22 Understand User Defined Depreciation Methods

You assign depreciation methods to an asset when you create a master record. The system performs depreciation calculations based on the established depreciation rules for each user defined depreciation method.

This chapter includes the following topics:

Section 22.1, "User Defined Depreciation Methods,"
Section 22.2, "User-Defined Depreciation Concepts,"
Section 22.3, "User-Defined Depreciation Rule Components,"
Section 22.4, "User Defined Depreciation Calculation - Process Flow."

22.1 User Defined Depreciation Methods

Although the JD Edwards World Fixed Assets system provides a wide range of standard depreciation methods, you might need a specific depreciation algorithm other than those provided with the standard depreciation methods.

An organization that operates in a multi-site, multi-national, and/or multi-currency environment is likely to require a broad sample of the variations of the elements of depreciation. With user defined depreciation, you have access to all the elements of the depreciation equation. You can use these elements to define depreciation methods to meet your unique depreciation needs.

For example, you can set a user-defined period number to ensure that depreciation methods used complies with depreciation rules defined by Russian legislation. Setting a user-defined period number will allow for the tracking of the actual, remaining total number periods. For example, if the asset is a 36-month asset, the actual total number of periods will start at 36 and work down to one.

22.1.1 Elements of Depreciation

The following graphic shows the elements of depreciation and their relationship:

Figure 22-1 Elements of Depreciation and Their Relationship

Description of "Figure 22-1 Elements of Depreciation and Their Relationship"

User defined depreciation uses the following elements, combined into depreciation rules, to control depreciation:

Depreciation Elements	Description
Cost	Costs can be divided in different ways for different assets according to the nature of the assets, such as buildings, equipment, vehicles, and so forth. Cost also occurs for a single asset in multiple books or ledgers for such purposes as financial accounting, consolidated reporting, management and cost accounting and regulatory purposes. Cost can affect depreciation in many different ways. For example: Several elements of asset cost may exist in a single book or ledger. Several elements of cost might exist at one specific time, or spread out over time. Cost might exist concurrently in multiple currencies. Cost in one dimension might be a function of the cost in another dimension. One element of cost might be a function of another element.
Time (life years)	The life of an asset is represented in the depreciation process as a subdivision of time. Different depreciation methods might use different subdivisions of time. For example, the subdivision of time might be: The same as the fiscal year of your organization Related to the date the cost for the asset is incurred Related to the year of a political or regulatory entity
Accumulated depreciation	At any point during the life of an asset, the total of all depreciation taken is referred to as accumulated depreciation.
Net book value	At any time during the life of an asset, the current or net book value is equal to the cost less the accumulated depreciation. For example, at the beginning of an asset's life, when no depreciation has been taken, the net book value is equal to the original cost. At the end of the asset's life, when all possible depreciation has been taken, the net book value is equal to the salvage value of the asset, if any.
Salvage value and depreciable basis	At the end of the life of an asset, when it is no longer suitable for use within your organization, residual value might exist. This value, whether it is realized from the market, or from scrapping and salvaging, is referred to as the salvage value. Typically, the amount that is amortized over the life of an asset excludes this amount. The salvage value is used in the depreciation process to arrive at the depreciable basis of that asset, or the cost less the salvage value.
Dates	Depreciation takes place over time. Consequently, there are many instances in the depreciation process in which different dimensions of time [dates] are important. Dates that might especially affect the depreciation process include: Asset acquisition dates Depreciation start dates Asset disposal dates Cost expiration date Frequently, depreciation conventions require a modification of one or more of these dates.
Period Number	A period number to allow for the tracking of the actual remaining total number of periods. For example, if an asset is a 36-month asset, the actual total number of periods will start at 36 and work down to 1.

22.2 User-Defined Depreciation Concepts

The Fixed Assets system uses account rules and depreciation rules. Account rules define the association between cost accounts and the related accumulated depreciation and depreciation expense accounts. Depreciation rules define the algorithm that the system applies to the cost of an asset over the course of the asset's life every time you compute depreciation.

Depreciation rules are the key to user defined depreciation.

