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Different Methods of Depreciation Calculation

Depreciation Calculation Methods

Various depreciation calculation methods are mentioned below:

i.  Base Method

ii. Declining Balance Method

iii. Maximum Amount Method

iv. Multi Level Method

v. Period Control Method

i.     Base Method

Base Method- SPRO> IMG> Financial Accounting (New)> Asset Accounting>Depreciation> Valuation Methods> Depreciation Key> Calculation Methods>Define Base Methods

Base method primarily specifies:

        • The Type of depreciation  (Ordinary/ Special Depreciation)
        • Depreciation Method used (Straight Line/ Written Down value Method)
        • Treatment of the depreciation at the end of Planned useful life of asset or when the Net Book value of asset is zero (Explained in detail later in other related transactions ).

Straight Line Method (SLM)

        • This is the simple method of depreciation.
        • It charges equal amount of depreciation each year over useful life of asset.
        • It first add up all the costs incurred to bring the asset in use and then it divides that by the useful life of asset in years to calculate the depreciation expense.
        • E.g.: Say a Computer costs Rs. 30,000 and Rs. 11,000 (as additional set-up/installation/maintenance expenses) = Rs 41,000 and it is anticipated that its scrap value will be Rs. 1,000 at the end of its useful life, of say, 5 yrs.

Total Cost = Cost of Computer + Installation Exp. + Other Direct Costs

Depreciable Amount over No. of years = Total Cost – Salvage Value (At end of useful life)

30,000 +11,000 =41,000 (Total cost)

41,000 – 1,000 = 40,000 as the Depreciable Amount

Depreciable Amount = Rs. 40,000, Spread out over 5 years = Rs. 40,000/5(Yrs) = Rs. 8000/- depreciation per annum.

Written Down Value Method (WDV)

        • This method involves applying the depreciation rate on the Net Book Value (NBV) of asset. In this method, depreciation of the asset is done at a constant rate.
        • In this method depreciation charges reduces each successive period.
        • This method should be used in those assets, where high depreciation should be charged in initial years.
        • Assume the price of a depreciable asset i.e. computer is Rs. 40,000 and its salvage value after 10 years is 0.
        • In this method NBV will never be zero.

Depreciation Per year = (1/N) Previous year’s value, Where N= No. of years

So in our example, the depreciation amount during the first year is

[Rs. 40,000*1/10] =Rs.  4,000

NBV of computer after 1st year= Rs 40,000- 4,000 = Rs. 36,000

Depreciation for 2nd year is 

[Rs. 36,000*1/10] =Rs. 3,600

ii.     Declining Balance Method

       Enter Transaction code AFAMD- Change View “Declining Balance Method”

AFAMD- Change View “Declining Balance Method”- SPRO> IMG> Financial Accounting (New)> Asset Accounting>Depreciation> Valuation Methods> Depreciation Key> Calculation Methods> Define Declining-Balance Methods

This is the other name of Written Down Value (WDV) method as mentioned in Base method above.

If the WDV method is specified in Base method then the following additional settings in this method can be used:

        • A multiplication factor for determining the depreciation percentage rate. The system multiplies the depreciation percentage rate resulting from the total useful life by this factor.
        • A lower limit for the rate of depreciation. If a lower depreciation percentage rate is produced from the useful life, multiplication factor or number of units to be depreciated, then the system uses the minimum percentage rate specified here.
        • An upper  limit for the rate of depreciation.If a higher depreciation percentage rate is produced from the useful life, multiplication factor or number of units to be depreciated, then the system uses the maximum percentage rate specified here.

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iii.     Maximum Amount Method

Maximum Amount Method- SPRO> IMG> Financial Accounting (New)> Asset Accounting>Depreciation> Valuation Methods> Depreciation Key> Calculation Methods> Define Maximum Amount Method

Generally, If we uses Straight line method, then depreciation amount should be same for all years. But depreciation on asset is subject to change due to many factors e.g. any addition to the asset, change in estimate of useful life, change in estimate of scrap value etc.

