Preparing a Depreciation Run

Objective

After completing this lesson, you will be able to explain the basic concept of depreciation calculation

Depreciation Calculation

Kevin's manager wants to know if Kevin has gotten into fixed asset accounting. He asks if Kevin could explain to him how the monthly depreciation for the 3D printer is calculated.

Kevin first uses an AI-generated explanation of the depreciation key.

Kevin decides to prepare a visual overview to show his manager how the monthly depreciation is calculated.

The figure shows the process of calculating depreciation, starting with determining the useful life and applying a depreciation key. The amount calculated using the depreciation key is derived using three methods: multilevel control methods, period control methods, and basic methods. The multilevel methods use, for example, the acquisition value (01) or the net book value (24) as the base value. Period control methods apply a period factor to adjust the time of use within a year (for example, whole year, half year, or three months). Base methods determine the percentage of depreciation, for example, from the useful life (D) or the remaining useful life (R)

The following variables are relevant for the depreciation calculation:
- The planned useful life (defined in the asset master record)
- The depreciation keys (determine the calculation method)
The depreciation key contains all control variables for calculating the planned annual depreciation. The calculation methods are the most important part of the depreciation key for calculating the different, automatically calculated depreciation types.

The depreciation value is calculated from the following formula:

Base Value * Period Factor * Percentage = Calculated Amount

The figure, shows an example of depreciation calculation using a straight-line depreciation method. Base Value is 24 net book value,. Period factor is 1 and the calculation method is R remaining useful life. It starts with a net book value of EUR 10,000 in the current year (CY). The depreciation percentage is determined by dividing the net book value by the remaining useful life. For CY, the percentage is 0.333333, which results in a depreciation amount of EUR 3,333. In CY+1, the net book value is EUR 6,667 with a percentage of 0.500000, which also leads to a depreciation of EUR 3,333. In CY+2, the net book value is EUR 3,334 with a percentage of 1.000000, which in turn leads to a depreciation of EUR 3,334.

These are the baseline facts of the example:

The asset has a useful life 3 years
Depreciation start date 01.01. Acquisition Year (AY)
APC 10000 EUR
Depreciation Key LINS - Straight line depreciation

Follow the video to analyze the depreciation calculation of the 3D printer with Kevin.

Impact of Depreciation Terms on Capitalized Assets

After having calculated everything in detail, Kevin submits the planned monthly depreciation amount of the 3D printer to his manager. But unfortunately the planned depreciation is far too low.

Kevin heads to Lisette's office for some advise on how to correct the depreciation calculation. Kevin asks her what he can do to make the asset depreciate differently. Lisette tells him, that he can either choose a different depreciation key or change the useful life.

When selecting a different depreciation key in the master record or when extending or shortening the useful life, the system recalculates the planned depreciation after saving the master data. The changes are then taken into consideration in the next depreciation run.

To avoid mistakes, it is important to know that the changes to the depreciation key in Useful Life always affect all open fiscal years. So, when a depreciation key is changed for the current year, and the asset exists in the previous fiscal year, and that year is not yet closed, the depreciation of the previous year is recalculated.

To avoid that happening, you can wait until the year-end closing has been performed before making the change. Or, you can make the change time-dependent.

Let's look at how the useful life can be changed on a time-dependent basis.

The figure Depreciation Calculation Example compares two methods of calculating depreciation for an asset with an acquisition cost (APC) of 10,000 over three fiscal years. The left table shows depreciation without time-dependent parameters, resulting in a consistent annual depreciation of 2,000, 4,000, and 4,000, totaling -10,000. The right table illustrates depreciation with time-dependent parameters, showing a more varied depreciation schedule of 2,000, 2,000, and 6,000, also totaling -10,000. Both methods ultimately depreciate the asset by the same total amount, but the timing of the depreciation differs.

For an asset with an original useful life of 5 years and straight line depreciation (net book value over remaining useful life), after 2 years the useful life is shortened to 3 years.

Assumed initial situation:

The acquisition year (AY) of the asset is already closed.
The second year AY+1 of useful life of the asset is still open.
Time-dependent change of the useful life takes place on 01/01 of the third year AY +3 of useful life.

Kevin's Key Takeaways

Note

The changes to the depreciation key and useful life always affect all open fiscal years.
Time-dependent changes only affect future periods.

Change the Useful Life for an Activated Asset

ExerciseStart Exercise

Log in to track your progress & complete quizzes