22.2.1 What You Should Know About

Topic	Description
Cost	The cost for an asset is the focal point of the depreciation equation. The system uniquely identifies each cost for an asset.
Dates	Depreciation rules are date sensitive. When you set up depreciation rules, you must specify the dates that rule is effective.
Limits and bases	The amount you depreciate an asset can be subject to limits and bases. The limits and bases might be sensitive to particular dates. For example, the entire depreciation formula might be appropriate to a specific period of time, or a specific portion of the life of the asset.
Formulas	The depreciation formula might be as simple as a single percentage of the cost that applies to each year throughout the life of the asset. Or, the formula might relate to the utilization of the asset. The potential for formula variations is virtually infinite. For example: Salvage value can be a factor in the depreciation formula. The formula might provide occasions where the depreciation stops, and then resumes. Multiple depreciation formulas can relate to the same cost, possibly in different years or in different ledgers.
Apportionment - periodic and cumulative	The system stores the cost apportionments in the Item Balance table (F1202). The apportionment of the cost over time is stored as a cumulative balance in the accumulated depreciation records. The periodic apportionment of the cost is stored in the depreciation expense records. Each depreciable cost has at least one cumulative record and one periodic record for each year of the life of an asset.
Reporting years	The reference points in time can be a variable in the depreciation process. For example, a single legal entity might be required to determine and report depreciation according to different patterns of dates. Also, the fiscal years of entities might change.
General ledger accounts	Each Item Balance record is associated with an asset master record. The nature of an account refers to the type of cost. Asset costs are typically classified into categories, such as Real Property, Machinery, Equipment, and so on. The balance sheet business unit includes the cost and accumulated depreciation for the asset. For depreciation expense, the business unit might be an operating department, a project, or a location.
Depreciation accounts	Two accounts are especially important in the depreciation process: Depreciation Expense - As you compute depreciation for the basis of an asset, the system records the result as an expense of each of the years benefited by the cost. Accumulated Depreciation - It is important to know the original cost of an asset. The system records the expiration of the cost in an account that can be considered a part of the cost account. This contra account is called the Accumulated Depreciation account. In some cases, the depreciation mechanism might require multiple accumulated depreciation and depreciation expense accounts.
Item balance character	The system uses a character code to uniquely identify each Item Balance record that is related to depreciation. The character code indicates whether a record is a cost, accumulated depreciation or depreciation expense. Other accounts that are not related to the depreciation process, but are important to the depreciation equation, such as disposal accounts, are also identified by the system with an Item Balance Character code. Item Balance Character codes enable the system to identify and access specific records easily.
Asset	The system associates cost with an asset. You use category codes to classify assets within an accounting category and a depreciation category.
Annual depreciation amount	The system accesses various depreciation rules for an asset by codes in the Item Balances table. The codes identify depreciation method, computation direction, and so on for each depreciation rule that you use. Based on the specific depreciation rule, the system calculates depreciation on an annual basis. The system stores the annual depreciation amount for an asset in the associated Item Balance Accumulated Depreciation record. Once the system calculates the annual depreciation amount, it then deals with the initial term apportionment. Any special conventions are applied based on the options you define for the specific rule.
Periodic depreciation journal entries	The annual depreciation amount is subject to spread patterns of percentages that determine how the annual depreciation is to be apportioned to periods within a year. The system applies any conventions that relate to special apportionment during the first, last, and disposal year. The system creates general ledger journal entries based on the rules established for each ledger. Based on the account rules, the system updates the Item Balance records for the depreciation expense and accumulated depreciation expense.

22.3 User-Defined Depreciation Rule Components

The user-defined depreciation rules are defined in three components as shown in the following illustration.

Figure 22-2 The Components of Depreciation Rules

Description of "Figure 22-2 The Components of Depreciation Rules"

22.3.1 Header

The header information is key to identifying the depreciation rule and includes information, such as:

Method code
Initial term apportionment
Compute direction (also called the method of computation)
Asset life
Relevant dates
Rule description

22.3.2 Rule Conventions

The rule conventions define certain parameters within which the rules operate, such as:

First and last year spreads
Disposal apportionment
Secondary depreciation amount treatment
Life year reference
Over-depreciation indicators
Negative depreciation indicators

22.3.3 Annual Rules

The annual rules define the specifics of how the depreciation is actually calculated. For a given depreciation rule, one or more annual rules might exist. For a given year there might be primary and secondary rules. Annual rule specifics include such things as:

Beginning and ending years for each annual rule
Placed in service months
Annual multipliers
Spread patterns
Formula codes for both depreciation and depreciable basis

22.4 User Defined Depreciation Calculation - Process Flow

The system calculates depreciation for an asset cost based on the depreciation rules that you define. The rules relate to the category of the asset cost. The system determines which depreciation rule to use. The system associates accounting and depreciation categories in the asset master record and the cost account in the Cost Item Balance record with the corresponding information in the depreciation rule.

Figure 22-3 User Defined Depreciation Calculation - Process Flow

Description of "Figure 22-3 User Defined Depreciation Calculation - Process Flow"