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Different Methods of Depreciation Calculation


September 11, 2013 | 31,822 Views |

Darrick Arora
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FIN Asset Accounting


FIN (Finance) | SAP ERP | enterprise resource planning | sap erp financials

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Depreciation Calculation Methods

Various depreciation calculation methods are mentioned below:

i. Base Method

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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)

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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

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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”

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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>

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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

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.
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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:

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Select The depreciation key and click on Assignment of Calculation


methods. Now assign different methods to depreciation key.

Alert Moderator

33 Comments
You must be Logged on to comment or reply to a post.

Naresh Krishnamoorthy
https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 9/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

September 11, 2013 at 9:43 am

Good one…Thanks for your efforts.

Best Regards,

Naresh K.

Diwakar reddy Redlapalli

September 12, 2013 at 10:26 am

Hi Arrora,

Worthy information to understand the calculation methods.

Best Regards

Diwakar reddy

Sanil Bhandari

September 12, 2013 at 10:47 am

Thanks for sharing the information

Regards

Sanil Bhandari

Arvind Pereira

September 13, 2013 at 11:05 am

Very comprahensive about depreciation

https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 10/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

Praveen Chirakkel

September 20, 2013 at 4:20 am

Hi…

Worthy one ….Thanks for your effort

Regards

Praveen

Godavari SAP

September 23, 2013 at 8:37 am

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

Leelendra Adusumilli

September 26, 2013 at 11:34 am

Hello Darrick,

Thanks, very useful guide.

Regards,

Leelendra

https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 11/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

Jandoval Nascimento Silva Junior

September 26, 2013 at 12:10 pm

Hi Darrick.

Thanks for share your knowledge with us.

Best Regards.

Jandoval Nascimento.

Vijay V

October 11, 2013 at 4:44 am

Thanks for sharing document

Arun kumar

October 20, 2013 at 2:50 pm

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

Satya Yenumula

October 23, 2013 at 6:18 am

Hi Darrick,

Thanks a lot for sharing your knowledge.

https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 12/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

Thanks

Satya

rohit singh

October 23, 2013 at 5:21 pm

Hi Darrick,

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

Thanks

Rohit

Lakshmi Sama

October 30, 2013 at 8:49 am

Hi Darrick,

Thanks for sharing your knowledge.

Best Regards,

Lakshmi S

Ranjith Kumar Ramadass

November 27, 2013 at 9:47 am

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Hi Darrick,

Thanks for sharing the information .

Regards

Ranjith

Godavari SAP

December 10, 2013 at 7:56 am

Hello Darrick,

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

Thanks

Godavari SAP

December 27, 2013 at 2:39 pm

Hello All,

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

Thanks

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svamsi amarambedu

January 5, 2014 at 5:28 am

Thanks for your efforts dear……….

shreyas kulkarni

January 27, 2014 at 1:36 pm

Good one, very useful

Thanks

Devendra F

February 19, 2014 at 1:01 pm

Hi,

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

Devendra

Subhadeep Das

March 28, 2014 at 10:16 am

nice document. thanks.

best regds

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Subha

Rasheed Abdul

September 3, 2014 at 3:05 am

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

Very helpful…

Anujit Bagchi

September 3, 2014 at 10:08 am

Very useful information.. THanks for posting

Vinay Srivastava

February 2, 2015 at 4:17 pm

Great effort!

Extremely useful information compiled in one page.

Thank you so much!

CA Paresh Bhagwat

February 5, 2015 at 1:18 pm

Very Good Efforts…

https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 16/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

Ying Zhu

February 6, 2015 at 1:18 pm

Thanks for sharing.

Mithun Chakravarthy Napa

February 18, 2015 at 11:53 am

Thanks

Fernando Martinez Villada

February 20, 2015 at 2:33 pm

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

Yeswanth Itikirala

May 5, 2015 at 12:19 pm

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

Robert leblanc

https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 17/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

March 22, 2016 at 10:09 pm

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.

Karteek k

May 19, 2016 at 6:20 am

Hi

Nice document. Thanks for detailed explanation.

Regards

Karthi

Umma Vijay Deepak

June 15, 2016 at 2:07 pm

Good Document.

https://blogs.sap.com/2013/09/11/different-methods-of-depreciation-calculation/ 18/19
4/13/2018 Different Methods of Depreciation Calculation | SAP Blogs

Saikat sen

March 16, 2017 at 11:46 am

Fantastic Document , Very good Darrick Arora. 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 .

Digambar Borude

November 13, 2017 at 5:41 pm

This has been nicely presented in very simple language.

Thanks a lot

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