Formulas for Depreciation
The calculation of depreciation is based on several pieces of information, some of which have to be calculated themselves: depreciable base, useful life, and apportionment method.
Partial or Full Depreciation Based on Units: When catching up depreciation at the time of a sale, disposal, or transfer, depreciation must be adjusted if not all of the units for a component are involved. When depreciating with Mass Depreciation, all existing units are depreciated at the time of the run.
If Mass Depreciation # Disposed Units Ratio = 1
Else # Disposed Units Ratio = Disposed Units / Total Units
Transaction Depreciation by Units: With the # Disposed Units Ratio calculated and the amount of Incremental Depreciation calculated those two are multiplied to arrive at what is commonly called ‘catch up depreciation’ on a disposal.
# Disposed Units Ratio * Calculated Depreciation
Incremental Depreciation: Automatic depreciation is always incremented as depreciation is based on the number of days across each year in a useful life.
Incremental Depreciation = Incremental Fraction * Depreciation
If Historical Cost - Salvage Value - old Accumulated Depreciation – ‘new’ Deprecation < $0.00
Then the amount of Depreciation should be set to the amount that makes Historical Cost - Salvage Value - old Accumulated Depreciation - 'rounded down' Deprecation = $0.00.
Else ‘new’ Depreciation will be used
The Incremental Fraction is a ratio of days eligible for depreciation in a given calendar year divided by the total number of days in that calendar year.
End Date – Start Date / # days in calendar year
When the days eligible for depreciation span a calendar year (December 31st), then there are two partial ranges in a single depreciation time frame. When there is a Depreciation Elements Change (DEPEC) record for an asset that depreciates with time (not activity), there can be two or more ranges.
When there are multiple ranges of depreciation, the very last range adds 1 day to the calculation, which is a result of previous ranges not using the last day in the range. That same 1 day is also added in cases where a range should include the last day of the range. The first such situation is when a sale, transfer, or disposal occurs before the first depreciation. The next is when depreciation occurs for the first time yet the depreciation period does not span the end of a calendar year.
Where there is only a single range, the calculation can be any of the following:
End Date |
Start Date |
Depreciation End Date |
Acquisition Date |
Disposal Date |
In Service Date |
Sale Date |
Last Depreciation Date |
Transfer Date |
|
When the first range in a series of ranges, the calculation can be any of the following:
End Date |
Start Date |
Calendar Year End Date |
Acquisition Date |
DEPEC’s Effective Date |
In Service Date |
Sale Date |
Last Depreciation Date |
Transfer Date |
|
Disposal Date |
|
When a second or subsequent range in a series, the calculation can be any of the following:
End Date |
Start Date |
Depreciation End Date |
Calendar Year Begin Date |
DEPEC’s Effective Date |
DEPEC’s Effective Date |
Sale Date |
|
Transfer Date |
|
Disposal Date |
|
When validating calculated depreciation, there are two points to consider in the following formula:
End Date – Start Date / # days in calendar year
The first is the # days in a calendar year. The application uses 365 days for all years except leap years in which case 366 is used.
The second is whether or not the last date in a range is included. When there is only one range or it is the last range in multiple ranges, the last day is included because the application uses (End Date – Start Date + 1) / # days in calendar year. For all other ranges the formula is just (End Date – Start Date) / # days in calendar year.
Straight Line CalculationStraight Line Calculation
This type of depreciation is a type based on time and not usage. This method applies a set amount of depreciation that spreads the asset’s depreciable base out equally over the useful life.
Annual Depreciation = Original Asset Depreciable Base / Useful Life in Years
Where:
Original Asset Depreciable Base = (Asset Historical Cost – Salvage Value)
Declining Balance CalculationDeclining Balance Calculation
The Declining Balance method is similar to Straight Line but accelerates the rate so that the asset is depreciated more in the beginning of the useful life and then in ever decreasing amounts after that. This method requires that a rate be entered in the Declining Rate field. This amount is used in the calculation for this method.
Annual Depreciation = ((Asset Depreciable Base / Useful Life in Years)* Declining Rate)
Where
Asset Depreciable Base = (Asset Historical Cost – Accumulated Depreciation)
Sum-of-the-Years’-Digits CalculationSum-of-the-Years’-Digits Calculation
The Sum-of-the-Years’-Digits method is a form of accelerated depreciation and has similarities with the Straight Line method.
Annual Depreciation = Asset Historical Cost * (Remaining Life in Years / Sum-of-the-Years’-Digits)
Where
Sum-of-the-Years’-Digits = Useful Life*((Useful Life + 1)/2)
Remaining Life in Years is a whole number that starts with the Useful Life and increments down 1 year with each anniversary of the Acquisition Date or In Service Date, depending on Depreciation Date Indicator from Fixed Asset Type. 1 day after the anniversary causes the increment down 1.
