Fixed asset depreciation is a method of reallocating the cost of a tangible asset over its useful life span of it being in motion. Businesses depreciate long-term assets for both accounting and tax purposes. The former affects the balance sheet of a business or entity, and the latter affects the net income that they report. Generally, the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used.
Methods of computing depreciation and the periods over which assets are depreciated are specified by country laws and/or accounting standards.
But there are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service.
What is asset depreciation?
Depreciation is defined as the diminution in the utility or value of an asset. Depreciation is a non-cash expense. It does not result in any cash outflow. Causes of depreciation are natural wear and tear.
Asset depreciation is an accounting method of allocating the cost of an asset over its useful life and is used to account for declines in value. Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the assets they purchase as business expenses; however, businesses must depreciate these assets according to their countries tax rules about how and when the company can take the deduction. https://www.investopedia.com/terms/d/depreciation.asp
Why is asset depreciation important?
Whether you utilise an asset or not, that asset is reducing in value over time. Asset depreciation is used to assign cost over their useful life. Calculated asset depreciation is used for tax and accounting purposes as well as to estimate repair and replacement costs.
When a company acquires assets, those assets usually come at a cost. However, because most assets don’t last forever, their cost needs to be proportionately expensed based on the time period during which they are used. Amortisation and depreciation are methods of prorating the cost of business assets over the course of their useful life.
Depreciation for tangible assets
Assets such as property, plant and equipment (PP&E), fixed or physical assets; these assets are tangible, identifiable, and expected to generate an economic return for the company for more than one year or one operating cycle (whichever is longer). The account can include machinery, equipment, vehicles, buildings, land, office space, office equipment, and furnishings, among other things. Note that, of all these asset classes, the land is generally one of the only assets that do not typically depreciate over time.
The amortisation for intangible assets
An intangible asset is a non-physical asset that has a useful life of greater than one year. Some examples of intangible assets are trademarks, customer lists, motion pictures, franchise agreements, and computer software. The key difference between amortisation and depreciation is that amortisation is used for intangible assets, while depreciation is used for tangible assets. Click here for a more extensive list of intangible assets. The goal in amortizing an asset is to match the expense of acquiring it with the revenue it generates.
What about leased assets?
New leases standard requires virtually all leases to be capitalised on the balance sheet. On 13 January 2016, the International Accounting Standards Board (IASB) issued IFRS 16 Leases, which essentially does away with operating leases and, subject to limited exceptions, requires all leases to be capitalised on the balance sheet.
IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.
IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019.
For more information on asset depreciation for Australia – ATO Guide to depreciating assets
What to look for in asset depreciation software
Flexibility! Both in structure and reporting, to allow virtually any depreciation scenario to be handled, be it low-value pooling or multiple currencies. And advanced security features, to ensure against non-finance staff accidentally changing any financial asset values or structures, are important.
Look for an asset register that keeps both finance and IT staff happy!
Save time with asset depreciation reporting
Asset depreciation reports should be available via a comprehensive list of pre-formatted reports or alternatively be able to create your own custom report formats that can be saved for future use. General standard reports such as below are common:
- Depreciation Calculation
- Period Depreciation (Reporting by asset type, cost centre or location, in summary, detailed or total form)
- Year-to-date YTD Reconciliation (Reporting by asset type, cost centre or location, in the detailed or total form)
- Depreciation Exclusion List
- End of Year Rollover
- Depreciation Set Configuration
One powerful asset register database that can be segregated for different uses, locations, departments or projects!
Centralised asset depreciation management
Depreciation for an entire enterprise can be managed by a single dedicated person or team, anywhere in the world. You should be able to allocate depreciation expenses to your different cost centres, no matter whether you are managing one business unit or an entire global enterprise! Your chosen system should allow for flexibility to cater for all the variations, to cover your compliance and reporting needs. Build a log of insurance, depreciation and other financials against your assets over a full lifecycle. And you don’t need to separate non-depreciable assets from assets that are depreciable in the financial reporting processes!
With flexibility in structure and reporting, you can virtually handle any depreciation scenario.
- Full visibility of individual and group asset depreciation at a glance
- Assign individual assets their own depreciable status
- Full depreciation schedule on every asset generated whenever required
- Full mobility through a web browser interface
- Custom reports structured to exact needs of financial governance over the depreciation of assets
- Built-in depreciation calculator
- Current depreciated value integrated directly to the full asset register
- Integration with third-party asset management or accounting tools
- Multiple books and multiple currencies
Hardcat’s asset depreciation module
Hardcat’s fixed asset depreciation module allows all asset depreciation, for all types and all cost centres, to be handled in the one system. While easy to use, Hardcat boasts unparalleled flexibility both in structure and reporting to allow virtually any depreciation scenario to be handled. The module is easy to use and has amazing flexibility both in structure and reporting to allow virtually any depreciation scenario to be handled.
Comprehensive searching, financial reporting and journal export are prime features of our product offering. As with the other modules the depreciation module is supplied with a report generator where the user can select from our comprehensive list of pre-formatted reports or alternatively create their own custom report formats that can be saved for future use.
Hardcat’s fixed asset depreciation module permits individual organisations to tailor their asset depreciation module to suit exact industry, regulatory and/or governance requirements including new International Financial Reporting Standards (IFRS).
- Facilitates compliance with applicable reporting standards
- Significant cost and time savings on depreciation and revaluation calculations
- Automatic adjustments from previous to the current period
- Periods can be closed to retain depreciation values and reopened
- Set years can be any time length with up to 13 periods
- Eliminates time and expense of depreciating assets which no longer exist
- Insurance and replacement value update
- Unlimited number of user-definable depreciation sets (not limited to book and tax sets only)
- Separate sets may be maintained for depreciation forecasts such as historical cost
- Method and rate can be defined by asset type
- Daily percentage rate calculations
- Programmed changes to depreciation rate and/or method by asset or type (ideal for low-value pooling)
- Facility to handle intangible assets
- Insurance valuation and revaluation reporting
- Asset disposal (including profit/loss on sale and balancing charges)
- Extensive pre-formatted reports
- User customised reporting
- Flexible periods within each set
- Individual asset override
- Own import/export facility
- Journal export to your General Ledger (no need to maintain a separate depreciation schedule)
Unlike other depreciation solutions, Hardcat’s structure allows non-depreciable assets such as leased items to be maintained in the same asset database and appear in an asset listing without appearing in the depreciation schedule. It is also possible for other asset register users ( IT and/or Maintenance staff) to have their own asset classification system without affecting the asset type structure set up for depreciation purposes. Advanced security ensures against non-finance staff accidentally changing any financial asset values or structures.
As one of our customers said: “Finally, an asset register that keeps both Finance and IT staff happy!”
The depreciation module permits you to view, report on and calculate depreciation on each asset. You can maintain multiple books and there are a host of standard and customised reports all available online and supports multiple currencies too!