PROJECT REPORT ON

STUDY OF ACCOUNTING STANDARD 6 DEPRECIATION

SUBMITTED BY: MANSI KOTHARI PG12031 NEHA ASHER PG12006

PGDM (DIV: A) SEMESTER I ACADEMIC YEAR: 2012 2014

A report submitted to the institute in partial fulfillmentfulfilment of the requirement for the award of PGDM for the year

UNDER THE GUIDANCE OF PROF L. N. CHOPDE

SUBMITTED TO

MET Institute of Computer Science (MET ICS)

CERTIFICATE

This is to certify that project titled STUDY OF ACCOUNTING STANDARD 6 DEPRECIATION is based on the original study conducted by:

Mansi Kothari and Neha Asher Under my guidance and this had not found a basis for the award of any other degree of this institute.

Place: Mumbai Date:10th December, 2012

----------------------------Prof. L. N. Chopde

------------------------------MET INSTITUTE OF COMPUTER SCIENCE

PREFACE

We have made the project report on Aaccounting Sstandard 6 DEPRECIATION. Depreciation is a measure of wearing out consumption or other loss of value of a depreciable asset arising from use and passage of time. We have selected this topic as method of calculating depreciation is different under income tax act, 1961 and the companies act, 1956 and as depreciation can be used as a tool to evade corporate tax. Our period of study is 4 months from Aug2012 to Nov2012 i.e. during semester I. Our source of study is the booked named Indian Accounts Standards by Rawath, annual reports of different companies for the year 2011- 2012 and explanation of AS 6 from internet.

ACKNOWLEDGEMENT

The project undertaken by us was quite an enriching experience which helped us in upgrading us knowledge and getting a practical insight of the subject. We would like to thank C.A. Sunil Karve Founder, Trustee and Vice Chairman, Prof. V.V.Naik Course Coordinator of MET Institute of Computer Sciences. We would like to sincerely offer our deep gratitude to Prof. L.N. Chopde for his kind gesture in guiding us in the above project. His continual guidance and feedback has helped in providing the right direction during various phases of our project work. We would like to thank the college library staff for providing necessary support from time to time.

EXECUTIVE SUMMARY Nowadays in every organization, maintaining of financial accounts is of utmost importance as there is a big chance of a fraud of funds within the organization. It is vital that the people in the organization know the accounts system inside out so that there is clarity in the organization. An efficient accounting system is a clear indicator of how well the organization runs its business. As a result, it is very important to keep this accounts system very integrated but at the same time very simple. For this very purpose, various financial statements like balance sheet, profit and loss statement, cash flow statement and various journals are maintained. In our project we look to study a small portion in profit and loss statement called Depreciation (Accounting standard 6). As we move ahead with our project, we will emphasize on the depreciation policies and expensesand analysisin 4 different companies (TCS, Kotak Mahindra, Fortis, HUL) of 4 different sectors (IT, Banking, Healthcare, FMCG) . We choose to study depreciation due to its following advantages: Revenue:If a business had to account for the entire expense of major assets whenever it bought them, these expenses would be a major hit to business finances in the year they occur. While the business will actually have to pay for the asset in some way, recording a large expense on the books will make its revenue stream appear much lower to outside observers. By using depreciation, businesses can make their revenue seem greater. Taxes:The reverse of the revenue advantage comes in the form of taxes. The more revenue the business records on its books, the more taxes it has to pay. The more the expenses of its assets take up the book value revenue, the lower the taxes will be. Fortunately, there are depreciation methods that allow businesses to account for most of the asset expense within the first few years of its use, thereby receiving the tax benefits associated with recording the expense. Ease of Use:Depreciation methods are very easy to use because of their clear categories and rules. There are a set number of depreciation methods that shows businesses how long the lifespan of particular assets should be. This makes it very easy for accountants to create depreciation schedules and compare different plans to come up with the best one. Applications:Depreciation applies to many different assets and projects, more than some businesses realize. An improvement project, like repaving a shipping yard, can be depreciated as the new surface wears down. Many other materials and intangibles like software and copyrights can also be depreciated.
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TABLE OF CONTENT

Sr. No 1 2 3 4 5 6

Topics Company Profiles Introduction to Accounting Standard Introduction to Accounting Standard 6 - Depreciation Depreciation Notes of Companies and our analysis Conclusion Bibliography

