This document gives an introduction to the depreciation types and depreciation rules used in DC1 Asset Management. It also gives an overview of how to work with the rules in various ways.
The most common international methods for calculating depreciation and other costs can be handled by the system. Some of them are listed below together with common sub-methods (see section Depreciation modules for more information):
- Straight-line
- Degressive
- Fixed percentage
- Usage curve
- Progressive
- Combined
- Straight-line/Degressive
- Rate curve
- Sum-of-the-year digit
- Progressive
- Costing depreciation (Index based)
- One time total depreciation
This document is a reference to how depreciation types and depreciation rules are used together and in connection with depreciation. See also About working with depreciations for more information.
Overview
The system provides further flexibility by supplying you with depreciation modules that are linked to depreciation types and assets by using a depreciation rule. Depreciation calculations are based on the depreciation rules and their connected modules. You can either state default depreciation rules per asset type/group or update assets individually.
This overview illustrates how the depreciation calculation for one asset can be set up. In this example, the asset is connected to two depreciation types, but you can connect up to nine types to an asset. See section Depreciation types for further information. To each depreciation type you connect one depreciation rule, and for each rule you need one depreciation module.
Flowchart
Depreciation types
The depreciation function in DC1 Asset Management is flexible and robust. The system provides you with a choice of nine different depreciation types. It handles both your external (e.g. tax) depreciation as well as your internal requirements for, e.g. cost depreciation or calculation of cost of capital. This enables you to comply with any local requirements.
Preloaded depreciation types
In order to facilitate setup, the system comes preloaded with the following depreciation types:
- Depreciation according to plan
- Depreciation according to tax
- Costing depreciation
- Calculation for cost of capital
Note: You can add, change or delete depreciation types.
Depreciation type parameters
In addition to more general parameters (e.g., time schedule and G/L), you have to decide and enter a number of calculation parameters per depreciation type.
| Parameter | Description |
|---|---|
| Calculation base | To decide if the calculation will be based on period (meaning that all periods will have the same length) or will be day-based, 365/366 or 360 days/year. If day-based, depreciation start and end can be anytime within the period. For example, the start could be on the 25th one month and the end on the 24th of the following month. |
| Minimum depreciation amount | The minimum amount for depreciation.To avoid transferring minor depreciation amounts to the G/L, you can define a minimum depreciation amount in the Depreciation type table. |
| Minimum residual value | The lowest residual value for assets. When the asset residual value reaches this amount, the asset will be fully depreciated. If you are using the reducing balance technique, you will have a residual value on an asset that is reduced but does not depreciate to zero. To avoid this, you enter a minimum residual value. |
| Round off per year | How you want depreciation values to be rounded off on a yearly basis. |
| Round off per period | How you want depreciation values to be rounded off on a periodical basis. |
Depreciation rules
As mentioned in section Overview, the depreciation rule will connect a depreciation type for an asset to the module for calculation that will be used. Depending on which module is entered, a number of parameters have to be considered in one of the following ways:
- A constant value.
- A variable name (from the Variable parameter table), which will retrieve the value when performing the calculation.
- Leave the parameter blank if not applicable.
Some additional highlights of working with depreciation rules are listed below:
- You can use the preloaded standard depreciation rules, or you can create your own.
- In most cases, an adjustment made to a depreciation rule is in the form of a percentage value change. You can enter a percentage on the asset level and you can change the percentage in the percentage curve. This means that no modification is made to the actual depreciation rule.
Depreciation adjustments
The “Mode” parameter indicates how to treat the depreciation adjustment that a change of calculation conditions requires, treated by straight-line and curve modules (AACR700, AACR702, AACR703 and AACR704). A minus sign added to the mode means that negative depreciation values (for positive calculation base values) are permitted, both at a single depreciation period and for the year total.
| Mode | Description |
|---|---|
| A | The adjustment will be performed in the final period. |
| B/B- | The adjustment will be spread out over the remaining periods of the current year. If Mode B- is used, also negative depreciation is accepted. |
| C | The adjustment will be spread out over the remaining “life”. |
| D/D- | The adjustment will be performed in the same period as it occurs. If Mode D- is used, also negative depreciation is accepted. |
Depreciation modules
The following sections provide an overview of how you can work with depreciation modules in Asset Management:
- Straight-line depreciation
- Degressive depreciation
- Rate curve depreciation
- Combined depreciation
- Usage curve depreciation
- Cost curve depreciation
- Yearly fixed percentage rate depreciation
- Unlimited
- Limited (up to base value)
- One time total depreciation
Note: The Straight-line depreciation section is more extensively explained than the other calculation modules below. It includes detailed examples on how you can work with a depreciation rule in many different ways (see sub-section Examples) which can be used as reference when reading about the other depreciation methods.
