Optimal Strategies for Asset Accounting and Depreciation Calculation
Understand how depreciation rules vary between jurisdictions and the different accounting standards
and how complex / enterprise asset accounting scenarios can be met by xAssets Fixed Asset Management Software
08 May 2023
Paul Lambert

Optimal Strategies for Asset Accounting and Depreciation Calculation

Introduction

Asset accounting is the process of tracking and reporting on a company's assets. This includes both tangible assets, such as equipment and buildings, and intangible assets, such as patents and trademarks. Depreciation is the process of allocating the cost of an asset over its useful life. This is done in order to match the expense of the asset with the revenue it generates.

There are a number of different asset accounting and depreciation strategies that a company can choose from. The optimal strategy will vary depending on the company's specific circumstances. However, there are a number of factors that companies should consider when choosing an asset accounting and depreciation strategy, such as:

  • The type of assets the company owns
  • The company's tax jurisdiction
  • The company's financial reporting requirements
  • The company's internal reporting requirements

In this blog post, we will discuss the optimal asset accounting and depreciation strategies for companies in the European Union (EU), the United Kingdom (UK), the United States (US), and Canada.

When is Depreciation Allowable ?

Depreciation is permitted for assets that are in use and generating income for the business.

Depending on jurisdiction and the purposes of the book within which depreciation is being calculated, there may be circumstances where depreciation is allowed on an asset that is no longer in service or has been disposed of. For example, if an asset is destroyed or becomes obsolete before the end of its useful life, the business may be able to take a partial or full write-off of the remaining book value of the asset.

Similarly, if an asset is sold or disposed of before the end of its useful life, the business may be able to take a partial write-off of the remaining book value of the asset. This is known as a loss on disposal, and it represents the difference between the net book value of the asset (i.e., the original cost of the asset minus accumulated depreciation) and the proceeds received from its sale or disposal.

In some cases, the business may be able to continue depreciating an asset that is no longer in service if it is still held for productive use or held for sale. This can occur, for example, if the business has a large inventory of assets that are not currently being used, but are expected to be put back into service at some point in the future.

Asset Accounting and Depreciation Calculation in the EU

In the EU, companies adhere to the International Financial Reporting Standards (IFRS). This standard requires companies to use the straight-line method to calculate depreciation for financial reporting purposes. However, companies can choose to use an accelerated depreciation method for tax purposes. We recommend using a dual book system to manage asset accounting and depreciation calculation in the EU. This system involves maintaining two sets of books, one for financial reporting and one for tax purposes.

Asset Accounting and Depreciation Calculation in the UK

In the UK, companies follow the Generally Accepted Accounting Principles (GAAP) when calculating depreciation for financial reporting purposes. GAAP requires companies to use the straight-line method or the declining balance method. However, for tax purposes, companies can use an accelerated depreciation method. We recommend using a three-book system to manage asset accounting and depreciation calculation in the UK. This system involves maintaining three sets of books, one for financial reporting, one for tax purposes, and one for capital gains tax.

Key differences between IFRS and UK GAAP in Asset Accounting

  • Intangible assets
    • Under IFRS, the life of an intangible asset is indefinite, but under FRS 102, it should be no more than 10 years.
    • Under FRS 102, as long as the capitalisation criteria is met, you're allowed to recognise development costs in the profit or loss, or on a balance sheet. Under IFRS, meanwhile, all development costs must be capitalised as long as the criteria is met.
  • Goodwill
    • Under UK GAAP, goodwill is amortized over a period of up to 20 years, but under IFRS, goodwill must be tested for impairment at least annually.
    • Under UK GAAP, goodwill arising on a business combination is not required to be tested for impairment if the fair value of the identifiable net assets acquired exceeds the purchase price. Under IFRS, goodwill arising on a business combination is always required to be tested for impairment.
  • Investment property
    • Under UK GAAP, investment property is measured at fair value, but under IFRS, investment property can be measured at either fair value or cost.
  • Financial instruments
    • Under UK GAAP, financial instruments are classified as either debt or equity, but under IFRS, financial instruments are classified into a number of different categories, each with its own specific accounting treatment.
  • Leases
    • Under UK GAAP, leases are classified as either operating leases or finance leases, but under IFRS, leases are classified into a number of different categories, each with its own specific accounting treatment.

