Change in Depreciation Method
On 1 April 2021, Kavya Ltd bought a machine for ₹12,00,000. It estimated a residual value of ₹1,20,000 and an eight-year useful life. For 2021-22 and 2022-23 the company charged depreciation at 15% per annum on the written-down value. From 1 April 2023 it decides to switch to the straight-line method to reflect the machine’s even use. The accountant wants to charge ₹1,35,000 as depreciation for 2023-24 and makes no other adjustment, arguing that a change in method is applied only prospectively. Management asks whether earlier years’ depreciation must be recalculated, what amount should appear in the 2023-24 statement of profit and loss, and how the change should be disclosed. No asset has been sold.
1. Compute depreciation for 2021-22 and 2022-23 under the old method, and the carrying amount on 1 April 2023.
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Old method: 15% on written-down value.
- 2021-22 depreciation = 15% × ₹12,00,000 = ₹1,80,000. Carrying amount = ₹10,20,000.
- 2022-23 depreciation = 15% × ₹10,20,000 = ₹1,53,000. Carrying amount = ₹10,20,000 − ₹1,53,000 = ₹8,67,000.
Total depreciation charged in the first two years = 1,80,000 + 1,53,000 = ₹3,33,000.
2. Compute the transition adjustment and the depreciation charge for 2023-24 under the straight-line method. Show the net effect on 2023-24 profit.
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Straight-line depreciation = (Cost − Residual value) ÷ Useful life = (₹12,00,000 − ₹1,20,000) ÷ 8 = ₹1,35,000 per year.
If straight-line had been used from the beginning, depreciation for the first two years would be 2 × ₹1,35,000 = ₹2,70,000. Actual WDV depreciation was ₹3,33,000, so excess depreciation charged in earlier years = 3,33,000 − 2,70,000 = ₹63,000.
On change of method, recalculate earlier depreciation on the new method and credit the excess to profit or loss in the year of change. Depreciation for 2023-24 is ₹1,35,000. Net charge to 2023-24 profit = 1,35,000 − 63,000 = ₹72,000.
The recalculated carrying amount on 1 April 2023 becomes 12,00,000 − 2,70,000 = ₹9,30,000; after 2023-24 depreciation it is ₹7,95,000.
3. Explain whether the accountant’s prospective treatment is acceptable and how the change should be disclosed.
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A change in the method of depreciation is a change in accounting policy, not merely a change in estimate. Earlier years’ depreciation must be recalculated on the new method and the difference charged or credited to profit or loss in the year of change. The accountant’s proposal to charge only ₹1,35,000 and make no transition adjustment is therefore not acceptable under AS 6.
The company should disclose the change, the reason for it, and the quantified effect. Prospective treatment is appropriate for a revision of useful life or residual value, but not for a switch from WDV to straight-line. If comparative figures are presented, the effect of the change should be explained so that users can compare results.