods commencing on or after1.4.1995. Reference may be made to the section titled ‘Announcements of the Councilregarding status of various documents issued by the Institute of CharteredAccountants of India’ appearing at the beginning of this Compendium for a detaileddiscussion on the implications of the mandatory status of an accounting standard.From the date of Accounting Standard (AS) 26, ‘Intangible Assets’, becomingmandatory for the concerned enterprises, this Standard stands withdrawn insofar asit relates to the amortisation (depreciation) of intangible assets (See AS 26).1Attention is specifically drawn to paragraph 4.3 of the Preface, according to whichAccounting Standards are intended to apply only to items which are material.
Last edited by Admin; 25-03-2010 at 05:22 PM.
A. Facts of the Case
1. A company (hereinafter referred to as ‘the ancillary’) manufactures and supplies certain components to a manufacturer of motor cars (hereinafter referred to as ‘the principal manufacturer’).
2. The manufacture of these components entails the use of moulds/dies. Some of the moulds/dies are supplied by the principal manufacturer while others are arranged by the ancillary.
3. In respect of moulds/dies arranged by the ancillary, the two parties agree on what is termed as ‘tool cost’. The tool cost is agreed to be spread over a certain number of units of the component. For example, the parties may agree that the tool cost of, say, Rs.7,35,000 will be amortised over 1,50,000 units. The amortisation rate in this case works out to Rs. 4.90 per unit.
4. In some cases, a part of the agreed tool cost is paid by the principal manufacturer in lumpsum and the balance is amortised in the above manner.
5. While working out the cost of a component, the ancillary includes amortisation of the agreed tool cost as one of the elements of cost. In respect of moulds/dies supplied by the principal manufacturer, no tool cost is included in the cost of the components.
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the procedure followed by the ancillary in relation to costing of the components is proper.
Based on the above, the Committee is of the opinion that from accounting angle, the tool cost relating to moulds/dies to be included in the cost of components manufactured by the ancillary manufacturer is represented by the depreciation charge in respect of the relevant moulds/dies, computed in accordance with the requirements of AS 6. The Committee recognises that the amount agreed to be paid by the principal manufacturer towards tool cost relating to moulds/dies may be different from the amount of depreciation computed in accordance with AS 6
Opinion finalised by the Committee on 22.4.2000.