If needed, UK companies can represent assets in both these forms by using separate books for IFRS and UK GAAP

Asset Accounting and Depreciation Calculation in the USA

In the USA, companies adhere to the Generally Accepted Accounting Principles (GAAP) for financial reporting and the tax code for tax purposes. GAAP requires companies to use the straight-line method or the accelerated method, such as MACRS (Modified Accelerated Cost Recovery System) or ACRS (Accelerated Cost Recovery System). MACRS and ACRS are methods used for tax purposes to calculate depreciation over a shorter period, which results in larger depreciation deductions. We recommend using a four-book system to manage asset accounting and depreciation calculation in the USA. This system involves maintaining four sets of books, one for financial reporting, one for tax purposes, one for MACRS, and one for ACRS.

Asset Accounting and Depreciation Calculation in Canada

In Canada, companies adhere to the Canadian Generally Accepted Accounting Principles (GAAP) for financial reporting and the Income Tax Act for tax purposes. GAAP requires companies to use the straight-line method or the declining balance method. For tax purposes, companies can use the declining balance method or the capital cost allowance (CCA) method. We recommend using a dual book system to manage asset accounting and depreciation calculation in Canada. This system involves maintaining two sets of books, one for financial reporting and one for tax purposes.

Key Differences between IFRS and Canadian GAAP in Asset Accounting

Under Canadian GAAP, intangible assets are amortized over their useful life, while under IFRS, intangible assets are not amortized unless their value declines. This difference can have a significant impact on the financial statements of a company, as it can affect the amount of depreciation expense that is recorded each year.

Under Canadian GAAP, goodwill is amortized over a period of up to 20 years, while under IFRS, goodwill must be tested for impairment at least annually. This difference can also have a significant impact on the financial statements of a company, as it can affect the amount of goodwill impairment expense that is recorded each year.

Canadian GAAP and IFRS differ in the way that financial instruments are accounted for. Under Canadian GAAP, financial instruments are classified as either debt or equity, while under IFRS, financial instruments are classified into a number of different categories, each with its own specific accounting treatment. This difference can also have a significant impact on the financial statements of a company, as it can affect the amount of interest expense or income that is recorded each year.

Salvage Value

Salvage value is the estimated value of an asset at the end of its useful life. In asset accounting, salvage value is used to determine the depreciation of an asset - i.e. we start depreciating at the original value of the asset, and we stop when the salvage value is reached, so a straight line depreciation formula might look like this:

(OriginalValue - SalvageValue) / RecoveryPeriod

The above calculates the depreciation to be placed on each asset on a monthly basis, and recovery period represents the number of months of useful life of the asset. By taking into account the salvage value, the depreciation expense can be calculated more accurately.

Asset purchases are recorded on the balance sheet. The cost of the asset is then allocated over its useful life using a depreciation method such as the straight line method shown above. This depreciation expense is recorded on the income statement, reducing profit and increasing expenses. When the asset reaches the end of its useful life, the remaining value of the asset, which is the salvage value, is subtracted from the original cost to determine the total amount of depreciation expense for the life of the asset.

Salvage value also influences the book value of an asset. The book value of an asset is the original cost minus the accumulated depreciation. When an asset reaches the end of its useful life, the book value is equal to the salvage value. At this point, the asset is considered fully depreciated, and it is removed from the balance sheet.

It's important to note that the use of salvage value in asset accounting and depreciation calculations can vary depending on the specific accounting standards and regulations in a particular country or region. In some cases, the salvage value may be required to be estimated and updated periodically to ensure accurate financial reporting.

Representing Real-World Enterprise Depreciation Scenarios

xAssets was designed from the ground up to cover large enterprise asset accounting needs. This includes:

  • Multiple Company Support
  • Multiple Book Support
  • Multiple Currency Support
  • Exchange Rates
  • Multiple Sets of Accounting Periods
  • Multiple Nominal Ledgers
  • Unusual Accounting Periods and any Changes to Accounting Periods
  • Indexation
  • Formula based depreciation calculation
  • Depreciation calculations can lookup into tables, including MACRS and ACRS
  • Depreciation calculations can include complex requirements for salvage, disposals and other transactions
  • Manual Depreciation Entry is possible
  • Revaluations and Impairments
  • Assets can exist with different currencies in different books
  • Percent Business Use
  • Half Year, Mid Month, and Mid Quarter conventions
  • Posting rules are user defined, so you can determine how transactions are journalled
  • Custom Journal layouts are fully supported

Exchange rates are automatically loaded daily, weekly or monthly from a bank website API feed.

