1. Accounting
  2. Fixed Assets Management
  3. Setting Up the Fixed Assets Management System
  4. Depreciation Methods
  5. Preconfigured Depreciation Methods

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:

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

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

Note:

The Final Period Convention for Japan depreciation methods are set to Value Based to extend the depreciation beyond the asset life. Assets will be marked Fully Depreciated if the Current Net Book Value equals 1 JPY. This does not apply to 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.

Note:

You can use annual depreciation methods, like 150DB and 200DB, to generate depreciation journal entries. For example, you can create asset types that use 150DB and 200DB as the default accounting method, which will be carried over when an asset is created.

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:

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.

Cost

 

 

 

 

 

 

$90,000

Year 1

110,000

×

$0.20

=

$22,000

$22,000

68,000

Year 2

70,000

×

0.20

=

14,000

36,000

54,000

Year 3

90,000

×

0.20

=

18,000

54,000

36,000

Year 4

80,000

×

0.20

=

16,000

70,000

20,000

Year 5

50,000

×

0.20

=

10,000

80,000

10,000

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.

Book Value

Depreciation Expense

Cumulative Depreciation

Period

$1,000.00

0

0

0

$962.35

$37.65

$37.65

1

$926.12

$36.23

$73.88

2

$891.25

$34.87

$108.75

3

$857.69

$33.56

$142.31

4

$825.40

$32.29

$174.60

5

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.

Book Value - Beginning of Year

Depreciation Expense

Accumulated Depreciation

Book Value - End of Year

$17,000 (Original Cost)

$3,000

$3,000

$14,000

$14,000

$3,000

$6,000

$11,000

$11,000

$3,000

$9,000

$8,000

$8,000

$3,000

$12,000

$5,000

$5,000

$3,000

$15,000

$2,000 (Scrap Value)

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.

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

Book Value - Beg. of Year

Total Depreciable Cost

Depreciation Rate

Depreciation Expense

Accumulated Depreciation

Book Value - End of Year

$1,000 (Original Cost)

$900

5/15

$300 ($900 * 5/15)

$300

$700

$700

$900

4/15

$240 ($900 * 4/15)

$540

$460

$460

$900

3/15

$180 ($900 * 3/15)

$720

$280

$280

$900

2/15

$120 ($900 * 2/15)

$840

$160

$160

$900

1/15

$60 ($900 * 1/15)

$900

$100 (Scrap Value)

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.

Note:

When using the 4–4–5 calendar depreciation method, make sure the asset’s depreciation rule is not set to pro-rata. Using the pro-rata depreciation rule, the system will compute the depreciation amount based on a 30–day month. In a 4–4–5 calendar, the difference in the estimated days and the real length of the period alters the depreciation amount.

Period

Start Date

End Date

DP

YTD No. of Days

1

1/1/2015

1/28/2015

28

28

2

1/29/2015

2/25/2015

28

56

3

2/26/2015

4/1/2015

35

91

4

4/2/2015

4/29/2015

28

119

5

4/30/2015

5/27/2015

28

147

6

5/28/2015

7/1/2015

35

182

7

7/2/2015

7/29/2015

28

210

8

7/30/2015

8/26/2015

28

238

9

8/27/2015

9/30/2015

35

273

10

10/1/2015

10/28/2015

28

301

11

10/29/2015

11/25/2015

28

329

12

11/26/2015

12/31/2015

36

365

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.

Transaction Type

Date

Transaction Amount

Computation

Net Book Value

Depreciation

12/31/2018

2,958.90

12((60000–0)/24)*(36/365)

30,000.01

Depreciation

11/25/2018

2,301.37

12((60000–0)/24)*(28/365)

32,958.91

Depreciation

10/28/2018

2,301.37

12((60000–0)/24)*(28/365)

35,260.28

Depreciation

9/30/2018

2,876.71

12((60000–0)/24)*(35/365)

37,561.65

Depreciation

8/26/2018

2,301.37

12((60000–0)/24)*(28/365)

40,438.36

Depreciation

7/29/2018

2,301.37

12((60000–0)/24)*(28/365)

42,739.73

Depreciation

7/1/2018

2,876.71

12((60000–0)/24)*(35/365)

45,041.10

Depreciation

5/27/2018

2,301.37

12((60000–0)/24)*(28/365)

47,917.81

Depreciation

4/29/2018

2,301.37

12((60000–0)/24)*(28/365)

50,219.18

Depreciation

4/1/2018

2,876.71

12((60000–0)/24)*(35/365)

52,520.55

Depreciation

2/25/2018

2,301.37

12((60000–0)/24)*(28/365)

55,397.26

Depreciation

1/28/2018

2,301.37

12((60000–0)/24)*(28/365)

57,698.63

Acquisition

1/1/2018

60,000.00

12((60000–0)/24)*(28/365)

60,000.00

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.

Note:

The 4–4–5 calendar depreciation does not support irregular accounting periods. If you want to generate monthly depreciation history records and journal entries for an irregular accounting period setup, you must disable the Use Accounting Period Date for Depreciation preference from the FAM System Setup page. Also note that when you disable this preference, the depreciation will use calendar months. In the 4–4–5 depreciation formula, your DP should be equal to the number of days in a specific month.

Related Topics

Fixed Assets Management Overview
Depreciation Methods
Creating a New Depreciation Method
Depreciation Formula

General Notices