SAP FI AA: Depreciation Calculation Methods

Depreciation Calculation Methods : The depreciation calculation method is the most important
characteristic of the base method. The depreciation calculation method makes it possible to carry out the
numerous different types of depreciation calculation in the system. Depending on how the depreciation
calculation method is set up, the system determines which further control parameters need to be specified
in the depreciation key. For example, when you choose the Stated percentage depreciation calculation
method, you have to enter a percentage in the depreciation key.
The following depreciation calculation methods are available in the standard system.
01. Percentage from Useful Life / Percentage from Remaining Useful Life
There are two variants of this depreciation calculation method:
The system determines a depreciation percentage rate from the total useful life; the rate remains the
same for each year.
The system calculates a new percentage rate for each year based on the remaining useful life. The
depreciation percentage rate rises constantly until it reaches 100% in the last year of the useful life.
02. Total Percentage Rate in the Tax Concession Period
This method allows you to depreciate a certain percentage rate from the depreciation base within a tax
concession period. In order to calculate the current periodic depreciation, the system first determines the
accumulated depreciation up to the period under examination. The period depreciation is the difference
between the already existing depreciation and the total depreciation allowed. With subsequent
acquisitions, the system automatically catches up depreciation from previous years in a lump sum.
03. Stated Percentage Rate
In contrast to a total percentage rate, here you specify the percentage rate for each fiscal year. The
system uses this percentage rate for calculating depreciation for each period. For example, you can
depreciate 3.5% in each of the first 12 years, then 2% a year for 20 years and 1% per year for the
remaining 18 years. The total of the percentage rates over the useful life is always 100%, so that
complete depreciation is reached by the end of the useful life.
04. Percentage Rate from Remaining Life + Changeover Date - Depreciation Start Date
This method is used as a changeover method (in the next phase in the depreciation key) following
depreciation within the tax concession period of an investment support measure. The net book value of
the asset will be depreciated over the total useful life when the tax concession period ends (that is, the
actual duration of depreciation encompasses the tax concession period plus the total useful life that is
entered).
05. Mean Value from Several Areas
When defining depreciation areas, you can establish dependencies between them by specifying a
mathematical formula. This method allows you to calculate depreciation in one area based on the
depreciation in another area using this mathematical formula. Using this method you can, for example,
calculate the mean value of straight-line depreciation and declining-balance depreciation.
06. Unit-of-Production Depreciation
Unit-of-production depreciation is based on the output-related use of the asset. When you specify a total
expected output or a total expected number of units, and the exact output per period or exact unit of
production output figure per period, the system determines the resulting depreciation for each period. You
enter the output or number of units at the level of the depreciation key.
07. Depreciation Over Remaining Units of Production
In the same way as with the unit-of-production method of depreciation, the amount of depreciation here is
dependent on output. In contrast to the unit-of-production method of depreciation, the system uses the
remaining units of production and not the total units of production to determine the periodic depreciation.
Depreciating using the remaining units of production ensures that, for post-capitalization, the book value
reaches zero when the total output or the total units of production is reached.
08. Sum-of-the-Years-Digits Method
An arithmetic sequence is set up based on the total useful life. The depreciation percentage rate is
proportional to the remaining useful life.
09. Depreciation According to the Present Value of Lease Installments
This depreciation calculation method is designed for leased assets that have been capitalized using the

capital lease procedure. The depreciation amounts correspond here to the present value of the periodic
lease installments. The interest is determined as the difference between the lease installment and the
present value.
Leased assets create special accounting requirements for the lessee. During the term of the lease, leased
assets remain the property of the lessor or manufacturer. They represent, therefore, a special form of
rented asset. Such assets are legally and from a tax perspective the responsibility of the lessor, and are
not relevant for assessing the value of the asset portfolio of the lessee. However, in certain countries, you
are nonetheless required to capitalize leased assets, depending on the type of financing.
The Leased Assets component enables you to capitalize leased assets in the Asset Accounting (FI-AA)
component using the capital lease method. The system calculates the acquisition value from the present
value of the future lease payments in the leasing agreement.