Straight-line depreciation
Straight-line depreciation is the most frequently used method of depreciation and is therefore more extensively exemplified here.
This module calculates depreciation based on acquisition value and economic useful life using this equation:
(Base value is normally equal to acquisition value.)
Note: The equation displays the total depreciated amount per year. The depreciated amount will be distributed per period within the actual accounting year.
The equation does not consider non-depreciable amounts or other parameters (see example 2 below).
This calculation module will be linked to any of your depreciation types. The depreciation type is provided with several parameters. (See Depreciation type parameters for more information.)
Examples
This sub-section contains 10 examples on how the straight-line module works with the setups listed below. These examples can be used as reference when reading about the other calculation methods in this document.
Note: These parameters are only exemplified with the straight-line calculation module. All examples will use the period calculation base (see Depreciation type parameters).
This example is based on acquisition value and economic useful life. In the Asset file, you enter the economic useful life which will be used in the calculation.
Preconditions:
| Asset acquisition value: | 1,000,000 |
| Economic useful life: | 5 years |
| First depreciation period: | 0101 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 200,000 | 800,000 |
| 02 | 200,000 | 600,000 |
| 03 | 200,000 | 400,000 |
| 04 | 200,000 | 200,000 |
| 05 | 200,000 | 0 |
If you are using Straight-line depreciation, and also need to deduct for a non-depreciable amount, it will have the following impact:
Preconditions:
| Asset acquisition value: | 1,000,000 |
| Non-depreciable amount: | 200,000 |
| Economic useful life: | 5 years |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 160,000 | 840,000 |
| 02 | 160,000 | 680,000 |
| 03 | 160,000 | 520,000 |
| 04 | 160,000 | 360,000 |
| 05 | 160,000 | 200,000 |
Note: The 200,000 stated as a non-depreciable amount is left on the asset balance. In this case, the residual value is 200,000 instead of zero, and there will be no further depreciation.
The period handling in Asset Management is very flexible. You can start depreciation in periods other than the acquisition period. You decide for each asset in which period you want to start. Below is an example of the calculations when you start in period 0107 instead of 0101.
Preconditions:
| Asset acquisition value: | 1,000,000 |
| First depreciation period: | 0107 |
| Last depreciation period: | 0606 |
| Economic useful life: | 5 years |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 100,000 | 900,000 |
| 02 | 200,000 | 700,000 |
| 03 | 200,000 | 500,000 |
| 04 | 200,000 | 300,000 |
| 05 | 200,000 | 100,000 |
| 06 | 100,000 | 0 |
Note: In the schedule in the Depreciation type table, you state the periods within an accounting year in which you want to calculate depreciation. Whether you calculate depreciation to all periods, to some periods, or just to the last one has no impact on the calculated yearly amount.
To avoid transferring minor depreciation amounts to the G/L, you can define a minimum depreciation amount in the Depreciation type table. Below is an example of what happens when you use this feature.
Preconditions:
| Asset acquisition value: | 1,000,000 |
| Minimum depreciation amount: | 250,000 |
| Economic useful life: | 5 years |
| First depreciation period: | 0101 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 250,000 | 750,000 |
| 02 | 250,000 | 500,000 |
| 03 | 250,000 | 250,000 |
| 04 | 250,000 | 0 |
Note: No matter what the system calculates as depreciation for this asset, the minimum amount of depreciation must be 250,000. Because of the minimum amount, this asset is fully depreciated in 4 years instead of 5 (the economic useful life).
You can define a minimum residual value in the Depreciation type table. When the asset residual value reaches this amount, the asset will be fully depreciated. If you are using the reducing balance technique (see Degressive depreciation below), you will have a residual value on an asset that is reduced but does not depreciate to zero. To avoid this, you enter a minimum residual value.
Preconditions:
| Asset acquisition value: | 5,000 |
| Minimum residual value: | 2,500 |
| Economic useful life: | 5 years |
| First depreciation period: | 0101 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 1,000 | 4,000 |
| 02 | 1,000 | 3,000 |
| 03 | 3,000 | 0 |
Note: The asset in this example will be fully depreciated in 3 years instead of 5 (the economic useful life) because the asset reaches the minimum residual value in year 3 (0312).
