AC605 Profitability Analysis

AA003 – Depreciation

Content developed by Kavita Agarwal /Ajay Maheshwari

Course Overview Diagram
Overview 1
& Org elements

Special scenarios 7 Master data &

2
Asset acquisition

Information 6 Depreciation 3
System

YE Closing 5 Retirements 4
& transfers

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Chapter Contents

 Different methods of depreciation

– SLM/WDV/Useful life
 Different types of depreciation
– Ordinary depreciation
– Unplanned depreciation
– Special depreciation
 Understanding the components of depreciation Key
– Base method
– Multilevel method
– Period control
– Other settings
 Depreciation posting

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Introduction
 Due to continuous use of the asset, the value of the asset reduces due to wear &
tear and this is charged in the P/L as depreciation
 Another accounting school of thought towards depreciation is that the benefit
accruing to the business out of a fixed asset is usually long term.
– Hence, upon acquisition, the asset is capitalized and periodically charged off to the P/L as
depreciation
 Important methods of depreciating an asset are
– SLM: The depreciation amount remains same year over year. Depreciation is calculated
on the original value of the asset
– WDV: The depreciation amount diminishes year after year. Depreciation is calculated on
the NBV (i.e. original value – accumulated dep up to PY)
– Useful life: The depreciation amount depends on the useful life. At the end of useful life,
the NBV is reduced to zero
– Depreciation is calculated as Original value / Total useful life (OR) NBV/ rem. useful life

 A depreciation key is assigned to the asset master which specifies the depreciation
method and other key parameters to calculate the depreciation
 Depending on the posting frequency chosen by the organization, the depreciation
is posted into FI-GL

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Types of deprecation

Planned depreciation: depreciation charged on an asset at a pre-defined

rate of depreciation (E.g. 10% p.a. or based on useful life).
Planned depreciation can be categorized into
– Ordinary depreciation: depreciation charged in the normal course of business as
per the depreciation terms, year-after-year
– Special deprecation: depreciation charged over and above the ordinary
depreciation, usually for a temporary period.
Unplanned depreciation: depreciation charged on an asset to account for
any abnormal reduction in the NBV of an asset.
Components of depreciation key

Depreciation
Key

Other
Base Multi Level Period
settings
Method Method Control

Cut Off Value

Acquisition allowed
Only in cap year Dep to the day
Period control
acc to FY Dep Class
Change over
method Multiple Shift
indicator
Shutdown indicator
.... Continued
Base method: Specifies the basis of calculation i.e. dep. based on an explicit %
or dep based on useful life, etc
The important base methods used are
– 0011: for useful life based depreciation
– 0014: for explicit % based depreciation
– 0017: for immediate dep in the month of acquisition
A base method also controls other key parameters such as
– If depreciation is to be calculated after the useful life ends
– If depreciation is to be calculated even after the NBV is zero
Multilevel method (MLM): Specifies,
– The base value for calculating dep (i.e. original acquisition cost / net book value)
– The % rate of depreciation (For Base method = 0014)
– If the depreciation is to be based on remaining useful life (For base method = 0011)
Note that the base value chosen in the MLM must align with the choice for rem.
useful life & depreciation class chosen in the depreciation key
.... Continued
Period control key: Controls the
– Start date of dep in the case of acquisition/additions
– End date of dep in the case of retirement/transfers
Various options available to calculate depreciation in the standard system are
from
– Start of the month, mid of the month, start of next month, start of year, etc.
Custom period controls can be defined depending on the business requirement

Asset acquired Asset retired

Dep. Calculation? Dep. Calculation?

Asset Usage
.... Continued
Cut off Value key - Here, the % scrap value for the asset is specified.
– Asset is depreciated only till the time the NBV reaches the specified scrap %
– The scrap value may be reduced from the base value (before calculating depreciation)
Depreciation to the day – This is ticked when the depreciation on the asset is
to be calculated as per the exact no of days of usage
– In case of acquisition – depreciation starts from the day the asset is acquired
– In case of retirement – depreciation ends on the day the asset is retired
– This indicator makes the period control key irrelevant.
 Depreciation class – This controls whether the depreciation method is
WDV/SLM
Shutdown Indicator – controls whether asset shutdown is allowed or not
… Continued
Multiple Shift Indicator – When the asset is used in multiple shifts,
– Whether the depreciation is to be increased, or
– Whether the depreciation and expired useful life is to be increased, or
– No impact
Acquisition allowed only in capitalization year – It controls whether
further acquisitions in the same asset are to be allowed only in the year of
capitalization.
Period control according to FY – It controls whether the period control
setting will be year dependent or year independent.
Changeover method – controls if the depreciation method must change upon
a specific condition getting fulfilled
– For e.g., when using WDV method, you can specify that the depreciation method is
to switch over to SLM upon the NBV reaching a specified percentage so that asset is
reduced to zero.
System Demo:

Area Demo A
Configuration Create Dep. Keys based on useful life, SLM, WDV
Create Depreciation Key AFAMA
Create Multi Level Method AFAMS
Create Period Control Key AFAMP
Calendar assignments for Period Control OAVH
OAYR