So for maintaining better control on the amount of depreciation, SAP has provided this method where we can specify the maximum amount that can be charged as expense in a particular year. If this is specified, user will not be able to post depreciation exceeding the amount specified here.

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iv.       Multi Level Method

       Enter Transaction code AFAMS- Change View “Multilevel Method”

AFAMS- Change View “Multi Level Method”- SPRO> IMG> Financial Accounting (New)> Asset Accounting>Depreciation> Valuation Methods> Depreciation Key> Calculation Methods> Define Multi Level Methods

As the name itself suggests, this method provides the flexibility to specify different rate of depreciation for different years/periods. E.g. in some cases depreciation rate required is different in initial years and after that the rate should be changed.  This can be achieved in SAP by using Multi level Method.

In this method, SAP provides us the possibility to  specify different levels during the useful life of an asset. Each level represents the period of validity of a certain percentage rate of depreciation. This percentage rate is then replaced by the next percentage rate when its period of validity has expired. We can specify the validity period for the individual levels of a asset  in years and months.

It also provides the flexibility to us to choose the defined validity period, which can begins with

        • The capitalization date.
        • The start date for ordinary or tax depreciation.
        • The original acquisition date of the asset under construction.
        • The changeover year.

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v.       Period Control method

       Enter Transaction code AFAMP- Maintain Period Control Method

AFAMP- Maintain Period Control Methods”- SPRO> IMG> Financial Accounting (New)> Asset Accounting>Depreciation> Valuation Methods> Depreciation Key> Calculation Methods> Maintain Period Control Methods

It is one of the most relevant method to keep control on the calculation of depreciation. Here we mention the different rules for periods in case of different scenarios for assets. This method controls the period for which the depreciation is calculated on an asset during the year.

Under this method, we can specify the period for which the depreciation should be calculated in case of :

        • Acquisition of Asset/Subsequent acquisition
        • Retirements/Scrap
        • Sales/Transfers
        • Upward/Downward Revaluation

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There are some standard methods that has been provided by SAP e.g. Pro rata at

mid period, Pro rata at period start date, at the start of year or At mid year etc. E.g., If client requires to depreciate an asset from the First day of the year in which the asset is capitalised, we can use the method `At the start of the Year` in case of Acquisition.

This method has been explained with the help of one comprehensive example below:

Example: A company wants to charge depreciation as follows. Client follows calendar year from January-December 2013 as

Accounting/Fiscal year.

1.   In case of Asset Acquisition: Depreciation should start from the First day of the year in which asset is acquired.

2.   In case of Asset Addition: Depreciation should start from the Ist day of period  of date of addition.

3.   In case of Asset retirement: Depreciation should be charged upto Mid period regardless of date of retirement.

4.    In case of Asset Transfer: Depreciation for the full year should be charged by the transferee company.

    

After having knowledge of all the depreciation calculation methods, we can assign the depreciation calculation methods to the depreciation key.

Creation of Depreciation key:

  • Asset accounting module of SAP calculates the depreciation on Assets based on the configuration done for Depreciation key. Depreciation Key basically contains the calculation methods which in combination control the following:

    • Period for which Depreciation is charged
    • Method of Depreciation
    • Scrap value, if any
    • Planned change in Method of Depreciation

We enter a separate depreciation key for each depreciation area in the asset master record.

     Creating Depreciation Key:

Enter Transaction code AFAMA- Change View “Depreciation Key”

                 AFAMA- Change View “Depreciation Key”- SPRO> IMG> Financial Accounting (New)> Asset Accounting>Special Valuation> Net Worth Tax>Depreciation Key>Define Depreciation keys

As depreciation key is Chart of  Depreciation dependent, system will prompt to enter chart of Depreciation on accessing transaction AFAMA and screen shown below will be displayed.

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Here, we need to specify the following at appropriate fields\check boxes:

      • No./Name  of Depreciation key Numeric/Alphanumeric.
      • Maximum Amount method (Discussed above in methods of depreciation)
      • Cutoff value key to control the scrap value if no absolute scrap value is maintained in the system. The cutoff percentage rate that is determined on the basis of this cutoff value key is only used by the system when:
        • There is no absolute scrap value entered in the the depreciation areas of the asset concerned (an absolute scrap value takes precedence over a cutoff percentage rate)
        • Negative book value is not allowed for the asset
      • Whether ordinary depreciation should continue to be charged in a year in which special depriciation is also charged on the asset or not?
      • Set `Depreciation to the day` indicator to allow system to calculate the depreciation according to the number of days the asset is used.