Define a round off value in the Rounding-off/year field in the Depreciation type table if you want to round off the amount depreciated per year. Below is an example of how this feature works when you want the amount stated without decimals.
Note: If you use this feature, the system rounds per year, not per period. To round off per period, use the “Round off per period” feature described in the next section.
Preconditions:
| Asset acquisition value: | 10,000 |
| Round off per year: | 1 |
| Economic useful life: | 3 years |
| First depreciation period: | 0101 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 3,333.00 | 6,667.00 |
| 02 | 3,333.00 | 3,334.00 |
| 03 | 3,334.00 | 0.00 |
Note: The amount is adjusted in the final depreciation year. If the amount rounded off per year is greater than the acquisition value, no depreciation are calculated in the first 2 years, and the 10,000 is depreciated in year 3.
To calculate a rounded-off amount each period, define a value in the Rounding-off/period field in the Depreciation type table.
This feature rounds off depreciation per period, but the total yearly depreciation is left untouched. This means that the final period is adjusted to comply with the total for the year. In the example below, no decimals are posted. If you wish to calculate even thousands, the value in this field should be 1,000 instead of 1.
Note: To adjust both the period and yearly depreciation, use a combination of this feature and the “Round off per year” feature.
Preconditions:
| Asset acquisition value: | 10,000 |
| Round off per period: | 1 |
| Number of periods: | 12 |
| Economic useful life: | 3 years |
| First depreciation period: | 0101 |
Depreciation result:
| Period | Depreciation | Residual value |
|---|---|---|
| 0101 | 278.00 | 9,722.00 |
| 0102 | 278.00 | 9,444.00 |
| : | : | : |
| 0111 | 278.00 | 6,942.00 |
| 0112 | 275.33 | 6,666.67 |
Total depreciation year 01: 3,333.33
In the example below, both the period and the yearly depreciation are adjusted.
Preconditions:
| Asset acquisition value: | 10,000 |
| Round off per year: | 1 |
| Number of periods: | 12 |
| Round off per period: | 1 |
| Economic useful life: | 3 years |
| First depreciation period: | 0101 |
Depreciation result:
| Period | Depreciation | Residual value |
|---|---|---|
| 0101 | 278.00 | 9,722.00 |
| 0102 | 278.00 | 9,444.00 |
| : | : | : |
| 0111 | 278.00 | 6,942.00 |
| 0112 | 275.00 | 6,667.00 |
Total depreciation year 01: 3,333.00
For your internal depreciation types, you can hold depreciation on asset level. This means that the asset is excluded from the depreciation calculation. When you release the asset from this mode, depreciation starts again. When using this, you will not have an accumulated value in the first period after releasing the asset from the hold mode.
Preconditions:
| Asset acquisition value: | 10,000 |
| Economic useful life: | 5 years |
| First depreciation period: | 0101 |
| Hold depreciation during periods: | 0301-0312 |
Note: This forces you to depreciate this asset in the year 06, instead of finishing the depreciation in year 05. The total amount year 06 will be calculated in the first period this year.
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 2,000 | 8,000 |
| 02 | 2,000 | 6,000 |
| 03 | 2,000 | 4,000 |
| 04 | 2,000 | 2,000 |
| 05 | 0 | 2,000 |
| 06 | 2,000 | 0 |
New, technical improvements may have an impact on your older assets’ economic useful life. There can also be other changes that will affect the calculation, e.g., changed non-depreciable amounts or changes in the rate curve. There is no standard method for handling these changes. Therefore, you can choose whatever way fits your needs.
You can change the rules concerning depreciation from four different modes that are defined for each rule in the Depreciation rule table and which will be connected to the Straight-line and Curve depreciation modules (see section Depreciation adjustments):
Preconditions:
| Asset acquisition value: | 1,000,000 |
| Economic useful life: | 5 years
In year 03, period 01, you change the economic useful life to 4 years. |
| First depreciation period: | 0101 |
Mode A
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 200,000 | 800,000 |
| 02 | 200,000 | 600,000 |
| 03 | 250,000 | 350,000 |
| 04 | 350,000 | 0 |
Modes B and D
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 200,000 | 800,000 |
| 02 | 200,000 | 600,000 |
| 03 | 350,000 | 250,000 |
| 04 | 250,000 | 0 |
The difference between Modes B and D in this example is that the adjustment amount year 03 (100,000) will appear in the first period if Mode D is used, but will be spread out over the year if Mode B is used.
