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when can we change the Depreciation Method? and what is the
requirements.
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Answer Posted / deependra shekhawat
As per Accounting Standard 1 "Disclosure of Accounting Policies" the method of depreciation can be changed in any of the following three cases -
1. The adoption of new method of depreciation will lead to a much better and comparable presentation of the Financial Statements.
for eg. let suppose there are 7 cement manufacturing companies and out of them, 6 are charging depreciation on SLM basis and 1 on WDV basis then to facilitate a better comparison with the financial statements of rest of the 6 cement manufacturing companies the one can switch over to SLM basis.
2. If there is a newly incorporated requirement by any of the ACCOUNTING STANDARD to follow a particular method of Depreciation then, the method can be changed to comply with the requirements of That Accounting Standard.
for eg. if any accounting standard is incorporated by the ICAI that mandates to follow SLM method for a group of assets then the existing industries can switch over to SLM despite the fact that, they were charging depreciation based on Written Down Value Method.
3. If there is a change in any law governing a particular class of enterprises allowing to that class of enterprises to follow a different method rather than the existing method of depreciation.
For eg. if banking regulation Act, 1949 prescribes any method of depreciation for banking companies then, all the banking companies can easily switch over to the newly prescribed method for compliance with the provisions of the said Act.
Any change in the method of Depreciation is treated as a change in ACCOUNTING POLICY and therefore it should be applied RETROSPECTIVELY and it should be disclosed separately in the financial statement and its financial impact including any excess or deficit between the depreciation as per old method and the depreciation as per newly adopted method (Calculated form the date of Acquisition of the relevant asset) should be Charged off or Credited to The INCOME STATEMENT of that year in which the change is effected. (ACCOUNTING STANDARD 1)
Thanks and Regards
Deependra Shekhawat
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