Pg. No 7 8 9 13 21 22

Company Profiles

Company Name:Tata Consultancy Services Limited (TCS) Description:Tata Consultancy Services Limited (TCS) (BSE: 532540, NSE: TCS) is an Indian multinational information technology (IT) services, business solutions and outsourcing services company headquartered in Mumbai, Maharashtra. TCS is a subsidiary of the Tata Group and is listed on the Bombay Stock Exchange and the National Stock Exchange of India. It is one of India's most valuable companiesand is the largest India-based IT services company by 2012 revenues. Company Name:Fortis Healthcare Limited Description:Fortis Healthcare Limited (BSE: 532843) is an established chain of super specialty hospitals based in Delhi, also available in Amritsar, Kolkata, Navi Mumbai, Mohali, Jaipur, Chennai,Kota, Bengaluru, Gurgaon.On 12 March 2010, Fortis Healthcare bought 23.9% stakes in Singapore's Parkway Holdings Ltd. On 29 May 2012, Fortis Healthcare reported an increase of 41.34% in the consolidated net profit for Q4.

Company Name:Hindustan Unilever Limited (HUL) Description:Hindustan Unilever Limited (HUL) (BSE: 500696) is India's largest consumer goods company based in Mumbai, Maharashtra. It is owned by the British-Dutch company Unilever which controls 52% majority stake in HUL. Its products include foods, beverages, cleaning agents and personal care products.It has employee strength of over 16,500 employees and contributes to indirect employment of over 65,000 people.The company was renamed in June 2007 as Hindustan Unilever Limited.Hindustan Unilever's distribution covers over 2 million retail outlets across India directly and its products are available in over 6.4 million outlets in the country.

Company Name:Kotak Mahindra Bank Description:Kotak Mahindra Bank (BSE: 500247, NSE: KOTAKBANK) is an Indian financial service firm established in 1985. It was previously known as Kotak Mahindra Finance Limited, anon-banking financial company. In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the first company in the Indian
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banking history to convert to a bank. Today it has more than 20,000 employees and Rs. 10,000 crore in revenue.The Bank has its registered office at Nariman Bhavan, Nariman Point, Mumbai. Introduction to Accounting Standard An accounting standard is a guideline for financial accounting, such as how a firm prepares and presents its business income and expense, assets and liabilities. The Generally Accepted Accounting Principles is comprised of a large group of individual accounting standards. GAAP standards apply to financial reporting in the United States and may be eventually phased out in favorfavour of the International Accounting Standards. Objective of Accounting Standards Objective of Accounting Standards is to standardize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements. The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977. Some of the Accounting Standards Issued by the Institute of Chartered Accountants of India areare as below:

Disclosure of accounting policies: Valuation Of Inventories: Cash Flow Statements Contingencies and events Occurring after the Balance sheet Date Net Profit or Loss For the period, Prior period items and Changes in accounting Policies. Depreciation accounting. Construction Contracts. Revenue Recognition. Accounting For Fixed Assets. The Effect of Changes In Foreign Exchange Rates. Accounting For Government Grants. Accounting For Investments. Accounting For Amalgamation. Employee Benefits. Borrowing Cost. Segment Reporting. Related Party Disclosures. Accounting For Leases.
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Earnings Per Share. Consolidated Financial Statement. Introduction to Accounting Standard 6 Depreciation

Definitions The following terms are used in this Standard with the meanings specified:
Depreciation is a measure of the wearing out, consumption or other loss of value of a

depreciable asset arising from use, efflux of time or obsolescence through technology and market changes. Companies invest in assets (such as machinery) in order to produce goods or services to sell. These are known as fixed assets. In the case of the gas or oil industry, an oil rig is a fixed asset the company must own an oil rig to supply oil or gas. All companies have some form of fixed assets although the dependence on these assets varies with the type of business. Another example could be machinery for manufacturing a car, or a building in which employees work. In this example, Global Oil has built an oil rig for 50m. In its balance sheet, cash will be reduced by 50m and fixed assets will increase by 50m. In 20 years time (the economic life), the company knows that the oil rig will need to be replaced. By the 20th year, the value of the oil rig in the companys balance sheet will be zero. Thus, the value of the oil rig will reduce each year by a set amount (2.5m in this example). This is known as depreciation and the annual depreciation figure is shown in the profit and loss account.

Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.

It is a non-cash charge, i.e. a charge of depreciation reduces profit available for distribution without reducing the available cash. The cash thus retained in the business is intended to be used for replacement of depreciable asset. For this reason, section 205 of The Companies Act 1956, provides that companies can pay dividend only out of profit available after charging depreciation. The Act also prescribes certain rates of depreciation. These minimum rates of depreciation a company must charge.

 Depreciable assets are assets which

(i) (ii)

Are expected to be used during more than one accounting period; and 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.

