|
Comply
with Global Statutory Requirements with Formula-based
Depreciation
|
| Contents |
| |
|
Overview
......................................................................................................................
3 |
| |
|
A Global Perspective
....................................................................................................
4 |
| |
| |
|
Straight Line ...............................................................................................................
4 |
| |
|
Sum-of-the-Years'-Digits
..............................................................................................
5
|
| |
|
US-MACRS ................................................................................................................
6 |
| |
| |
|
A Technical
Perspective ..............................................................................................
9 |
| |
| |
|
Variables and Functions
..............................................................................................
9 |
| |
|
Life .............................................................................................................................9
|
| |
|
Salvage Value .............................................................................................................9 |
| |
|
Remaining Life 1..........................................................................................................
9 |
| |
|
MAX ..........................................................................................................................
9 |
| |
|
MIN ...........................................................................................................................
9 |
| |
| |
Appendix --
MACRS Property Classes .........................................................................
10 |
|
| Overview |
| One
of the challenges of a global enterprise is to
meet stringent tax requirements coming from all
over the world. As a worldwide corporation, you
need a financial system that satisfies the needs
from operations in different geographic locations.
This financial system has to enable you to meet
the ever-changing statutory requirements while
keeping cost low. |
|
| This
paper discusses depreciation requirements in various
countries and industries and sheds some light
on how you can meet these requirements using formula-based
depreciation. It also walks you through some complex
depreciation calculations. You will walk away
with all the details you need to create your own
depreciation formulas to optimize your asset accounting
strategies. |
|
|
| A
Global Perspective |
| |
| Norming
Asset Management supports traditional depreciation
methods employed by different countries: MACRS,
Sum-of-year's digits, and straight-line methods
are used in the U.S.; Asian countries such as
Japan, China uses declining balance and flat rate
depreciation; European countries often employ
flat rate methods. In view of frequently changing
statutory requirements governing asset depreciation,
Norming Asset Managemnt introduces Formula-Based
Depreciation. Based on those country-specific
requirements, we derive depreciation formulas
for your considerations. |
|
| Straight
Line |
| This
section discusses a formual-based method that
can be used to calculate the asset depreciation
over its remaining life. This method always result
in identical depreciation expenses as depreciating
an asset's cost over a flat rate of 1/life |
| The
standard straight-line deduction works this way: |
|
|
| The
Adjusted Cost is the same as the recoverable cost,
which is equal to 'book value less salvage value'.
This Adjusted Cost remains constant throughout
the entire life of the asset until a cost adjustment
or revaluation is made. |
| Formula-based
depreciation offers you the option of deriving
a straight-line deduction using Net Book Value
as the basis. The formula you can consider using
is: |
|
1/<Remaining_Life_1>
|
| With
this formula, the system takes the Net Book Value
at the beginning of the Fiscal Year to be the
depreciable basis for that Fiscal Year. |
| The
asset deductions for a 5-year property are as
follows: |
| Year |
Cost |
Accumulated
Depreciation |
NBV |
Depreciation
Expense |
Rate |
|
1
|
100
|
20
|
100
|
20.00
|
0.2
|
|
2
|
100
|
40
|
80
|
20.00
|
0.25
|
|
3
|
100
|
60
|
60
|
20.00
|
0.33333
|
|
4
|
100
|
80
|
40
|
20.00
|
0.5
|
|
5
|
100
|
100
|
20
|
20.00
|
1
|
|
|
|
|
100.00
|
|
|
| Comparing
the above results to the cost-based straight-line
method below, you would notice that the annual
deductions are the same across both methods. |
| |
|
| Sum-of-the-Years'-Digits |
| The sum-of-the-years'-digits method results in a decreasing
depreciation charge based on a decreasing fraction
of depreciable cost, which is cost less salvage
value. Each fraction uses the sum of the years
as the denominator and the number of remaining
useful life as the numerator. In this method,
the numerator decreases every year and the denominator
remains constant. For an asset with a life of
5 years, the annual depreciation rates are (5/15,
4/15, 3/15, 2/15, 1/15). At the end of the assets'
life, the balance remaining should be equal to
the salvage value. |
| The following example illustrates the calculation on a 5-year
asset placed in service in the first period of
the year: |
| Year |
Cost |
Depreciation
Expense |
Accumulated
Depreciation |
Rate |
| 1 |
450000 |
149998.5 |
149998.5 |
0.33333 |
| 2 |
450000 |
120001.5 |
270000.00 |
0.26667 |
| 3 |
450000 |
90000.00 |
360000.00 |
0.2 |
| 4 |
450000 |
59998.5 |
419998.5 |
0.13333 |
| 5 |
450000 |
30001.5 |
450000.00 |
0.03336 |
| |
|
450000.00 |
|
|
|
| Consider the following formula: |
|
2* (Remaining_Life_1) / Life / (Life + 1)
|
| Using the above formula to depreciate 5-year assets with cost
as the depreciable basis, the resulting deductions
are identical to the above table. The discrepancies
in the depreciation expenses are due to rounding.
