Setting Up Depreciation

To setup depreciation, we must define the following characteristics
Depreciation methods
Prorate/Retirement conventions
Bonus Rules
Depreciation Ceilings
Investment Tax Credits

Depreciation Methods
By following the navigation path Setup/Depreciation/Methods, we can select from four different depreciation methods. They are as follows:

Calculated- is a straight line method. It calculates an assets annual depreciation rate by spreading its recoverable cost evenly across its useful life. The calculation basis has to be cost. We can elect to depreciate the asset in the year it retires. We can also select assets useful life.

Table Depreciation- Method determines the depreciation rate based on a user or system defined table. The calculation basis can be cost or NBV. We can also enter the number of prorate periods per year this depreciation method uses. Clicking on the Rate button allows you to enter annual depreciation rates. Since assets must be fully depreciated when they are retired, for the Cost calculation basis, all annual rates must add up to exactly 1. For the NBV calculation basis, the annual rate for the asset's last year has to be 1, and the rates prior to the last year must be between o and 1.

Production- Is used for units of production depreciation, in which the depreciation rate is based on consumption. We cannot modify any parameter for this depreciation method, and no life needs to be defined.

Flat-Uses a flat rate as the depreciation rate. The calculation basis can be cost or NBV. We can elect to depreciate the asset in the year the asset retires, and we can specify whether to exclude salvage value if the cost basis is NBV. No life needs to be defined for this depreciation method.

Prorate Retirement Conventions
The prorate convention is used to determine how much depreciation to take in the first year of assets life, while the retirement convention is only used when an asset is retired before it is fully reserved. In this case, the retirement convention is used to determine how much depreciation to take in the last year of the asset's life. For depreciation methods other than straight line, you can enable the Depreciate when placed in service option to force use of the date placed in service instead of the prorate date. Common prorate convention include:

Following month starts depreciating in the period following the asset's date placed in service for example

From DATE TO Date Prorate Date
01-JAN-2005 31-JAN-2005 01-FEB-2005
01-FEB-2005 28-FEB-2005 01-MAR-2005

Half year starts depreciating at the beginning of the fiscal year or at the half year point of the fiscal year, depending on whether the asset is placed in service in the first half of the fiscal year or the second half of the fiscal year for example:

From Date TO Date Prorate Date
01-JAN-2005 31-JUN-2005 01-JAN-2005
01-JUL-2005 31-DEC-2005 01-JUL-2005

Mid Month applies when an asset is placed in service after mid month; take the half month depreciation in the period the asset's is placed in service, and half month depreciation in the month the asset is retired. Otherwise,take a full month in the period the asset is placed in service and nothing in the month the asset is retired. For Example

From Date TO Date Prorate Date
01-JAN-2005 15-JAN-2005 01-JAN-2005
16-JAN-2005 31-JAN-2005 16-JAN-2005

Mid quarter is similar to mid month, but instead of month, use the quarter as the date range. For example

From Date TO Date Prorate Date
01-JAN-2005 15-FEB-2005 01-JAN-2005
16-FEB-2005 31-MAR-2005 16-FEB-2005

Bonus Rules
For the flat depreciation method, we can create a bonus rate for each year, or range of years, of the asset's life.

Depreciation Ceilings
There are three types of depreciation ceilings:
A Cost Ceiling Sets the maximum value we can use as recoverable cost in depreciation.
An expense ceiling sets the maximum value we can take as a depreciation or an expense ceiling for assets in the tax book-but not both. For luxury automobiles in the United States, we must set an expense depreciation ceiling.
An Investment Tax credit ceiling sets the maximum amount that can be used to not surprisingly calculate an investment tax credit.

Investment Tax Credits
In order for investment tax credits (ITC) to work, we must also setup the ITC rates and ITC recapture rates. ITC rates define the amount of ITC for an asset, while ITC recapture rates define the amount of ITC that needs to be recaptured if the asset retires before its useful life is complete.