Considerations When Changing Depreciation Methods
The most common circumstance that may require changes to depreciation methods for existing assets occurs as a result of acquisitions and mergers in which conflicting depreciation methods, lives, and policies are in force for the same types of property.
In this circumstance, many users allow their existing assets to continue depreciating under the "old" methodology until they are fully depreciated; they apply the "new" depreciation methodology to all new assets and only on a forward-going basis. (Some users make an exception to this strategy by also applying their "new" depreciation methodology to assets with a longer useful life.)
Because changes to depreciation methodology for assets with depreciation history in Costpoint Fixed Assets usually require some user intervention, the example that follows illustrates some of the issues you may encounter.
Assumptions for this example:
| Asset Cost: | $ 6,000.00 | |
| Depr Start Date: | 09-12-99 | |
| Company's Fiscal Year: | January to December | |
| Old Depr Method: | SL 5 | Date of Purchase basis |
| New Depr Method: | DDB 200% | Date of Purchase basis |
| Date of Change: | 04-24-01 | (FY 2001, Pd 4) |
| As of FY 200, Pd 4: | Curr Depr Yr = 2 | |
| Days/Pds Remaining = 9 | ||
In this example, the depreciation method for an asset with a five-year useful life must be switched from straight-line methodology to double declining-balance methodology in its second depreciation year. This declining-balance method indicates a switch to straight-line in the year in which straight-line depreciation is greater (in year 5).
Old Depr Method - SL5
| Year | % |
|---|---|
| 1 | 20.00 |
| 2 | 20.00 |
| 3 | 20.00 |
| 4 | 20.00 |
| 5 | 20.00 |
New Depr Method - DDB 200%
| Year | % |
|---|---|
| 1 | 40.00 |
| 2 | 24.00 |
| 3 | 14.40 |
| 4 | 10.80 |
| 5 | 10.80 |
In purchase year 1 (both "old" and "new" depreciation methods use Date of Purchase basis), the system historically expensed 20% ($1,200) for this asset using SL5 methodology. If you had used DDB 200% methodology, the system would have expensed 40% ($2,400) in purchase year 1.
For now, we'll ignore the issue of going back to a prior year and simply address the change in the current purchase year on a forward-going basis. This asset is now in its second purchase year—any change we make to depreciation methodology will be reflected in full at the end of the second full purchase year.
We are short 20% going forward because we now want to use DDB 200% methodology. It will be your decision on how to remedy this. You should create a NEW depreciation method code for any standard methodology that you revise, because standard methodology for your "new" depreciation methods will prevail on a forward-going basis (with no revisions) for your new assets.
Do you want to plug the 20% missed in year 1 into current year 2 so that subsequent years 3 - 5 will be correct, as in the example below?
Note that, for this option, we changed the percentage for year 2 for method DDB200 from 24% to 44% on the Manage Depreciation Methods screen.
Method - DDB 200%
| Year | % |
|---|---|
| 1 | 20.00 |
| 2 | 44.00 |
| 3 | 14.40 |
| 4 | 10.80 |
| 5 | 10.80 |
Do you want to spread the 20% missed in year 1 over the remaining 4 years (including current year 2), as in the example below?
Note that, for this option, we changed the percentages for years 2 - 5 for method DDB 200% by spreading the 20% as a 5% increase in each of years 2, 3, 4, and 5 on the Manage Depreciation Methods screen.
Method - DDB 200%
| Year | % |
|---|---|
| 1 | 20.00 |
| 2 | 29.00 |
| 3 | 19.40 |
| 4 | 15.80 |
| 5 | 15.80 |
Or, do you want to develop another methodology to handle the 20% missed in year 1?
For any other methodology you choose, simply create a new depreciation method code and enter the desired percentages on the Manage Depreciation Methods screen.
After you have decided overall how to handle the 20% missed in year 1, you will need to create new depreciation methods with the desired years and percentages, as in the previous tables. You must create a separate revised depreciation method code for each current and future year of useful life for each depreciation method currently used.
(For example, the previous illustrations regarding percentage adjustments by year apply only to this sample asset that is currently in its second year of useful life. You will also need to set up percentages for new depreciation method DDB 200% for assets in their third year of life, fourth year of life, and fifth year of life, because different incorrect percentages have already been expensed in the past based on the historical S/L methodology.)
How do you want to spread the change in the current year depreciation?
To control how the system will compute and distribute "catch-up" depreciation (either positive or negative, as applicable) for the current year (purchase year or fiscal year), select one of the following options in the System-Wide Configuration for Depreciation Calculations group box on the Configure Fixed Assets Settings screen:
- Spread among remaining periods in PY or FY
Select this option to spread the amount of "catch-up" depreciation evenly throughout the remaining periods in the current purchase year or fiscal year, as applicable. If you choose this option, the system divides the amount of catch-up depreciation by the number of periods remaining in the depreciation year and includes this amount in each period's depreciation.
- Added to current period amount
Select this option to include the total amount of catch-up depreciation in the depreciation for the current period, regardless of basis.
Regardless of the methodology you select as a "catch-up" system option, you can always apply a different methodology on an asset-by-asset basis by making manual edits.
How can you physically change the depreciation methods in asset records?
Several functions and utilities in Costpoint can help with this task:
- Use the Manage Asset Master Global Changes screen to select the specialized subsets of records and perform the changes automatically.
Note that you can use optional screens on the Asset/Template Changes menu to enable the system to capture change data, store it in history, and make it available for you to view and print.
Other Considerations
Because of the nature of Date of Purchase-based depreciation methods, whose purchase years cross fiscal years (except when the purchase is made in the first period of the fiscal year), the whole issue of changing depreciation methodology becomes more complex than with Fiscal Year-based depreciation methods. Keep this in mind when developing your strategies for change.
Prior FY Issues
The application of newly-revised depreciation methodologies to historical data for closed prior fiscal years is time-consuming and manually intensive. Consider carefully whether you really want to "dump" this type of extreme retroactive adjustment into the Prior Years Retained Earnings account.
The most direct way to revise the historical data is to compute the revised depreciation off-line via a spreadsheet for each year of history for each prior depreciation year and depreciation method. Another alternative is to create a test Fixed Assets directory/DB in which you can change depreciation methods, and so on, and use the Fixed Assets module to perform the computation for you.
After you have completed the computations, you would then need to make a summary journal entry directly to the G/L for the adjustment(s). Keep in mind, however, that Journal entries made directly to the G/L that bypass Fixed Assets always pose reconciliation issues because these entries will never be reflected in Fixed Assets reports that call up Fixed Assets data.
Ideally, in this circumstance, you would also make individual adjustments to the Prior FY Depreciation amount in each asset record to minimize any reconciliation issues. Fixed Assets reports that call up Fixed Assets data will still not contain the correct data, however. Manual intervention in the Asset Master records is tedious and inefficient; if the technical expertise to provide more efficient solutions does not reside in-house, you may find that the most beneficial solution is to request technical consulting assistance from Deltek.