The following table shows the annual depreciation
expenses using the formula method. |
| Year |
Life |
Remaining
Life |
Cost |
Depreciation
Expense |
Rate |
|
1
|
5
|
5
|
450000.00
|
150000.00
|
0.333333
|
|
2
|
5
|
4
|
450000.00
|
120000.00
|
0.266667
|
|
3
|
5
|
3
|
450000.00
|
90000.00
|
0.2
|
|
4
|
5
|
2
|
450000.00
|
60000.00
|
0.133333
|
|
5
|
5
|
1
|
450000.00
|
30000.00
|
0.066667
|
| |
|
|
|
450000.00
|
|
|
| Here
is the derivation of the formula of sum-of-years'-digits
method: |
|
Sum
of n Year= p=
|
 |
|
Depreciation
Rate =
|
 |
|
Where
m denotes the remaining useful life and n is
the estimated asset life.
|
| |
|
| U.S.
Revenue Codes -- Modified Accelerated Cost Recovery
System |
| In
the U.S., some commonly used tax depreciation
methods are ACRS and MACRS methods. ACRS (Accelerated
Cost Recovery System) was a by-product of the
Economic Recovery Tax Act of 1981. With this depreciation
method, capital investments are stimulated due
to faster write-offs. This method applies to assets
purchased in the years 1981 through 1986. MACRS
(Modified Accelerated Cost Recovery System) was
enacted by Congress in the Tax Reform Act of 1986.
It applies to capitalized assets placed in service
in 1987 and later. |
| The
calculation of depreciation under MACRS differs
from that under GAAP in three aspects: (1) a mandated
tax life, which is generally shorter than the
economic life; (2) cost recovery on an accelerated
basis; and (3) an assigned salvage value of zero.
Tax rules on depreciation tend to change every
year. |
| The
depreciation expense is computed based on the
tax basis, usually the cost, of the asset. The
depreciation method depends on the life of the
assets as mandated by the MACRS property class.
For example, 3-, 5-, 7- and 10-year property employ
double-declining-balance method. (Refer to the
Appendix for MACRS property classes.) When a declining
balance or accelerated method is used, a switch
is made to the straight-line method in the first
year in which straight-line depreciation exceeds
the accelerated depreciation. Depreciation computations
for income tax purposes are based on the half-year
convention. An asset is depreciated to zero salvage
value at then end of the MACRS life. |
| Consider
using the following formula for double-declining
computation: |
|
MAX(
2/ Life , 1/Remaining_Life_1)
|
| In
the formula, 2/Life returns a double-declining
rate. The second part of the formula (1/Remaining
Life 1) returns a straight-line rate. The MAX
function compares the two rates and returns the
greater. Applying this formula to a 7-year property
with a half-year convention and Net Book Value
basis , you can arrive at the results below: |
| Year |
Cost |
NBV |
Remaining
Life |
2/Life |
1/Remaining
Life |
Depreciation |
Accum
Depreciation |
|
1
|
10000
|
10000.00
|
7
|
0.285714
|
0.142657
|
1428.57
|
1428.57
|
|
2
|
10000
|
8571.43
|
6.5
|
0.285714
|
0.153846
|
2448.98
|
3877.55
|
|
3
|
10000
|
6211.45
|
5.5
|
0.285714
|
0.181818
|
1749.27
|
5626.82
|
|
4
|
10000
|
4373.18
|
4.5
|
0.285714
|
0.222222
|
1249.48
|
6876.30
|
|
5
|
10000
|
3123.70
|
3.5
|
0.285714
|
0.285714
|
892.49
|
7768.79
|
|
6
|
10000
|
2231.21
|
2.5
|
0.285714
|
0.4
|
892.49
|
8661.27
|
|
7
|
10000
|
1338.73
|
1.5
|
0.285714
|
0.666667
|
892.49
|
9553.76
|
|
8
|
10000
|
446.24
|
0.5
|
0.285714
|
2
|
446.24
|
10000.00
|
|
|
| Compare
the above results with calculations using MACRS
tables and a cost basis, you will discover that
the annual depreciation expenses are identical.