Unusual accounting periods are supported, such as 5,5,4, 13 week quarters, seasonal quarters and non-calendar year periods. Each accounting period is a database record with a start date and end date, so any scenario can be represented by our data model. If you have two companies with different nominal ledgers, different year ends, or different accounting periods, xAssets can represent these companies correctly within a single database instance.

There is no limit to the number of companies, books or currencies you can use in the system, so many representations of the same asset are possible, and books can support multiple jurisdictions against an asset or its children

Companies who are changing their year end dates can use the software to represent those accounting periods correctly and report on short years as expected.

xAssets also allows you to model depreciation formulae on a trial basis to see how they would affect assets.

Some examples of the depreciation formulae we can represent in xAssets include:

Depreciation TypeSql Formula
Standard 20% Declining Balance
0.2 * (NetBookValue - SalvageValue) * (DepreciableDaysInExistence / DaysInYear)
No Depreciation0
Straight Line over Recovery Period
(OriginalValue - SalvageValue) / RecoveryPeriod
Standard Depreciation at 25% per annum
0.25 * OriginalValue * DepreciableDays / DaysInYear
GDS Tables
Lookup() * BusinessUseFactor * InServiceFlag * Basis / DepreciablePeriodsInServiceInYear
GDS 200% DB Half Year Calculated
2 * (PeriodsInFy / RecoveryPeriod) * HalfYearFactor * BusinessUseFactor * BasisDepreciated / DepreciablePeriodsInServiceInYear
GDS 200% DB Mid Quarter Calculated
2 * (PeriodsInFy / RecoveryPeriod) * MidQuarterFactor * BusinessUseFactor * BasisDepreciated / (DepreciablePeriodsInServiceInQuarter * 4)
GDS 200% DB Mid Month Calculated
2 * (PeriodsInFy / RecoveryPeriod) * MidMonthFactor * BusinessUseFactor * BasisDepreciated / DepreciablePeriodsInServiceInYear
Straight Line Daily
(DepreciableDaysInExistence / DaysInPeriod) * (OriginalValue - SalvageValue) / RecoveryPeriod
Straight Line Daily In Service
(DepreciableDaysInService / DaysInPeriod) * (OriginalValue - SalvageValue) / RecoveryPeriod
Straight Line Half Year
(PeriodsInFy / RecoveryPeriod) * HalfYearFactor * BusinessUseFactor * Basis / DepreciablePeriodsInServiceInYear
Sum of Years Digits
(OriginalValue - SalvageValue) * InServiceFlag * (RecoveryPeriod / 12 - YearsInService) / (12 * (RecoveryPeriod / 12) * ((RecoveryPeriod / 12) + 1) / 2)
Straight Line Mid Quarter
(PeriodsInFy / RecoveryPeriod) * MidQuarterFactor * BusinessUseFactor * Basis / (DepreciablePeriodsInServiceInQuarter * 4)
Straight Line Whole Month
(DepreciableDaysWholeMonth / DaysInPeriod) * BusinessUseFactor * Basis / RecoveryPeriod
Straight Line Mid Month
MidMonthFactor * BusinessUseFactor * Basis / RecoveryPeriod
Lease Amorization - Straight Line
Basis / RecoveryPeriod
Whole Year Straight Line
FirstPeriodInFYFlag * Basis * PeriodsInYear / (RecoveryPeriod)
Straight Line Half Year with Disposal
Option:IgnoreNetBookValueInMonthOfDisposal | Case When DisposedThisPeriodFlag = 1 Then ((PeriodsInFy / RecoveryPeriod) * HalfYearFactor * BusinessUseFactor * Basis) - AccumulatedDepreciationThisYear Else (PeriodsInFy / RecoveryPeriod) * HalfYearFactor * BusinessUseFactor * Basis / DepreciablePeriodsInServiceInYear End

Construction in Progress

xAssets also supports Construction in Progress (CIP) and Bill of Materials (BOM), however those topics are outside the scope of this article.

Conclusion

Proper asset accounting and depreciation calculation are crucial for accurate financial reporting and maximizing profits. xAssets makes it easy for companies to choose an optimal strategy for asset accounting and depreciation calculation. In the EU, UK, USA, and Canada, we recommend using different book systems to ensure accurate financial reporting and tax compliance.

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