There are different ways of handling the values of leased assets in the system. Depending on legal
requirements and the conditions of the lease, there are two different options:
You have to capitalize and depreciate certain leased assets (capital lease).
You treat others as periodic rent expense, which flows into the profit and loss statement (operating lease).
This second type is not relevant to the fixed assets of the lessee. It is therefore sufficient to do one of the
following:
1. Manage operating leases as statistical assets in the Asset Accounting component (with no active
depreciation areas)
2. Manage them only as cost-accounting values (or for group accounting) in the corresponding
depreciation areas
There is a special report on rent liability that can be used for all types of leased assets (see below).
You can also manage insurance values for purely statistical leased assets (without depreciation areas).
You enter a manual insurance value and an index series for the leased assets in the asset master record.
You obtain reports on these values using the standard report for insurance values.
10. Capital Lease Method
Leased assets can be capitalized in the Asset Accounting component using the capital lease method. The
system calculates the acquisition value from the present value of the future lease payments in the leasing
agreement. To be able to determine the future burden of payment, you need to maintain the following
leasing conditions in the asset master records:
Amount of lease payment
Number of payments
Payment cycle
In order to calculate present value, also enter an interest rate. The system requires that you post a
leasing partner as a vendor in the asset master record at the time of the acquisition posting (opening
posting).
At the present time, the capital lease method can only be used for assets that are capitalized in the book
depreciation area. An opening posting with simultaneous creation of leasing liability is not possible for
assets that have only cost-accounting depreciation areas.
11. Handling of Input Tax for the Capital Lease Method
You can only include the net amount (that is, the amount without input tax) of the liabilities for a leased
asset when determining the present value. Therefore, you have to enter the net lease payments in the
asset master record.
In addition, set the input tax indicator V0 (= no input tax) in the respective leasing type (see below). In this
way, you can ensure that there is no posting of input tax at the time of capitalization. Instead, you should
post the input tax directly in the Financial Accounting (FI) component (debit input tax and credit vendor) at
the time of payment.
12. Leasing Type
You define leasing types in Customizing for Asset Accounting. The leasing type is a selection criterion in
reporting, and the most important control feature for the posting of acquisitions to a leased asset. It
determines the following:
The transaction type used for the acquisition posting of a leased asset. The transaction type controls the
depreciation areas in which the capitalization posting takes place (such as book depreciation, group

depreciation, and so on). You define the transaction type in Customizing for Asset Accounting.
Different specifications for posting to Financial Accounting (for example, document type, input tax
indicator, and so on.)
The bookkeeping treatment of the leased asset
You can set the depreciation area for automatic posting to active or inactive in each asset class for leased
assets. This determines whether the acquisition of leased assets is posted to G/L accounts. The system
also determines the accounts to be posted for leased assets using the account allocation in their asset
class.
Leased assets for cost-accounting purposes
If you do not want to capitalize leased assets, you can still manage their acquisition values in costaccounting depreciation areas. Just set the corresponding cost-accounting depreciation areas to active
(posting to general ledger: inactive) in the asset class of the assets in question. This ensures that no
posting is made to Financial Accounting in the event of asset acquisition. You can still use periodic
depreciation in active depreciation areas for cost-accounting purposes.
Leased assets capitalized in the general ledger with interest accrued (capital lease)
In some countries, you are required to capitalize leased assets for book depreciation or for tax purposes.
In this case, you have to manage the leased asset in an area that posts to the general ledger (generally
the book depreciation area). Set posting in the general ledger to active in the corresponding leased asset
classes. In addition, enter specifications for posting to Financial Accounting in the leasing types.
For the acquisition posting, the system capitalizes the fixed asset with the calculated present value. The
installment payments are posted to the vendor as scheduled. The system determines the vendor from the
leasing partner that you specified in the asset master record.
Leased assets capitalized in the general ledger without separate interest
In some countries (such as the USA) only the present value is posted as a liability (obligation), in contrast
to the above treatment. This means that the interest amount, resulting from the difference between the
liability and the present value, as shown in the above case, does not have to be displayed separately. In
this case, define the clearing account for the interest portion and the vendor account so that they are both
displayed in the same item of the balance sheet.