|
| Year |
Cost |
Rate |
Depreciation |
|
1
|
10000
|
0.14286
|
1428.60
|
|
2
|
10000
|
0.2449
|
2449.00
|
|
3
|
10000
|
0.17492
|
1749.20
|
|
4
|
10000
|
0.12495
|
1249.50
|
|
5
|
10000
|
0.08925
|
892.50
|
|
6
|
10000
|
0.08925
|
892.50
|
|
7
|
10000
|
0.08925
|
892.50
|
|
8
|
10000
|
0.04462
|
446.20
|
|
| Similar
to the Double-Declining method, you can consider
employing the following formula on a 150% declining
balance deduction: |
|
MAX
(1.5/ Life, 1/Remaining_Life_1)
|
...Formula
1
|
| The deductions on a 15-year property using the 150% declining
balance method are as follows: |
| Year |
Cost |
NBV |
Remaining
Life |
1.5/Life |
1/Remaining
Life |
Depreciation |
Reserve |
|
1
|
10000
|
10000.00
|
15
|
0.1
|
0.066667
|
500.00
|
500.0
|
|
2
|
10000
|
9500.00
|
14.5
|
0.1
|
0.068966
|
950.00
|
1450.00
|
|
3
|
10000
|
8550.00
|
13.5
|
0.1
|
0.074074
|
855.00
|
2305.0
|
|
4
|
10000
|
7695.00
|
12.5
|
0.1
|
0.08
|
769.50
|
3074.50
|
|
5
|
10000
|
6925.50
|
11.5
|
0.1
|
0.086957
|
692.55
|
3767.05
|
|
6
|
10000
|
6232.95
|
10.5
|
0.1
|
0.095238
|
623.30
|
4390.35
|
|
7
|
10000
|
5609.66
|
9.5
|
0.1
|
0.105263
|
590.49
|
4980.84
|
|
8
|
10000
|
5019.17
|
8.5
|
0.1
|
0.117647
|
590.49
|
5571.33
|
|
9
|
10000
|
4428.68
|
7.5
|
0.1
|
0.133333
|
590.49
|
6161.82
|
|
10
|
10000
|
3838.19
|
6.5
|
0.1
|
0.153846
|
590.49
|
6752.31
|
|
11
|
10000
|
3247.70
|
5.5
|
0.1
|
0.181818
|
590.49
|
7342.80
|
|
12
|
10000
|
2657.21
|
4.5
|
0.1
|
0.222222
|
590.49
|
7933.29
|
|
13
|
10000
|
2066.72
|
3.5
|
0.1
|
0.285714
|
590.49
|
8523.78
|
|
14
|
10000
|
1476.23
|
2.5
|
0.1
|
0.4
|
590.49
|
9114.27
|
|
15
|
10000
|
885.74
|
1.5
|
0.1
|
0.666667
|
590.49
|
9704.76
|
|
16
|
10000
|
295.25
|
0.5
|
0.1
|
2
|
295.25
|
10000.00
|
|
| The annual depreciation expenses based on the rate tables are: |
| Year |
Cost |
Rate |
Depreciation |
|
1
|
10000
|
0.05
|
500.00
|
|
2
|
10000
|
0.095
|
950.00
|
|
3
|
10000
|
0.0855
|
855.00
|
|
4
|
10000
|
0.06926
|
692.60
|
|
5
|
10000
|
0.06232
|
623.20
|
|
6
|
10000
|
0.05905
|
590.50
|
|
7
|
10000
|
0.05905
|
590.50
|
|
8
|
10000
|
0.05905
|
590.50
|
|
9
|
10000
|
0.05905
|
590.50
|
|
10
|
10000
|
0.05904
|
590.4
|
|
11
|
10000
|
0.05905
|
590.50
|
|
12
|
10000
|
0.05905
|
590.50
|
|
13
|
10000
|
0.05905
|
590.50
|
|
14
|
10000
|
0.05905
|
590.50
|
|
15
|
10000
|
0.05905
|
590.50
|
|
16
|
10000
|
0.02952
|
295.20
|
|
| |
| The
following table exhibits the depreciation rates
of 150 double declining method that can be applied
to 15-year assets placed in service at different
times of the year. There are in total 196 rates.