Mode C
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 200,000 | 800,000 |
| 02 | 200,000 | 600,000 |
| 03 | 300,000 | 300,000 |
| 04 | 300,000 | 0 |
Note: If the recalculation affects the depreciation in that you should have depreciated less than you actually did, depreciation will stop until you reach a period where the actual residual value equals the new recalculated residual value. However, if you enter a minus sign after a mode (e.g., B-), the depreciation will not stop, but instead create negative depreciation amounts.
Degressive depreciation
Use the Degressive depreciation module when you want your depreciation to be considered as declining balances. Depreciation is then calculated based on the depreciation rate and the residual value at the beginning of the year, using the following equation:
This section provides an example of how you can use this rule based on fixed percentage. For information about rounding off, minimum amounts, and changes of calculation conditions, see section Depreciation types in the introduction and sub-section Examples.
The following calculation is based on depreciation rate and residual value. To run it, you need a fixed percentage rate on each asset (if not entered direct into the depreciation rule that you are using). You can also retrieve default values from the Asset type & group table. This is a declining (reducing) balance method which means that it continues to subtract 20% even from minor residual values. You can stop this by entering a minimal residual value or by using the round off function.
Preconditions:
| Asset acquisition value: | 10,000 |
| Depreciation rate: | 20.00 % |
| First depreciation period: | 0101 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 2,000 | 8,000 |
| 02 | 1,600 | 6,400 |
| 03 | 1,280 | 5,120 |
| 04 | 1,024 | 4,096 |
| 05 | 819.20 | 3,276.80 |
| 06 | 655.35 | 2,621.45 |
| : | : | : |
| 26 | 6.05 | 24.20 |
| : | : | : |
Rate curve depreciation
Select this module if the depreciation rates that you use within your company vary from year to year, or if you have special formulas to follow, like SOFTY (sum-of-the-year digit). This rule enables you to create your own rate curves. The rate curve works with relative years, so you do not need to consider different starting years. Depreciation is calculated based on acquisition value and rate using the following equation:
(Base value is normally equal to acquisition value.)
See sub-section Examples for further explanation.
This calculation example is based on acquisition value and a rate from a curve (SOFTY) which is entered into the Rate curve file.
Preconditions:
| Asset acquisition value: | 10,000 |
| Rate curve: | SOFTY |
| First depreciation period: | 0101 |
Depreciation result:
| Rate curve (SOFTY) | |
|---|---|
| Year | Percentage |
| 01 | 6.67 |
| 02 | 13.33 |
| 03 | 20 |
| 04 | 26.67 |
| 05 | 33.33 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 667 | 9,333 |
| 02 | 1,333 | 8,000 |
| 03 | 2,000 | 6,000 |
| 04 | 2,667 | 3,333 |
| 05 | 3,333 | 0 |
Combined depreciation
Use the combined depreciation module if you can choose between two different depreciation values. In this case, the system will select the most favorable depreciation. The two values to compare are the straight-line module and the degressive module. How to adjust for this change between modules depends on the adjustment mode you use. You select the mode in the Depreciation rule table. (For further explanation, see sub-section Examples and section Depreciation adjustments).
Depreciation is calculated, and the highest amount based on these two formulas is selected as the depreciation amount:
(Base value is normally equal to acquisition value.)
or
This example is based on acquisition value (10,000) and an entered fixed percentage rate (30%).
Preconditions:
| Asset acquisition value: | 10,000 |
| Economic useful life: | 5 years |
| Fixed percentage rate: | 30% |
| First depreciation period: | 0101 |
Mode A
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 3,000 | 7,000 |
| 02 | 2,100 | 4,900 |
| 03 | 2,000 | 2,900 |
| 04 | 2,000 | 900 |
| 05 | 900 | 0 |
In this case the system first uses the degressive module value and then switches to the straight-line in year 03 because 2,000 is greater than 1,470. The difference will be adjusted in the final year’s final period.
Modes B and D
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 3,000 | 7,000 |
| 02 | 2,100 | 4,900 |
| 03 | 1,470 | 3,430 |
| 04 | 1,430 | 2,000 |
| 05 | 2,000 | 0 |
In modes B and D, the system adjusts in the year when you switch rules (03).
Mode C
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 3,000 | 7,000 |
| 02 | 2,100 | 4,900 |
| 03 | 1,633.33 | 3,266.67 |
| 04 | 1,633.33 | 1,633.34 |
| 05 | 1,633.34 | 0 |
In mode C, the system adjusts by dividing the difference value with the number of years remaining.
