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.
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.
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.
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
- Upward/Downward Revaluation
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
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.
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.
Good one...Thanks for your efforts.
Worthy information to understand the calculation methods.
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Very comprahensive about depreciation
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After read this Document, i understand few new points regarding Depreciation methods in Sap.
Thanks for sharing your knowledge.
Thanks for sharing the information .
Thanks a lot for sharing this. I am looking for good notes on Legacy Asset upload process in SAP.
Can you pls explain the use of Dec. factor and Max % and Min with some calculation (example).
Thanks for your efforts dear..........
Good one, very useful
This is simplest and powerful tool to access the Depreciation calculation,
nice document. thanks.
Hi Arrora, its a very useful and detailed document for Depreciation methods and key.
Very useful information.. THanks for posting
Extremely useful information compiled in one page.
Thank you so much!
Very Good Efforts...
Thanks for sharing.
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.
Thanks for your efforts, really useful and easy to understand.
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.
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
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.
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?
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...
Nice document. Thanks for detailed explanation.
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 .
This has been nicely presented in very simple language.
Thanks a lot