Preconfigured Depreciation Methods

Some of the most widely used standard depreciation methods are automatically set up upon installation of the Fixed Assets Management SuiteApp.

To see the preconfigured depreciation methods, go to Fixed Assets > Setup > Depreciation Methods. The Depreciation Method List shows the depreciation method name, description, and formula. The following depreciation methods are available:

• 150DB

• 200DB

• 250DB

• 25% Reducing Balance

• 4–4–5 Calendar Depreciation

• Asset Usage

• Capital Allowance Year 1

• Capital Allowance Year N

• Fixed Declining

• Straight Line

• Straight Line Remaining

• Sum of Years/Straight Line

• Sum of Years Digits

• Zero Depreciation

The following depreciation methods, specific for Nordic countries and Benelux, are also available:

• 30% Declining Balance

• 25% Declining Balance

• 24% Declining Balance

• 20% Declining Balance to 12% Declining Balance

• 20% Declining Balance

• 15% Declining Balance

• 14% Declining Balance

• 12% Declining Balance

• 10% Declining Balance

• 6% Declining Balance

• 4% Declining Balance

• 2% Declining Balance

The following depreciation methods, specific for Japan, are also available:

• Japan Straight Line

• Japan 250% Declining Balance

• Japan 200% Declining Balance

• Japan Old Straight Line

• Japan Old Declining Balance

• Japan Special Depreciation

For Japan depreciation methods, to ensure depreciation amount is computed correctly, you must edit your asset record to set the Residual Value to 1 JPY. For depreciation computation, the residual value is deducted from the last year’s depreciation amount. If the Depreciation Rule is set to Pro-rata, the current behavior where assets will be depreciated until the end of its life will not be applied. The asset will instead continue to depreciate until it reaches its residual value.

Some of these methods are described in more detail in the following topics.

Asset Usage (Asset Activity) Depreciation

Usage-based depreciation methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of this level of activity. Assume a vehicle is estimated to go 50,000 miles in its lifetime. The per-mile depreciation rate is calculated as:

($17,000 cost -$2,000 salvage value) / 50,000 miles =$0.30 per mile

Each period, the depreciation expense is then calculated by multiplying the rate by the actual activity level.

Calculating Units-of-Activity Depletion:

• Depreciable Cost divided by Units in Useful Life =Per Unit Depreciation

• Per-Unit Depreciation x Units During Period =Period Depreciation Expense

If a truck with a depreciable cost of $80,000 ($90,000 cost, less $10,000 estimated salvage value) is expected to be driven 400,000 miles during its service life, the truck depreciates $0.20 each mile ($80,000 ÷400,000 miles =$0.20 per mile). The following table shows how depreciation expense is assigned to the truck based on the number of miles driven each year.

Fixed Declining (Declining Balance) Depreciation

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset. Many assets are most useful when they are new. One popular accelerated method is the fixed declining method.

For example, a business has an asset with $1,000 original cost, $100 salvage value, and five years (60 months) of useful life. The following table illustrates the fixed declining method of depreciation. Book Value at the beginning of the first year of depreciation is the Original Cost of the asset. At any time Book Value equals Original Cost minus Accumulated Depreciation.

Book Value =Original Cost -Accumulated Depreciation

The asset is depreciated until the Book Value equals Salvage Value, or Scrap Value.

Straight Line Depreciation

Straight-line depreciation is the simplest and most often used technique. In straight-line depreciation, the company estimates the salvage value of the asset at the end of its useful life (the period during which it is used to generate revenues), and will expense a portion of the original cost in equal increments over that period. The residual value, also known as scrap value, is an estimate of the value of the asset at the time it will be sold or disposed of. The residual value may be zero.

Annual Depreciation Expense =(Cost of Fixed Asset -Scrap Value) divided by Life span

For example, a vehicle that depreciates over five years, is purchased at a cost of US$17,000, with a residual value of US$2000, will depreciate at US$3,000 per year: ($17,000 -$2,000) / 5 years =$3,000 or ($17,000 -$2,000) / 60 months =$250. In other words, it is the depreciable cost of the asset divided by the number of years or number of months of its useful life.

Sum of Years' Digits Depreciation

Sum-of-Years' Digits is a depreciation method that results in a more accelerated write-off than straight line, but less than declining-balance method. Under this method, annual depreciation is determined by multiplying the depreciable cost by a schedule of fractions.

• Depreciable Cost =Original Cost -Salvage Value

• Book Value =Original Cost -Accumulated Depreciation

Example: If an asset has original cost $1,000, a useful life of five years and a salvage value of $100, to calculate its depreciation schedule:

1. Determine Years' digits. Because the asset has a useful life of five years, the Years' digits are: 5, 4, 3, 2, and 1.

2. Calculate the sum of the digits. 5+4+3+2+1=15

   Depreciation rates are as follows:

   • 5/15 for the 1st year

   • 4/15 for the 2nd year

   • 3/15 for the 3rd year

   • 2/15 for the 4th year

   • 1/15 for the 5th year

Straight Line Remaining

This method is similar to the standard Straight Line method but will depreciate the asset from the value at the start of the method rather than the original cost. This method would be typically used as a linked method following another method.

Sum of Years/Straight Line

This method depreciates the asset using the Sum of Years' Digits method for the first year before switching to use Straight Line depreciation for the rest of the depreciation lifetime.

150DB and 200DB

These are standard Modified Accelerated Cost Recovery System (MACRS) methods as defined for US Tax purposes.

These two methods consist of two calculations where the highest value is selected. The net effect is that for the first part of the asset life it will depreciate faster. Partway through the asset life, approximately a third in the case of 150DB, the second method will take over, and the depreciation will go from a curve to finish as a straight line method.

The formula for the 150DB method is:

((NB-RV)*(1.5/AL))~((NB-RV)/(AL-CP+1))

200DB is the same basic formula but will depreciate faster before switching to straight line:

((NB-RV)*(2/AL))~((NB-RV)/(AL-CP+1))

4–4–5 Calendar Depreciation

The 4-4-5 Calendar Depreciation method computes depreciation on a daily basis. When you enable the Use Accounting Period Dates for Depreciation preference in the Fixed Assets Setup page, the generated depreciation history record and journal entry will use the end date of the base period.

Formula: 12*((CC-RV)/AL)*(DP/FY)

DP/FY is a pro-rated calculation which is based on the number of days in a period. In a 4–4–5 calendar, this is equivalent to 28 days for 4 weeks, 35 days for 5 weeks, and 36 days for the last period of the year.

If you have an asset with a cost of 60,000, to be depreciated in 24 months, the following table shows the depreciation using the formula 12*((CC-RV)/AL)*(DP/FY). Note that FY is equivalent to 365.

When your accounting period is set to Calendar Months, using the 4-4-5 Calendar Depreciation method will compute the monthly depreciation based on the number of days for a specific month.

General Notices