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Depreciation

Fields Involved in Calculation
LTD Depreciation
Depreciation Options

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OVERVIEW OF INVENTORY DEPRECIATION

Taken from the Ohio AOS Powerpoint from 8/26/2021 “Capital Assets: An Overview” from LGS (Local Government Services).

Per GASB34, Paragraphs 21 and 22:

In general, capital assets should be depreciated by allocating their net cost (historical cost less estimated salvage value) over their estimated useful lives. Inexhaustible capital assets, that is, assets whose economic benefit or service potential is used up extremely slowly, are not depreciated. Examples of inexhaustible assets are land and some land improvements, construction-in-progress, and, in certain circumstances, certain monuments and works of art and historical treasures.

Land improvements that would not be depreciable include such things as excavation, fill, and grading – improvements that produce permanent benefits.

Land improvements that would be considered part of a structure or that deteriorate with use or the passage of time, such as parking lots and fencing should be considered depreciable.

Library Books depreciable assets? If considered to have a useful life of greater than one year, they are capital assets and depreciable. Because most library holdings consist of a large number of books with modest values, group or compositie depreciation methods (discussed in paragraphs 163-166 of Statement 34) may be appropriate.

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Depreciation Calculation

Depreciation is stored on the Item record (Transactions>Items). The following fields are involved in tracking and calculating depreciation.

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Depreciation Field	Explanation
Depreciation Method	Default value is ‘Straight Line’ which is most widely used by schools. Others include ‘None’ if you aren’t tracking depreciation and Declining Balance method which involves an accelerated depreciation for the beginning years
Factor	Used only for declining balance method.
Beginning Date	Date to begin calculating depreciation. This is usually the same date as the acquisition date
Original Cost	Contains the amount to be depreciated
Life Expectancy	Used to determine the number of years the item is to be depreciated.
Salvage Value	Estimated fair value at the end of the item’s useful life or the anticipated trade-in value.
LTD Depreciation	Calculated automatically when an open period is closed. It contains the total depreciation from the beginning date up through the June 30^th of the last fiscal year closed

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Depreciation Calculation

The LTD depreciation is the depreciation for an item through June of the last fiscal year closed.

For example, if my item’s beginning depreciation date is 07/01/2019 and my current period is FY 2023, the current LTD depreciation for my asset would be from the beginning date of depreciation through June 30, 2022 (assuming the last fiscal year closed is 2022). Closing a period via Core>Fiscal Years will update the LTD depreciation amount by one year.

Depreciation is tracked monthly in the application. Based on the beginning depreciation date, the depreciation posted for the first year will be the annual depreciation amount pro-rated based on the number of months the item is actually being depreciated.

For example, if an item has a depreciation beginning date of 01/01/2023, only one-half (6 months) of the annual depreciation amount will be posted to the LTD depreciation once FY2023 is closed. In subsequent years, the entire annual depreciation amount will be posted to the LTD depreciation field.

When generating a Book Value, it contains three depreciation figures.

The LTD depreciation (calculated depreciation up through June of the last FY closed)
The current fiscal year (FTD) depreciation which is calculated on a monthly basis as the report is generated.
The Total Depreciation (LTD + FTD)

NOTE: If you have NOT closed a prior period and have opened and started processing in the new period, your LTD figures in the new period will not be accurate until the prior period is closed

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Depreciation Methods

In order to meet the reporting guidance for capital assets, “Governments may use any established depreciation method”. There are many methods of calculating depreciation expense. The depreciation method is established by district policies and procedures.
The depreciation method is required on an item in the software. The methods available are None, Straight-Line, or Declining-Balance.
Because state and local governments are not subject to taxation, districts may not employ declining balance methods. The use of the straight-line method is virtually universal in the public sector and is the most frequently used method by districts

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Per AOS: In order to meet the reporting guidance for capital assets: “Governments may use any established depreciation method”. There are many methods of calculating depreciation expense and “Governments also may use composite methods to calculate depreciation expense”. The depreciation method is established by district policies and procedures.