With formula-based depreciation, however, you
only need to define one simple formula to handle
your needs. |
Year/
Period |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
15 |
16 |
|
1
|
0.1
|
0.09
|
0.081
|
0.0729
|
0.06561
|
0.05905
|
0.05905 |
0.05905
|
0.05905
|
0.05904
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0
|
|
2
|
0.09167
|
0.09083
|
0.08175
|
0.07358
|
0.06621
|
0.0596
|
0.05905 |
0.05905
|
0.05905
|
0.05904
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0.00492
|
|
3
|
0.08333
|
0.09167
|
0.0825
|
0.07425
|
0.06683
|
0.06014
|
0.05905 |
0.05905
|
0.05904
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0.00984
|
|
4
|
0.075
|
0.0925
|
0.08325
|
0.07493
|
0.06743
|
0.06069
|
0.05905 |
0.05904
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0.01476
|
|
5
|
0.06667
|
0.09333
|
0.084
|
0.0756
|
0.06804
|
0.06124
|
0.05905 |
0.05904
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0.01968
|
|
6
|
0.05833
|
0.09417
|
0.08475
|
0.07628
|
0.06864
|
0.06179
|
0.05904 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0.0246
|
|
7
|
0.05
|
0.095
|
0.0855
|
0.07695
|
0.06926
|
0.06232
|
0.05905 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05905 |
0.02952
|
|
8
|
0.04167
|
0.09583
|
0.08625
|
0.07763
|
0.06986
|
0.06287
|
0.05905 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05905
|
0.05904 |
0.03445
|
|
9
|
0.03333
|
0.09667
|
0.087
|
0.0783
|
0.07047
|
0.06342
|
0.05905 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05904
|
0.05905 |
0.03937
|
|
10
|
0.025
|
0.0975
|
0.08775
|
0.07898
|
0.07107
|
0.06397
|
0.05905 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905 |
0.05904
|
0.05905 |
0.04429
|
|
11
|
0.01667
|
0.09833
|
0.0885
|
0.07965
|
0.07169
|
0.06451
|
0.05905 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05904 |
0.05905
|
0.05905 |
0.04921
|
|
12
|
0.00833
|
0.09917
|
0.08925
|
0.08033
|
0.07229
|
0.06506
|
0.05905 |
0.05905
|
0.05905
|
0.05905
|
0.05905
|
0.05904
|
0.05905 |
0.05905
|
0.05905 |
0.05413
|
|
| |
|
| A
Technical Prspectve |
| To
help you derive your own formulas to handle specific
needs in your organization, we present the technical
details on Formula here. |
|
| Variables
and Functions |
| This
section of the document describes in detail each
variable you can use to build a depreciation formula.
The syntax of each function is also outlined here. |
| Life
|
|
| 'Life'
is the useful life of an asset expressed in years.