If this indicator is set, period control method assigned to depreciation key will be ignored and Asset value date will be considered as the depreciation start date.

Assignment of Depreciation Calculation Method to Depreciation key:

      Select The depreciation key and click on Assignment of Calculation methods. Now  assign different methods to depreciation key.

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      37 Comments
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      Author's profile photo Former Member
      Former Member

      Good one...Thanks for your efforts.

       

      Best Regards,

      Naresh K.

      Author's profile photo Former Member
      Former Member

      Hi Arrora,

       

      Worthy information to understand the calculation methods.

       

      Best Regards

      Diwakar reddy

      Author's profile photo Sanil Bhandari
      Sanil Bhandari

      Thanks for sharing the information

       

      Regards

      Sanil Bhandari

      Author's profile photo Arvind Pereira
      Arvind Pereira

      Very comprahensive about depreciation

      Author's profile photo Former Member
      Former Member

      Hi...

      Worthy one ....Thanks for your effort

       

       

      Regards

      Praveen

      Author's profile photo Godavari SAP
      Godavari SAP

      Hello Arora - This is what I am looking for long. Thanks a lot.

      Author's profile photo Former Member
      Former Member

      Hello Darrick,

       

      Thanks, very useful guide.

       

      Regards,

      Leelendra

      Author's profile photo Former Member
      Former Member

      Hi Darrick.

       

      Thanks for share your knowledge with us.

       

       

      Best Regards.

       

      Jandoval Nascimento.

      Author's profile photo Vijay V
      Vijay V

      Thanks for sharing document

      Author's profile photo Former Member
      Former Member

      Very good information. Than you very much and appreciate the effor made.

      Author's profile photo Former Member
      Former Member

      Hi Darrick,

       

      Thanks a lot for sharing your knowledge.

       

      Thanks

      Satya

      Author's profile photo rohit singh
      rohit singh

      Hi Darrick,

       

      After read this Document, i understand few new points  regarding Depreciation methods in Sap.

       

      Thanks

      Rohit

      Author's profile photo Lakshmi Sama
      Lakshmi Sama

      Hi Darrick,

       

      Thanks for sharing your knowledge.

       

      Best Regards,

      Lakshmi S

      Author's profile photo Former Member
      Former Member

      Hi Darrick,

       

      Thanks for sharing the information .

       

      Regards

      Ranjith

      Author's profile photo Godavari SAP
      Godavari SAP

      Hello Darrick,

       

       

      Thanks a lot for sharing this. I am looking for good notes on Legacy Asset upload process in SAP.

       

       

      Thanks

      Author's profile photo Godavari SAP
      Godavari SAP

      Hello All,

       

       

       

      Can you pls explain the use of Dec. factor and Max % and Min with some calculation (example).

       

       

       

      Thanks

      Author's profile photo Former Member
      Former Member

      Thanks for your efforts dear..........

      Author's profile photo Former Member
      Former Member

      Good one, very useful

       

      Thanks

      Author's profile photo Former Member
      Former Member

      Hi,

       

      This is simplest and powerful tool to access the Depreciation calculation,

       

      Devendra

      Author's profile photo Subhadeep Das
      Subhadeep Das

      nice document. thanks.

       

      best regds

      Subha

      Author's profile photo Rasheed Abdul
      Rasheed Abdul

      Hi Arrora, its a very useful and detailed document for Depreciation methods and key.

      Very helpful...

      Author's profile photo Anujit Bagchi
      Anujit Bagchi

      Very useful information.. THanks for posting

      Author's profile photo Former Member
      Former Member

      Great effort!

      Extremely useful information compiled in one page.

      Thank you so much!

      Author's profile photo CA Paresh Bhagwat
      CA Paresh Bhagwat

      Very Good Efforts...