Depreciation/amortization is the systematic and rational allocation of that cost over a capital asset’s estimated useful life. Conceptually, there are three basic approaches:

Allocate the same amount of expense to each benefitting period (straight-line method)

Allocate an amount of expense proportionate to the service value exhausted each period (activity method: for example, current year mileage/total estimated mileage); and

Allocate increasingly smaller amounts of expense over time to compensate for increased maintenance expense on older assets (declining charge methods: for example, declining balance method and sum-of-the-years’ digits method).

Because state and local governments are not subject to taxation, there is little incentive to employ declining balance methods. Indeed, the use of the straight-line method is virtually universal in the public sector. Both depreciation methods you referenced are acceptable options; however, straight-line is used more frequently.

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Depreciation Methods�Straight-Line

Straight-line method is the cost minus estimated salvage value spread proportionally over the estimated life of the asset. The basic formula for computing straight-line depreciation is:

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Depreciation Methods�Straight-Line

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Example: $10,000 original cost; Useful life 5 years; salvage value of $1000. Straight-line would have annual (FTD) depreciation of $1800

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Depreciation Method�Straight-Line

Inventory application uses a slightly different calculation for the straight-line method. The total depreciation as of the end of the last fiscal year (called Life-to-date Depreciation) is stored for each item. The system uses the following calculation for annual depreciation. The depreciation for a part of a year will be the annual depreciation pro-rated for the number of months involved.

This formula protects the calculation from being sensitive to changes in original cost, life expectancy, etc. Thus, if an improvement (additional acquisition) is done to an item, the amount of depreciation taken from that point on will reflects the increase or decrease to the original cost. Depreciation already taken in prior years will not be affected.

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Straight-Line Example

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Depreciation Method�Declining Balance

It’s an accelerated depreciation method that results in larger depreciation amounts during the earlier years of an asset’s useful life and gradually lower amounts in the later years.

The declining-balance method applies a uniform rate of not more than twice the straight-line rate to the asset. Estimated salvage value need not be considered in computing the rate or the base. It’s generally used for calculating the depreciation of assets that lose their value quickly

The declining balance method allows you to enter a ‘factor’ which should be greater than 1 but not greater than 2 to use in calculating declining-balance depreciation.

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In the example below, the declining-balance method factor entered is 2 (twice the straight-line rate applied) to a $10,000 asset with an estimated life of 5 years. The accelerated rate would be 40% and the initial base against which the rate would be applied would be $10,000. However, an asset may not be depreciated below its estimated salvage value.
Straight line would be $10,000/5 years = $2000 (20% a year)
With a factor of 2 set for declining-balance method, it’s twice the straight-line rate, so it 40% a year.

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Depreciation Method�Declining Balance

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Depreciation Options

Depreciate from the Items grid

re-calculates the LTD depreciation field from the LAST field year closed from scratch.
May be used after making changes to the depreciation-related fields on existing items where it warrants LTD depreciation to be recalculated.
Does not calculate the depreciation for assets added in the current period (these assets only have FTD depreciation at this point)
Only items whose depreciation has been changed by the program will be included on the report.
Use with caution. Why? See next slide

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Depreciation Options

Before running Depreciate

Tag #1’s original cost is $5000 depreciated over 5 years. Yearly depreciation is $1000. In year 4, additional acquisition added thus updating original cost to $7000. Yearly depreciation has changed to $2000. It will not disturb prior year (historical) depreciation.

After running Depreciate

If I run depreciate on Tag #1, it will recalculate LTD depreciation from scratch using the current original cost of $7000 and useful life.

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Depreciation Options

Item’s Depreciation Transactions

LTD depreciation field is not modifiable. If you want to change an item’s existing LTD depreciation to a specific value, you must edit the item and post a Depreciation Transaction.

Depreciation Transaction can only be created for active items that have not been fully depreciated and can only be created for the current fiscal year.
The amount entered will be added (or subtracted if entering a negative adjustment) to the existing LTD amount.

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Questions?

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