Periodic Posting: The depreciation posting program posts the depreciation of leased assets and the writeoff of the interest. You can use any depreciation key. The standard R/3 System includes a special
depreciation key, in which the depreciation amounts correspond to the present value of the periodic
leasing payments (LEAS). Using this key, interest is determined as the difference between the leasing
payments and the present value.
Calculation of Present Value: The present value of the leased asset is calculated on the basis of the
following specifications:
g : Amount of lease payment
i : Annual interest rate
n : Number of lease payments
r: Leasing cycle (for example, 3 = quarterly, 6 = semiannual)
m : Number of periods in a year
q : Period interest factor = 1 + ( i / 100 * r / m)
If payment is made at the beginning of the period, the present value then results from the following
formula:
Present value = g + g * q** (n-1) - 1 / (q**n-1 * (q - 1))
With payment at the end of the payment period, on the other hand, the present value is calculated as
follows:
Present value = g * ( q**n - 1) / ( q**n * ( q - 1))
Example
g : 100
i: 10.000 %
n: 20
r: 3
m: 12
q: 1 + (10.000 / 100 * 3 / 12) = 1.025
Present value at the beginning of the payment period:
100 + 100 * (1.025**19 - 1) / (1.025**19 * (1.025 - 1)) = 1597.89

Present value at the end of the payment period:

100 * (1.025**20 - 1) / (1.025**20 * ( 1.025 - 1)) = 1558.92
Reports: There is a standard report in the system for determining future leasing liability (especially in
regard to leased assets that are not capitalized). The report displays for each leased asset:
The payments already made
The payments due up to the date of the report
The total lease payments to be made for the asset
You can create a totals list with cumulative values for each fiscal year and company code. In order for the
report to work properly, you must make sure that the following leasing conditions are properly maintained
in the asset master record:
Start date of the lease
Payment information (lease payment amount, payment cycle, number of payments)
Leasing type
Using the APC by acquisition year indicator, you can display the theoretical acquisition value of leased
assets according to acquisition year. This statistical analysis is required in some countries for financial
reports. The system uses the base new value that is specified in the asset master record in the leasing
information. The acquisition year is determined from the start date of the lease.
Implementation Considerations: If you want to manage capitalized leased assets in the system, follow
these steps:
Define leasing types in Customizing for Asset Accounting with the specifications for posting asset
acquisitions.
Create special asset classes and account allocations for your leased assets.
Define depreciation areas, in which you plan to capitalize leased assets using the capital lease procedure,
so that they manage interest that can be posted with the depreciation posting program.
Activate the depreciation areas, in which the leased assets will be capitalized and depreciated, in these
asset classes.
Assign a leasing type to the asset master records for leased assets.
Maintain the information and conditions of the leasing agreement in the master records of the leased
assets. Specify an interest rate for calculating the present value and determine whether the lease
payments should be made at the beginning of the payment period or at the end of the payment period.
Post the acquisition of a leased asset with the display transaction for asset master data.
13. Declining-Balance Method of Depreciation According to Japanese Regulations
Using this method, the system determines the depreciation percentage rate from the ratio between the
relative scrap or cutoff value and the acquisition value. The system then determines the n-th root of this
ratio (n = useful life). The depreciation percentage rate is the complement of the percentage that was thus
determined. This depreciation percentage rate is in effect for the entire useful life of the asset.
Calculation : Depreciation = Net book value * depreciation percentage rate
APC: 1000Scrap value: 10%Useful life: 10 years
Depreciation percentage rate = 1 - ((1000/10000)1/10) = 20 %
14. Your Own Depreciation Calculation Method
You can program your own depreciation calculation methods using the BAdI method
FAA_EE_CUSTOMER (Set_percent_amount). For more information, see the documentation of this
customer enhancement (transaction SE18.)
Methods of depreciation
There are several methods for calculating depreciation, generally based on either the passage of time or
the level of activity (or use) of the asset.