Useful life is either

(i) The period over which a depreciable asset is expected to be used by the enterprise; or (ii) The number of production or similar units expected to be obtained from the use of the asset by the enterprise.

Depreciable amount of a depreciable asset is its historical cost, or other amount

substituted for historical cost in the financial statements less the estimated residual value. Depreciable amount is allocated on a systematic basis to each accounting year over the estimated useful life of depreciable assets.

Depreciation Accounting This Standard deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply: (i) Forests, plantations and similar regenerative natural resources; (ii) Wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources; (iii) Expenditure on research and development; (iv) Goodwill and other intangible assets; (v) Livestock.

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This standard also does not apply to land unless it has a limited useful life for the enterprise. Different accounting policies for depreciation are adopted by different enterprises. Disclosure of accounting policies for depreciation followed by an enterprise is necessary to appreciate the view presented in the financial statements of the enterprise.

Methods of depreciation There are two methods of depreciation:

Method 1 - Straight-line depreciation The straight-line method of depreciation is widely used and simple to calculate. It is based on the principle that each accounting period of the asset's life should bear an equal amount of depreciation.

As a result, the depreciation charge for the asset can be calculated using the following formula: Dpn = (C- R)/ N Where: Dpn = Annual straight-line depreciation charge C = Cost of the asset R = Residual value of the asset N = Useful economic life of the asset (years) The pattern of annual depreciation charges for a fixed asset should attempt to match the pattern of benefits derived from that asset. Therefore, where the benefits from an asset are likely to be reasonably constant over its life the straight-line method of depreciation would be appropriate as it results in a constant annual depreciation charge. In practice it may be difficult to assess the pattern of benefits relating to an asset. In such cases the straight-line method may often be chosen simply because it is easy to understand and calculate.

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Method 2 - Reducing balance method The reducing balance method of depreciation provides a high annual depreciation charge in the early years of an asset's life but the annual depreciation charge reduces progressively as the asset ages. To achieve this pattern of depreciation, a fixed annual depreciation percentage is applied to the written-down value of the asset. Thus, depreciation is calculated as a percentage of the reducing balance. For certain fixed assets, the benefits derived may be high in the early years, but may decline as the asset ages. For such assets, the reducing-balance method of depreciation would be appropriate insofar as it matches the depreciation expense with the pattern of benefits. Once a particular method of depreciation has been chosen for a fixed asset, the method should be applied consistently over its life. It is only permissible to switch from one method to another if the new method provides a fairer presentation of the financial results and financial position. Selection of appropriate method depends on type of asset, nature of the use of the asset or circumstances prevailing in the business. Change in depreciation method may be done under the following condition: For compliance of statute For compliance of accounting standards For more appropriate presentation of the financial statement

Any company wanting to change its depreciation procedure has to follow a particular procedure: (i) Depreciation should be recomputed applying the new method from the date of its acquisition till the date of change of method (ii) Difference between the total depreciation under the new method & accumulated depreciation under the old method till the date of change may be surplus/deficiency. (iii) Such resultant surplus is credited to profit & loss account under head depreciation written back (iv)Such resultant deficiency is charged to profit & loss account. Such change of depreciation method should be treated as change in accounting policy and its effect should be quantified and disclosed.

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Depreciation Notes of Companies and our analysis Notes to Consolidated financial statements for the year ended March 31, 2012: Tata Consultancy Services Limited (TCS): Depreciation / Amortization (in Policy):

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Depreciation / amortization on fixed assets, other than freehold land and capital work-in-progress is charged so as to write-off the cost of assets, on the following basis: Type of asset Leasehold land and buildings Freehold buildings Factory buildings Leasehold improvements Plant and machinery Computer equipment Vehicles Office equipment Electrical installations Furniture and fixtures Intellectual property / distribution rights Rights under licensing agreement Method Straight line Written down value Straight line Straight line Straight line Straight line Written down value Written down value Written down value Straight line Straight line Straight line Rate / Period Lease period 5% 10% Lease period 33.33% 25% 25.89% 13.91% 13.91% 100% 24 60 months License period

Fixed assets purchased for specific projects are depreciated over the period of the project. Depreciation and Amortization Expense (in P/L statement): March 31, 2012 ` in lacs tangible 4023.22 March 31, 2011 ` in lacs 3263.42 281.73 3545.15

Depreciation of assets Amortization of intangible 306.01 assets TOTAL 4329.23 Our Analysis:

As per auditors report, there is no change in depreciation methods from the start on the assets. They do not have uniformity in depreciation methods of tangible assets. 100% depreciation in furniture and fixtures implies they must be getting worn out every year and so company would be changing them every year i.e. they would be buying fresh and new furniture and fixtures every year. 5% depreciation in freehold buildings implies that the market value of it would be very good and that wear and tear on it would be less in a year which may be
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because of ongoing support always. Depreciation as mentioned in lease hold things may not always be true as the company can manipulate its percentage in policies every year so as to suit to tax benefits. The company has accepted Income Tax rate for charging depreciation.