End User  Generate period control rules for FY dependant OA84

period control

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Other settings
Frequency of depreciation posting – Here, the interval of depreciation posting is
specified (Annual/semi-annual/quarterly/monthly/bi-monthly).
– Note that depreciation is posted using document type AF in the standard system.
Smoothing/Catch Up – This controls how the system is to account for delta
depreciation upon a change in the depreciation terms
– Smoothing: The delta depreciation for previous periods is smoothened (spread
equally) over the remaining periods of the fiscal year
– Catch up: The delta depreciation for previous periods is posted upon the next
depreciation posting
– Note that a change in depreciation terms impacts all open FY/ periods in FI-AA.
Additional Account Assignment Objects – As explained in earlier module,
the CO object specified in the asset master is referenced during depreciation
posting, as a result of this setting
System Demo:

Area Demo T Code

(s)
Configuration Specify Document Type for Posting of Depreciation AO71
Specify Intervals and Posting Rules OAYR
Additional account assignment objects ACSET

End User

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Depreciation posting
Depreciation is posted in FI-GL using transaction AFAB. Various ways in which
this program can be executed are explained below
Planned posting run – This is used to post depreciation as per the posting
interval specified for the company. No periods can be skipped in between.
Example – if monthly dep posting is chosen, depreciation can only be posted for period
February after January. Dep for March cant be posted after January
Unplanned posting run – This is used to post depreciation out of the regular
posting cycle. Here, system does not check the previous period for which
depreciation is posted
Example – After depreciation posting for January, depreciation can be executed for
March and system posts the depreciation for Feb and Mar in the month of March
Repeat run – This is used to re-post depreciation for some specific assets,
after the depreciation run has been completed. It can be restricted to the assets
required
Example – When depreciation key is changed after the depreciation posting

Restart – This is used to re-process the depreciation run for a period when the
same got terminated abruptly for some technical reason. This can’t be executed
in test mode
… Continued
It is advisable to execute the depreciation in “test” mode first with “error
analysis” option checked. This helps to know the errors that needs to be
rectified, before the depreciation run can be successfully processed
The final depreciation run (i.e. without test mode) using any of the options can
be executed only in background mode
System Demo:

Area Demo T Code (s)

Configuration

End User •Post depreciation AFAB

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Memo Value / Scrap value
 Where an asset has a realizable value at the end of its useful life, the same
must be excluded from the depreciation calculation.
 A cut off value key (%) can be assigned in the dep. key for this purpose,
which applies to all the company codes under the chart of depreciation
A more specific specification of (absolute) memo value is possible at comp code
/ dep. area level. This takes precedence over the cut off value key.
An even more specific specification of memo value (absolute or %) can be
made in the individual asset master, which overrides everything else
System Demo:

Area Demo T Code

(s)
Configuration Specify memo value at company code / dep. area level

End User •Specify Memo value in the asset master

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It’s quiz time!!

Beware of multiple answers!!

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Q1. What is needed to post depreciation to the CC owning the asset?
(a) Maintain the CC in the asset master
(b) Maintain the CC as the additional account assignment object for Dep. postings
Q2. A depreciation key can be used to prevent subsequent acquisitions into an asset
in the year of acquisition
(a) True (b) False
Q3. What is true about Unplanned posting?
(a) Unplanned posting posts the depreciation into FI-GL
(c) Unplanned posting can be used to skip the depreciation periods in between which are
otherwise needed as per the posting frequency specified for the company code
(d) Unplanned posting posts the depreciation for 2 or more periods into one period
Q4. The depreciation key specified at the level of asset class
(a) Applies to all the assets under the asset class and cant be changed at asset level
(b) Applies to all the assets under the asset class unless changed at asset level
Q5. A depreciation key is defined at the client level and can be used by all the
company codes.
(a) True (b) False
Q6. Where do you specify that the depreciation is to be based on useful life?
(a) Multi level method (b) Base Method (c) Period control method

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Q7. Where do you specify that the depreciation is to be based on rem. useful life?
(a) Multi level method (b) Base Method (c) Period control method
Q8. A Multi level method is used to specify
(a) The applicable % of depreciation (b) The base value to be used to calculate depreciation
(c) That the dep. is to be calculated based on rem. useful life
Q9. A multi level method can be used to specify a depreciation % for different years
in the life cycle of an asset
(a) True (b) False
Q10. What is true about a period control key?
(a) Determines the start date / end date of depreciation for an asset
(b) Determines the start date/ end date of depreciation for an asset ONLY when “Dep. to
the day” is not used
Q11. You don’t calculate depreciation for an AUC
(a) True (b) False
Q12. To avoid calculating depreciation for an AUC, which settings are needed?
(a) Asset shutdown activated in dep. Key (b) Asset shutdown indicator activated in the
asset master (c) Dep. Key 0000 in the asset master
Q13. Arrange the following in correct sequence
(a) Memo value at Co. Code level (b) Cut-Off Value Key (c) Memo value at asset level

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Q14. Depreciation key for an asset is changed after the depreciation was posted.
What options are available to you in this situation?
(a) Execute the dep. run in REPEAT mode for the last depreciation posted period
(b) Execute the dep. Run in PLANNED mode for the next posting period
(c) The delta depreciation can be smoothened over the remaining periods of the year
(d) The delta depreciation can be “catch up” in the next posting period
Q15. Which of the following statements are correct?
(a) A PLANNED dep. posting run needs you to follow the depreciation posting frequency
(b) A REPEAT dep. posting run can be performed for any previous period
(c) An UNPLANNED dep. posting run can be performed for any previous period
(d) An UNPLANNED dep. posting run can be performed for any future period of the year

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