The value of life is stored in BEY |
| Salvage
Value |
|
| Salvage
Value is the estimated amount that will be received
at the time the asset is sold or removed from
service. It is the amount to which the asset must
be written down or depreciated during its useful
life. The value of salvage value is stored in
BSV. |
| Remaining
Life 1 |
|
| Remaining_Life_1
is the remaining useful life of an asset. Actually,
it refers to the total of remaining depreciation
count. Normally, the number of fiscal period is
12, and then the vale of total count is 60 for
the asset with 5 as the life. The remaining life
is equal to 60 minus accumulated depreciation
count (BDT). |
| MAX |
|
| Syntax:
MAX (expr1, expr2) |
| Returns
the greater value from the expressions expr1,
expr2, which can be a number, formula variable
or a mathematical expression that returns a number.
For example, MAX (2/Life, Life) returns 10 if
Life has a value of 10. |
| MIN |
|
| Syntax:
MIN (expr1, expr2) |
| Similar
to the MAX function, Least returns the less value
from the expressions expr1, expr2, whcih can be
a number, formula variable a mathematical expression
that returns a number. For instance, MIN ( 2/Life,
Life) returns 0.2 if Life has a value of 10. |
|
| Appendix
-- MACRS Property Classes |
| MACRS
consists of two systems, namely General Depreciation
System (GDS) and Alternative Depreciation System
(ADS). GDS is more commonly used and ADS is selected
only if required by law. The difference between
the two system is mainly that ADS provides a longer
recovery period. |
| Tax
lives of an asset depends on the property class.
The MACRS property classes under the General Depreciation
System are presented below : |
| 3-year
property includes: |
|
a.Tractor
units for over-the-road use. |
|
b.Any
race horse over 2 years old when placed in service.
|
|
c.Any
other horse over 12 years old when placed in service.
|
|
d.Qualified
rent-to-own property. |
| 5-year
property includes: |
|
a.Automobiles,
taxis, buses, and trucks. |
|
b.Computers
and peripheral equipment. |
|
c.Office
machinery (such as typewriters, calculators, and
copiers). |
|
d.Any
property used in research and experimentation.
|
|
e.Breeding
cattle and dairy cattle. |
| 7-year
property includes: |
|
a.Office
furniture and fixtures (such as desks, files,
and safes). |
|
b.An
property that does not have a class life and that
has not been designated by law as being in any
ĦĦother class. |
| 10-year
property includes: |
|
aVessels,
barges, tugs, and similar water transportation
equipment. . |
|
b.Any
single purpose agricultural or horticultural structure.
|
|
c.Any
tree or vine bearing fruits or nuts. |
| 15-year
property includes: |
|
a.Certain
depreciable improvements made directly to land
or added to it (such as shrubbery, fences, roads,
and bridges). |
|
b.Service
station buildings and other land improvements
used in the marketing of petroleum and petroleum
products (but not facilities related to petroleum
and natural gas trunk pipelines). |
| 20-year
property includes farm buildings (other than
single purpose agricultural or horticultural structures).
|
| Residential
rental property includes real property such as
a rental home or structure (including a mobile
home) if 80% or more of its gross rental income
for the tax year is from dwelling units. A dwelling
unit is a house or apartment used to provide living
accommodations in a building or structure. It
does not include a unit in a hotel, motel, inn,
or other establishment where more than half the
units are used on a transient basis. If you occupy
any part of the building or structure for personal
use, its gross rental income includes the fair
rental value of the part you occupy. The recovery
period for this property is 27.5 years. |
| Nonresidential
real property includes section 1250 property
that is neither of the following. |
| ĦĦa.Residential
rental property (defined in (7)). |
| ĦĦb.Property
with a class life of less than 27.5 years. |
|
The
recovery period for nonresidential real property
is: |
|
39
years for property you placed in service after
May 12, 1993, or 31.5 Years for property you placed
in service before May 13, 1993. |
|
Depreciation
Methods are mandated by the MACRS property classes
:
|
| MACRS
Property Class |
Depreciation
Method |
Benefits |
| Non-farm
3-,5-,and 10-year property |
Double
Declining Balance |
Provides
a greater deduction during the earlier
recovery years.
Switches to SL when that method provides
a greater deduction.
|
All
farm property(except real propert)
All 15- and 20-year propertyNonfarm 3-,5-,and
10-year property |
150%
Declining Balance |
Provides
a greater deduction during the earlier years
of asset lives |
| 27.5
and 39-year property |
Straight-line |
Straight-line |
|
|