[edit]Straight-line depreciation
Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates
the salvage value of the asset at the end of the period during which it will be used to generate revenues
(useful life) and will expense a portion of original cost in equal increments over that period. The salvage
value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or
even negative. Salvage value is also known as scrap value or residual value.
Straight-line method:

For example, a vehicle that depreciates over 5 years, is purchased at a cost of US$17,000, and will have
a salvage value of US$2000, will depreciate at US$3,000 per year: ($17,000 $2,000)/ 5 years = $3,000
annual straight-line depreciation expense. In other words, it is the depreciable cost of the asset divided by
the number of years of its useful life.
This table illustrates the straight-line method of depreciation. Book value at the beginning of the first year
of depreciation is the original cost of the asset. At any time book value equals original cost minus
accumulated depreciation.
book value = original cost accumulated depreciation Book value at the end of year becomes book value
at the beginning of next year. The asset is depreciated until the book value equals scrap value.
Book value at
beginning of year Depreciation
expense Accumulated
depreciation Book value at
end of year
$17,000 (original cost) $3,000 $3,000 $14,000
$14,000 $3,000 $6,000 $11,000
$11,000 $3,000 $9,000 $8,000
$8,000 $3,000 $12,000 $5,000
$5,000 $3,000 $15,000 $2,000 (scrap value)
If the vehicle were to be sold and the sales price exceeded the depreciated value (net book value) then
the excess would be considered a gain and subject to depreciation recapture. In addition, this gain above
the depreciated value would be recognized as ordinary income by the tax office. If the sales price is ever
less than the book value, the resulting capital loss is tax deductible. If the sale price were ever more than
the original book value, then the gain above the original book value is recognized as a capital gain.
If a company chooses to depreciate an asset at a different rate from that used by the tax office then this
generates a timing difference in the income statement due to the difference (at a point in time) between
the taxation department's and company's view of the profit.
[edit]Declining-balance method (or Reducing balance method)
Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and
gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may
be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets
are most useful when they are new. One popular accelerated method is the declining-balance method.
Under this method the book value is multiplied by a fixed rate.
Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year
The most common rate used is double the straight-line rate. For this reason, this technique is referred to
as the double-declining-balance method. To illustrate, suppose a business has an asset with $1,000
original cost, $100 salvage value, and 5 years useful life. First, calculate straight-line depreciation rate.
Since the asset has 5 years useful life, the straight-line depreciation rate equals (100% / 5) 20% per year.
With double-declining-balance method, as the name suggests, double that rate, or 40% depreciation rate
is used. The table below illustrates the double-declining-balance method of depreciation.
Book value at
beginning of year Depreciation
rate Depreciation
expense Accumulated
depreciation Book value at
end of year
$1,000 (original cost) 40% $400 $400 $600
$600 40% $240 $640 $360
$360 40% $144 $784 $216
$216 40% $86.40 $870.40 $129.60
$129.60 $129.60 - $100 $29.60 $900 $100 (scrap value)
When using the double-declining-balance method, the salvage value is not considered in determining the
annual depreciation, but the book value of the asset being depreciated is never brought below its salvage
value, regardless of the method used. The process continues until the salvage value or the end of the
asset's useful life, is reached. In the last year of depreciation a subtraction might be needed in order to

prevent book value from falling below estimated Scrap Value.

Since double-declining-balance depreciation does not always depreciate an asset fully by its end of life,
some methods also compute a straight-line depreciation each year, and apply the greater of the two. This
has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint
in the asset's life.
It is possible to find a rate that would allow for full depreciation by its end of life with the formula:
,
where N is the estimated life of the asset (for example, in years).
[edit]Activity depreciation
Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven
for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of
this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. The per-mile
depreciation rate is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile. Each
year, the depreciation expense is then calculated by multiplying the rate by the actual activity level.
[edit]Sum-of-years' digits method
Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line,
but less than declining-balance method. Under this method annual depreciation is determined by
multiplying the Depreciable Cost by a schedule of fractions.
depreciable cost = original cost salvage value
book value = original cost accumulated depreciation
Example: If an asset has original cost of $1000, a useful life of 5 years and a salvage value of $100,
compute its depreciation schedule.
First, determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and
1.
Next, calculate the sum of the digits. 5+4+3+2+1=15
The sum of the digits can also be determined by using the formula (n2+n)/2 where n is equal to the useful
life of the asset. The example would be shown as (52+5)/2=15
Depreciation rates are as follows:
5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15 for the 5th
year.
Book value at
beginning of year Total
depreciable
cost Depreciation
rate Depreciation
expense Accumulated
depreciation Book value at
end of year
$1,000 (original cost) $900 5/15 $300 ($900 * 5/15) $300 $700
$700 $900 4/15 $240 ($900 * 4/15) $540 $460
$460 $900 3/15 $180 ($900 * 3/15) $720 $280
$280 $900 2/15 $120 ($900 * 2/15) $840 $160
$160 $900 1/15 $60 ($900 * 1/15) $900 $100 (scrap value)
[edit]Units-of-production depreciation method
Under the units-of-production method, useful life of the asset is expressed in terms of the total number of
units expected to be produced:
Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000
units.
Depreciation per unit = ($70,00010,000) / 6,000 = $10
10 actual production will give the depreciation cost of the current year.
The table below illustrates the units-of-production depreciation schedule of the asset.
Book value at
beginning of year Units of
production Depreciation
cost per unit Depreciation

expense Accumulated
depreciation Book value at
end of year
$70,000 (original cost) 1,000 $10 $10,000 $10,000 $60,000
$60,000 1,100 $10 $11,000 $21,000 $49,000
$49,000 1,200 $10 $12,000 $33,000 $37,000
$37,000 1,300 $10 $13,000 $46,000 $24,000
$24,000 1,400 $10 $14,000 $60,000 $10,000 (scrap value)
Depreciation stops when book value is equal to the scrap value of the asset. In the end, the sum of
accumulated depreciation and scrap value equals the original cost.
[edit]Units of time depreciation
Units of time depreciation is similar to units of production, and is used for depreciation equipment used in
mine or natural resource exploration, or cases where the amount the asset is used is not linear year to
year.
A simple example can be given for construction companies, where some equipment is used only for some
specific purpose. Depending on the number of projects, the equipment will be used and depreciation
charged accordingly.
[edit]Group depreciation method
Group depreciation method is used for depreciating multiple-asset accounts using straight-linedepreciation method. Assets must be similar in nature and have approximately the same useful lives.
Asset Historical
cost Salvage
value Depreciable
cost Life Depreciation
per year
Computers $5,500 $500 $5,000 5 $1,000
[edit]Composite depreciation method
The composite method is applied to a collection of assets that are not similar, and have different service
lives. For example, computers and printers are not similar, but both are part of the office equipment.
Depreciation on all assets is determined by using the straight-line-depreciation method.
Asset Historical
cost Salvage
value Depreciable
cost Life Depreciation
per year
Computers $5,500 $500 $5,000 5 $1,000
Printers $1,000 $100 $ 900 3 $ 300
Total $ 6,500 $600 $5,900 4.5 $1,300
Composite life equals the total depreciable cost divided by the total depreciation per year. $5,900 / $1,300
= 4.5 years.
Composite depreciation rate equals depreciation per year divided by total historical cost. $1,300 / $6,500
= 0.20 = 20%
Depreciation expense equals the composite depreciation rate times the balance in the asset account
(historical cost). (0.20 * $6,500) $1,300. Debit depreciation expense and credit accumulated depreciation.
When an asset is sold, debit cash for the amount received and credit the asset account for its original
cost. Debit the difference between the two to accumulated depreciation. Under the composite method no
gain or loss is recognized on the sale of an asset. Theoretically, this makes sense because the gains and
losses from assets sold before and after the composite life will average themselves out.
To calculate composite depreciation rate, divide depreciation per year by total historical cost. To calculate
depreciation expense, multiply the result by the same total historical cost. The result, not surprisingly, will
equal to the total depreciation Per Year again.