Usage curve depreciation
If you want to base your depreciation on the actual consumption, mileage, machine hours, etc., the system provides you with the Usage curve depreciation module. In order to run this module, you need to set up a usage curve.
The main reason for using this method is that you need not to have your depreciation curve values set up in advance. You can update the usage curve period by period, based on the actual consumption.
You will then have your calculations based on used quantity in relation to total quantity.
The equation is:
(Base value is normally equal to acquisition value.)
See sub-section Examples for further explanation.
This example is based on acquisition value and a distance curve (DIST), which is entered in the Usage curve table.
Preconditions:
| Asset acquisition value: | 10,000 |
| First depreciation period: | 0101 |
| Usage curve: | DIST |
Usage curve table
Depreciation result:
| Year | DIST curve (total qty 5,000 km) |
|---|---|
| 01 | 500 km |
| 02 | 1,000 km |
| 03 | 1,000 km |
| 04 | 500 km |
| 05 | 2,000 km |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 1,000 | 9,000 |
| 02 | 2,000 | 7,000 |
| 03 | 2,000 | 5,000 |
| 04 | 1,000 | 4,000 |
| 05 | 4,000 | 0 |
Cost curve depreciation
Use the Cost curve depreciation module if you want to base your depreciation on a revaluated replacement value instead of an acquisition value for your internal accounting. This rule is based on replacement value and technical useful life using the following equation:
where:
As this method is based on a revaluated value, it continues depreciating until it reaches the end of the technical useful life. The residual value is not taken into account at all, as it is not applicable in this method. Thus, you never get a residual value of zero.
See sub-section Examples for further explanation.
Preconditions:
| Asset acquisition value: | 10,000 |
| Replacement base value: | 10,000 |
| Index: | Index |
| Index base period: | 0101 |
| Technical useful life: | 10 years |
Index table
Depreciation result:
| Year | Index |
|---|---|
| 01 | 100.00 |
| 02 | 110.00 |
| 03 | 120.00 |
| 04 | 110.00 |
| 05 | 120.00 |
| 06 | 125.00 |
| 07 | 130.00 |
| 08 | 140.00 |
| 09 | 150.00 |
| 10 | 125.00 |
Depreciation result:
| Year | Depreciation | Remaining amount |
|---|---|---|
| 01 | 1000.00 | N/A |
| 02 | 1100.00 | N/A |
| 03 | 1200.00 | N/A |
| 04 | 1100.00 | N/A |
| 05 | 1200.00 | N/A |
| 06 | 1250.00 | N/A |
| 07 | 1300.00 | N/A |
| 08 | 1400.00 | N/A |
| 09 | 1500.00 | N/A |
| 10 | 1250.00 | N/A |
Yearly fixed percentage depreciation – limited or unlimited
Use one of these modules when you want your depreciation to be considered as declining balances. Base value is normally equal to acquisition value. In both these modules, you are also able to use other values as the calculation base for the depreciation. If you want the calculation of depreciation to stop when the accumulated depreciations have reached maximum value (acquisition value – non-depreciable amount), use the limited module. Otherwise, use the unlimited. Depreciation is then calculated based on the depreciation rate and the chosen base value using the following equation:
(Base value is normally equal to acquisition value.)
This section provides an example of how you can use this module based on a yearly percentage. For information about rounding off, minimum amounts, and changes of rules, see sub-section Examples.
The following example will use the limited depreciation module. To run it, you need a fixed percentage rate on each asset (if not entered direct into the depreciation rule you are using). You can also retrieve default values from the Asset type & group table. This is a declining (reducing) balance method which means that it continues to subtract 20% even from minor residual values. You can stop this by entering a minimal residual value or by using the round off function.
Preconditions:
| Asset acquisition value: | 10,000 |
| Depreciation rate: | 17.50% |
| First depreciation period: | 0101 |
Depreciation result:
| Year | Depreciation | Residual value |
|---|---|---|
| 01 | 1,750 | 8,250 |
| 02 | 1,750 | 6,500 |
| 03 | 1,750 | 4,750 |
| 04 | 1,750 | 3,000 |
| 05 | 1,750 | 1,250 |
| 06 | 1,250 | 0 |
One time total depreciation
This depreciation module will depreciate the residual value (which normally is equal to base value) at the first depreciation period with this module.
See sub-section Examples for further explanation.