Fixed asset depreciation is a method of reallocating the cost of a tangible asset over its useful life span. Businesses depreciate long-term (fixed) assets for both accounting and tax purposes. The former affects the balance sheet of a business, and the latter affects the net income that they report. Depreciation expense generally begins when the asset is placed in service.
But there are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. In this blog we will discuss the benefits of using a comprehensive solution that fully integrates.
Defining fixed asset depreciation
Depreciation is defined as the diminution in the utility or value of an asset, is a non-cash expense and does not result in any cash outflow. The causes of depreciation are natural wear and tear.
Methods of computing depreciation and the periods over which assets are depreciated are specified by country laws and/or accounting standards.
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.
Why is fixed 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 are tangible assets. They are 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. However, 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.
One powerful asset register database that can be segregated for different uses, locations, departments or projects!
The key difference between amortisation and depreciation is that amortisation is used for intangible assets, while depreciation is used for tangible assets. The goal in amortising an asset is to match the expense of acquiring it with the revenue it generates.
What about leased assets?
The 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. 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.
Hardcat’s structure allows non-depreciable assets such as those under leases, to be maintained in the same asset database. Appearing in an asset listing without appearing in the depreciation schedule. It is also possible for other asset register users (e.g. IT staff, maintenance staff) to have their own asset classification system without affecting the asset type structure set up for depreciation purposes.
Fixed asset depreciation reporting
Asset depreciation reports are available via a comprehensive list of pre-formatted reports or alternatively create your own custom report formats that can be saved for future use.
Standard reports; available for book, tax or any other user defined depreciation set include:
- 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 (EOY) rollover
- Depreciation set configuration
Centralised 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 fixed asset depreciation module
Hardcat’s fixed asset depreciation module, while easy to use, boasts unparalleled flexibility both in structure and reporting. Allowing 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 Hardcat modules, the depreciation module is supplied with a report generator. Where the user can select from our comprehensive list of pre-formatted reports. Alternatively you can create your 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 insurance valuation and revaluation calculations
- automatic adjustments from previous to 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
- revaluations by asset type
- programmed changes to depreciation rate and/or method by asset or type (ideal for low value pooling)
- facility to handle intangible assets
- asset disposal (including profit/loss on sale and balancing charges)
- 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.
Asset audit trails
Companies are required to efficiently capture and report data to certain regulatory boards and track changes to their assets. Asset management software helps your business comply with regulatory requirements, streamlining reporting and facilitating compliance.
All asset transaction data such as; transferring, buying, selling, and repairing or disposing should be recorded against the assets’ record in your asset register software. Asset audit trails report on the “who, what and when” behind asset maintenance history, protecting your business from liability, assist in monitoring data for security breaches, and demonstrate compliance.
If there is no verifiable source, you cannot provide clarification for any concerns raised!
Look for comprehensive asset solution that incorporate asset finance, spare parts and maintenance. Establishes audit controls (that withstand the rigors of internal and external audits) and track asset life-cycle from initial budget proposal through to final disposal.
As one of our customers said: “Finally, an asset register that keeps both Finance and IT staff happy!”
While easy to use, Hardcat boasts unparalleled flexibility both in structure and reporting. To allow virtually any depreciation scenario to be handled, be it low-value pooling or multiple currencies. You can maintain multiple books and there are a host of standard and customised reports.