      Author's profile photo Former Member
      Former Member

      Thanks for sharing.

      Author's profile photo Former Member
      Former Member

      Thanks

      Author's profile photo Former Member
      Former Member

      I am working with fixed assets as of now and i was not clear of the difference of all of them. The Fixed asset manual (AC305) is not quite clear on this.

       

      Many thanks.

      Fernando

      Author's profile photo Yeswanth Itikirala
      Yeswanth Itikirala

      Thanks for your efforts, really useful and easy to understand.

      Author's profile photo Robert leblanc
      Robert leblanc

      Very good information:

      I have following questions:

      1. Of all the depreciation calculation methods that are assigned to depreciation key in AFAMA, does only one act at any point in time to determine the depreciation or do multiple calculation methods act together to determine the depreciation. in other words why do we have to assign multiple depreciation methods to a single depreciation key?

      if a key has multiple phases, then I have seen that for instance, for each phase, different base methods are assigned. Once the single phase or multiple phase depreciation key is assigned all these depreciation calculation methods, how does the system determine the correct phase and correct method from the depreciation key configuration?

       

      Appreciate any responses to my questions.

      Author's profile photo Micheal Mathews
      Micheal Mathews

      Hi Experts,

      I would want to apologize for randomly tagging everyone on this. However if anyone can answer point 1 mentioned above it would be really helpful, or please do tag someone who you know can answer this..

      Thank you for your help and support

       

      Hitesh Agrawal

      Jonathan Eemans

      Author's profile photo Jonathan Eemans
      Jonathan Eemans

      Hi,

      Only one calculation method is active at a certain point in time for a depreciation key.

      When you have multiple calculation methods in a depreciation key, there's a changeover at a certain moment in time to switch from one calculation method to another one.

      Certain depreciation methods necessitate a changeover to another calculation method for mathematical reasons in order to depreciate the asset completely within the period of use. An example is the declining-balance method of depreciation, which never results in a net book value of zero. Apart from this, there may be legal regulations that allow or necessitate the changeover to another method.

      Therefore, when you assign calculation methods to a depreciation key, you can enter a changeover method. The changeover method specifies when the system should change over to a different calculation method (for example, Changeover when net book value percentage is reached). The changeover method also specifies the conditions under which the changeover takes place. You can also enter a net book value percentage for certain changeover methods.

      Best regards,
      Jonathan Eemans

      Author's profile photo Micheal Mathews
      Micheal Mathews

      Hi Jonathan,

      Thank you for the explanation, however how do you come to know which calculation method is currently active.

      This is my config screenshot, where 4 methods are defined and changeover is blank so which method is being used by SAP?

       

      Author's profile photo Jonathan Eemans
      Jonathan Eemans

      Hi Micheal,

      In your example there's no automatic depreciation as the base method is 0002 (no automatic depreciation).

      Let's use another example: straight line depreciation based on remaining value and remaining life with depreciation start first day of month of capitalisation

      This depreciation key is configured as follows...

      • Base method: 0011 (Ordinary: percentage from useful life)
      • Decl.-bal method: irrelevant as it's straight line depreciation so we use 001 (0.00x / 0.0000% / 0.0000%)
      • Period control: 001 (01/01/02/02) > 01 as period control for acquisition with 01 at start of period
      • Multilev.Meth.: 001 (0.0000% (NBV)) > Calculate Percentage from Remaining Useful Life with Net book value as Base Value Key for Depreciation Calculation

      Best regards,

      Jonathan Eemans

      Author's profile photo Former Member
      Former Member

      Hi

       

      Nice document. Thanks for detailed explanation.

       

      Regards

      Karthi

      Author's profile photo Umma Vijay Deepak
      Umma Vijay Deepak

      Good Document.

      Author's profile photo Saikat sen
      Saikat sen

      Fantastic Document , Very good Former Member. I have some questions on Assets accounting. Can you please share your personal mail ID so that I can send you because I need some help from you .

      Author's profile photo Former Member
      Former Member

      This has been nicely presented in very simple language.

       

      Thanks a lot