As seen from the above note in profit and loss statement, depreciation has increased from 2011 to 2012. This implies that they have increased number of assets which may result in increase in technology and hence benefits and profits.

Fortis Healthcare Limited: Depreciation (in Policy):

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(i) Except as stated in paragraph (ii), (iii) and (iv) below, depreciation on all fixed assets within the Fortis Group is provided for using the Straight Line method at higher of the rates arrived at as per the useful lives of the assets as estimated by the management or where applicable, those prescribed under Schedule XIV of the Companies Act, 1956. The Company has used the following rates to provide the depreciation on its fixed assets:S. No. 1 2 3 4 5 6 7 Assets Building Plant & Equipment Furniture & Fittings Computer Office equipment Motor vehicle Medical equipment Rate SLM 2% to 20% 4.75% to 12.38% 6.33% to 25% 10% to 100% 4.75% to 25% 9.50% to 54.15% 7.07% to 87.15%

(ii) Depreciation on Leasehold Improvements is provided over the primary period of lease or over the useful lives of the respective fixed assets, whichever is shorter. (iii) Leasehold land is amortized over the period of lease except in respect of two subsidiaries where the same is available on perpetual lease basis [(34.77% (previous year 44.72%) of net block of leasehold land of the Fortis Group aggregating to ` 21,020.59 lacs (previous year ` 16,342.03 lacs) as at March 31, 2012]. (iv) In respect of certain subsidiaries, depreciation is being provided for using the Written Down Value method at higher of the rates arrived at as per the useful lives of the assets as estimated by the management and those prescribed under Schedule XIV of the Companies Act, 1956 [7.94% (previous year 16.25%) of the total net block of fixed assets (excluding leasehold and freehold land) of the Group aggregating to ` 185,703.31 lacs (previous year ` 111,679.67 lacs) as at March 31, 2012].

The rates used at written down value method are as follows:S. No 1 Assets Building Rate WDV 10%
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2 3 4 5 6 7

Plant & Equipment Furniture & Fittings Computer Office equipment Motor vehicle Medical equipment

13.91% 18.10% to 25.88% 16.21% to 40% 13.91% 25.89% 20.00%

Depreciation and Amortization Expense (in P/L statement): March 31, 2012 ` in lacs tangible 16,407.25 March 31, 2011 ` in lacs 9,249.29 1,363.01 10,612.30

Depreciation of assets Amortization of intangible 1,954.99 assets TOTAL 18,362.24 Our Analysis:

The company has adopted SLM method of depreciation on most of the fixed asset . Hhowever ,the company has also adopted WDV method of depricitiondeprecation for fixed asset at few subsidiaries. Leasehold land is depreciated as per WDV method. The company has not changed any method of depreciation. It is observed from P&L that the company has incurred higher dpriciationdepreciation expense in March 121 as compared to March 111 , hence it seems that the company has purchased more machinery during the current financial year. The company has adhered toobsevered AS-6 while charging depreciation for the fixed assets of the comapnycompany

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Hindustan Unilever Limited (HUL): Depreciation of tangible assets(assets (in Policy): Depreciation is provided on the straight line method over the estimated useful lives of the assets or the rates prescribed under Schedule XIV of the Companies Act, 1956, whichever is higher. Accordingly, computers and related assets, included in Office equipment are depreciated over four years leasehold land is amortized over the primary period of the lease Certain assets of the cold chain, included in Plant and equipment, are depreciated over four / seven years; and motor vehicles are depreciated over six years. certain assets lying at salons and training centre, included in Plant and equipment, Furniture and fixtures and Office equipment, are depreciated over five to nine years Assets of certain subsidiaries are depreciated on Written Down Value Method (WDV). The difference between the SLM basis and WDV basis is not significant. Amortization of intangible assets: Intangible assets are stated at cost of acquisition less accumulated amortization and accumulated impairment loss, if any. Amortization is provided on the straight line method as per rates mentioned below: Asset Class Goodwill Brands / Trademarks Computer Software Rate of Amortization 25% 25% 20%