Common sense requires depreciation expense to be equal to total depreciation per year, without first
dividing and then multiplying total depreciation per year by the same number.
[edit]Tax depreciation
Most income tax systems allow a tax deduction for recovery of the cost of assets used in a business or for

the production of income. Such deductions are allowed for individuals and companies. Where the assets
are consumed currently, the cost may be deducted currently as an expense or treated as part of cost of
goods sold. The cost of assets not currently consumed generally must be deferred and recovered over
time, such as through depreciation. Some systems permit full deduction of the cost, at least in part, in the
year the assets are acquired. Other systems allow depreciation expense over some life using some
depreciation method or percentage. Rules vary highly by country, and may vary within a country based on
type of asset or type of taxpayer. Many systems that specify depreciation lives and methods for financial
reporting require the same lives and methods be used for tax purposes. Most tax systems provide
different rules for real property (buildings, etc.) and personal property (equipment, etc.).
[edit]Capital allowances
A common system is to allow a fixed percentage of the cost of depreciable assets to be deducted each
year. This is often referred to as a capital allowance, as it is called in United Kingdom. Deductions are
permitted to individuals and businesses based on assets placed in service during or before the
assessment year. Canada's Capital Cost Allowance are fixed percentages of assets within a class or type
of asset. Fixed percentage rates are specified by type of asset. The fixed percentage is multiplied by the
tax basis of assets in service to determine the capital allowance deduction. The tax law or regulations of
the country specifies these percentages. Capital allowance calculations may be based on the total set of
assets, on sets or pools by year (vintage pools) or pools by classes of assets.
[edit]Tax lives and methods
Some systems specify lives based on classes of property defined by the tax authority. Canada Revenue
Agency specifies numerous classes based on the type of property and how it is used. Under the United
States depreciation system, the Internal Revenue Service publishes a detailed guide which includes a
table of lives based on types of businesses in which assets are used. The table also incorporates
specified lives for certain commonly used assets (e.g., office furniture, computers, automobiles) which
override the business use lives. U.S. tax depreciation is computed under the double declining balance
method switching to straight line or the straight line method, at the option of the taxpayer.[7] IRS tables
specify percentages to apply to the basis of an asset for each year in which it is in service. Depreciation
first becomes deductible when an asset is placed in service.
[edit]Additional depreciation
Many systems allow an additional deduction for a portion of the cost of depreciable assets acquired in the
current tax year. The UK system provides a first year capital allowance of 50,000. In the United States,
two such deductions are available. A deduction for the full cost of depreciable tangible personal property
is allowed up to $250,000. This deduction is fully phased out for businesses acquiring over $800,000 of
such property during the year.[8] In addition, additional first year depreciation of 50% of the cost of most
other depreciable tangible personal property is allowed as a deduction.[9] Some other systems have
similar first year or accelerated allowances.
[edit]Real property
Many tax systems prescribe longer depreciable lives for buildings and land improvements. Such lives may
vary by type of use. Many such systems, including the United States and Canada, permit depreciation for
real property using only the straight line method, or a small fixed percentage of cost. Generally, no
depreciation tax deduction is allowed for bare land. In the United States, residential rental buildings are
depreciable over a 27.5 year or 40 year life, other buildings over a 39 or 40 year life, and land
improvements over a 15 or 20 year life, all using the straight line method.[10]
[edit]Averaging conventions
Depreciation calculations can become complex if done for each asset a business owns. Many systems
therefore permit combining assets of a similar type acquired in the same year into a pool. Depreciation
is then computed for all assets in the pool as a single calculation. Calculations for such pool must make
assumptions regarding the date of acquisition. The United States system allows a taxpayer to use a half
year convention for personal property or mid-month convention for real property.[11] Under such a
convention, all property of a particular type is considered acquired at the midpoint of the acquisition
period. One half of a full period depreciation is allowed in the acquisition period and in the final
depreciation period. United States rules require a mid-quarter convention for personal property if more
than 40% of the acquisitions for the year are in the final quarter.