Fixed Assets Depreciation

Depreciation is the process by which an asset’s book value decreases over time.  As capital assets age, wear, or become obsolete, the loss in value is recognized as depreciation expense.  A computer, for example, that initially cost $2,000 is worth substantially less than the original cost in the third year of its useful life.  Advantage Fixed Assets allows users to define the types of assets your organization will depreciate, the depreciation method employed, and the accounting structure(s) to which depreciation posts.

This section discusses the following topics:

• Defining Depreciable Assets

  The Fixed Asset Type (FATP) Table allows users to define the types of assets that are subject to depreciation by setting the Deprecation Indicator field as appropriate (Selected or Not Selected).  Land and Construction assets are typically not depreciable, while all other asset types are normally depreciable.  However this distinction is a site-specific policy decision.  You may check whether a specific asset type is subject to depreciation by reviewing the records on FATP.

• Defining the Depreciation Method

  Each asset entered into Advantage Fixed Assets system requires a Depreciation Method. The field is located on the Fixed Asset Acquisition (FA) document in the Cost, Valuation, and Depreciation tab.  This field controls the type of depreciation calculation that will be performed.  The field's default value is blank and must be provided for each asset.  Even if the Fixed Asset Type is not subject to depreciation, Not Applicable is required.

  Since most Governments use the straight line method exclusively, Advantage Fixed Assets provides for depreciation calculations based on that method.  In addition to the Straight Line method, the following depreciation methods can be entered:

  • Manually Computed

  • Modified

  • Not Applicable

  The only depreciation method supported for automated depreciation is Straight Line. For assets that need to have depreciation calculated external to Advantage and only recorded in Advantage, the Manually computed method can be chosen. The Modified method can be used only the Infrastructure Maintenance Assets (FAIM).  Using the Modified approach to depreciation allows you to not depreciate certain assets if those are maintained in a certain way.  For example, roads and bridges will last forever if properly maintained - so they should not be depreciated in the normal way because the useful life is undetermined.  Instead of the depreciation, you can opt to track the maintenance of those assets on the Infrastructure Maintenance (FAIM) table and depreciate them based on the wear and tear.  If the asset is not eligible for depreciation (example Land), select the method as Not Applicable.

  If the Depreciation Method field is blank, a value may be inferred based on the Fixed Asset Catalog code.  For Composite assets, the Depreciation Method is inferred from the asset header.

Calculation of Depreciation

• Composite Depreciation

Each Fixed Asset Acquisition (FA) document header includes a subsection to provide Composite Asset details.  When the Composite Indicator checkbox is selected, many of the fields in this sub section are required.  Depreciation calculations for Assets flagged as Composite receive a separate treatment.  More specifically, the calculations are impacted as follows:

• If the Composite Indicator is Selected, depreciation calculations are based on the single set of depreciation attributes stored on the asset header.  The header Useful Life, Acquisition Date/ In Service Date, Deprecation Method, and Depreciation Structure determine the amount applied to each asset component.  The expense is then allocated to each accounting line based on the net book value of each accounting line funding the asset component.

• If the Composite Indicator is Not Selected, each asset component is depreciated separately using the depreciation attributes defined on each Component Line.  The expense is then allocated to each accounting line based on the net book value of each accounting line funding the asset component.

Formula For Depreciation

Depreciation is calculated using the following formula:

• Incremental Depreciation Expense = Annual Depreciation Expense * In Service Years

Where:

1. • Annual Depreciation Expense = Asset Depreciable Base / Residual Useful Life (in years)

   • Asset Depreciable Base = Asset Historical Cost – Salvage Value – Accumulated Depreciation

   • Residual Useful Life = Useful Life – ((Last Depreciation Date – In Service Date*) / (Number of days in calendar year))

   • In Service Years = (Depreciation End Date – Last Depreciation Date) / (Number of days in calendar year)

   • If Residual useful life < 0 then set it to zero. If Residual useful life = 0 then annual depreciation =0

Notes:

• Residual Useful Life calculation uses In-Service Date or Acquisition Date based on the Date Indicator established on FATP.  Example assumes In-Service Date [I] is selected.

• Current period depreciation may never exceed the Asset’s Depreciable Base.  In the event that the calculated depreciation is greater than the Asset Depreciable Base, current period depreciation is set equal to the Asset Depreciable Base.

For additional details on depreciation process please refer the Mass Depreciation run sheet in the CGI Advantage Financial - Fixed Assets Run Sheets guide.

Retrospective and Prospective Effects of Depreciation Elements Change

The depreciation calculation distinguishes the retrospective effect (triggers recalculation for all prior periods of depreciation) versus prospective effect (affects the current period and all future periods only) of certain changes. There can be changes to the depreciation elements in terms of useful life of asset, salvage value and asset value. The depreciation should be calculated after considering the effective dates of the changes to the depreciable elements.

Such changes to the depreciable elements are stored in the Depreciation Element Changes (DEPEC) table. The process first checks whether any eligible records (Active records) exist in the Depreciable Elements Change Table and uses the information (”before” and ”after” values that impact depreciation) to calculate the depreciation.  If no eligible Depreciable Elements Change table records are found then the process uses the information stored on the Fixed Asset Registry (Useful Life, Acquisition Date, In Service Date, Last Depreciation Date, Asset Value, Accumulated Depreciation, and Salvage Value) to calculate depreciation updates.

There can be one or more than one active eligible records on the DEPEC table. If there are multiple matching records on the DEPEC table for the FAR record’s Asset Number and Component number it compares the Effective date of the DEPEC table records with the Depreciation End date. The active eligible DEPEC records are sorted by effective date so that the records with the lowest Effective date is considered first in the calculation. The effective date of the eligible records can be lesser than as well as greater than the depreciation end date. The logic for calculating the depreciation is detailed below:

• For the first record, depreciation will be calculated for the period from Last Depreciation Date of the FAR record to the Effective date using the Old values of the DEPEC record. In this case, both the Last Depreciation date and the Effective date should be excluded while calculating the number of days.

• For the next DEPEC record, depreciation will be calculated for the period from Effective date of the first DEPEC record to the next record’s Effective date less one day using the New values of the First DEPEC record. This logic will be continued until it reaches a record where the Effective date is greater than the Depreciation End date.

• For the DEPEC records whose Effective date is greater than the Depreciation End date, depreciation will be calculated using the old values of that DEPEC record for the period from the Effective date of the last DEPEC record to the Depreciation End date.  In this case both Effective date and the Depreciation End date should be considered while calculating the number of days.

• The job will update the Active flag, Processed Date, Last Action Date, Modification Document Code, Modification Document Department and Modification Document ID fields on the corresponding DEPEC records used in the depreciation calculation except the record that has Effective date greater than the Depreciation End date.

• For each DEPEC record used in the calculation, the job will insert one new record into the DEPH table.