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Depreciation and Amortization Expense (in P/L statement): March 31, 2012 ` in lacs tangible 211.85 19.21 231.06 2.48 March 31, 2011 ` in lacs 207.52 19.69 227.21 2.08

Depreciation of assets Amortization of intangible assets TOTAL Share of Joint Venture (Depreciation and Amortization Expense of Kimberly - Clark Lever Private Limited) TOTAL Our Analysis:

233.54

229.29

The company has adopted SLM method of depreciation on most of the fixed assett . Hhowever ,theowever, the company has also adopted WDV method of depricitiondeprecation for fixed asset at few subsidiaries. DepriciationDepreciation is calculated as per rate specified in Tthe companiesCompanys Aact 1956 Leasehold land is depreciated as per WDV method. The company has not changed any method of depreciation However it is observed that the fixed assets are depreciciated over fixed number of year rather than their existing life. It is observed from P&L that thethat the company has incurred higher dpriciationdepreciation expense in March 12 as compared to March 11 ,hence11; hence it seems that the company has purchased more machinery during the current financial year.

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Kotak Mahindra Bank: Depreciation / Amortization (in Policy): The Group has adopted the Straight Line Method of depreciation so as to write off 100% of the cost of the assets at rates higher than those prescribed under Schedule XIV to the Companies Act, 1956 for all assets other than premises, based on the Managements estimate of useful lives of these assets. Estimated useful lives over which assets are depreciated/ amortised are as follows: Asset Type Premises Useful life in years 58
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Improvement to leasehold premises

Over the period of lease subject to a maximum of 6 years Office equipments (chillers, transformers, 10 UPS & DG set) Office equipments (other than above) 5 Computers Furniture and Fixtures 6 Vehicles 4 ATMs 5 Software (including development) 3 expenditure Forex Broking Business Rights 10 Goodwill (Other than on consolidation) 5 Membership Card of the Bombay Stock 20 Exchange Limited Assets costing less than 5,000 are fully depreciated in the year of purchase.

Depreciation Expense (in P/L statement): Premises (Including Land): March 31, 2012 ` in lacs As at 31st March of the 435,039 preceding year Charge for the year 52,981 Deductions during the year TOTAL 488,020 Other Fixed Assets (including furniture and fixtures):
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March 31, 2011 ` in lacs 382,058 52,981 435,039

March 31, 2012 ` in lacs As at 31st March of the 6,378,481 preceding year Charge for the year 1,590,329 Deductions during the year 377,091 TOTAL 7,591,719 Our Analysis:

March 31, 2011 ` in lacs 5,143,853 1,470,481 235,853 6,378,481

The company has adopted SLM method of depreciation for charging deprecation. The company has not changed any method of depreciation However it is observed that the fixed assets are depreciated over fixed number of year rather than their existing life. The companies need to maintain numerous assets for it dailyc work, hence assets having value below 5000 are considered as negligible assets and they are being treated as expenses and the entire amount is treated as expenses in the year of purchase.

CONCLUSION

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It is thus mandatory for all the companies to calculate and account the depreciation of their assets as per Accounting Standard 6. Each company according to its company policy has its own method of calculating depreciation. A company may calculate depreciation by either SLM method or WDV method, but for the purpose of taxation the company has to follow WDV method only. The company might have to pay penalty in case of failure on its part to adhere to the Accounting Standards. Depreciation provides tax benefits to the companies by the way of tax shield. Hence, companies can increase their profits by accounting for depreciation.

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BIBLIOGRAPHY Accounting Standard 6 Depreciation

o

Books: (i) Indian Accounts Standards by Rawath (ii) Study Material on Accounting by The institute of Chartered Accountants of India

o o

http://www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf http://www.investopedia.com/terms/a/accounting-standard.asp

o http://www.icai.org/post.html?post_id=8660

Company profiles:
o o o o

http://en.wikipedia.org/wiki/Tata_Consultancy_Services http://en.wikipedia.org/wiki/Kotak_Mahindra_Bank http://en.wikipedia.org/wiki/Fortis_Healthcare http://en.wikipedia.org/wiki/Hindustan_Unilever

Annual Reports (pdfs):

o o

http://www.hul.co.in/images/hul_annual_report_2011-12_tcm114-289694.pdf http://www.fortishealthcare.com/india/UserFiles/Fortis-Healthcare-Limited-16thAnnual-Report-2011-12.pdf http://www.tcs.com/investors/Documents/Annual %20Reports/TCS_Annual_Report_2011-2012.pdf

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http://www.kotak.com/annualreport2011-12/pdf_2/GIOFL.pdf

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