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TO ANALYSIS THE TECHNIQUES INVOLVED IN CALCULATION

OF DEPRECIATION AT LG ELECTRONICS
Straight-Line Depreciation

This method uses the estimated salvage value (scrap value) of an asset at the
end of its life and then subtracts that value from its original cost. The difference is
equal to the value that is lost during the asset's productive use. Once figured, this
number is divided by the management's best-guess estimate of the number of years
that the asset will be useful.

Declining Balance Depreciation

Declining balance, a type of accelerated depreciation, is a method used to write


off depreciation costs more quickly and minimize tax exposure. The most common
form of declining balance is the double-declining balance, which is calculated by
multiplying the straight-line rate by 2.

Usually, the declining balance method applies a higher depreciation charge to the first
year of an asset's life and then gradually decreases depreciation expenses for future
years.

Sum-of-the-Years' Digits Depreciation

The sum-of-the-years' digits method offers as depreciation rate that accelerates


more than the straight-line method but less than the declining balance method. Annual
depreciation is separated into fractions using the number of years of the asset's useful
life.

Units of Production Depreciation

Units of production assigns an equal expense rate to each unit produced, which
makes it most useful for assembly or production lines. The formula involves
using historical costs and estimated salvage values and then determining the expense
for the accounting period, multiplied by the number of units produced.
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

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.

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.

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.
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.

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


 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:
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:


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.