Category Archives: Answers

Adjust Depreciation Going Forward Without Changing the Past

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Q and AWe often get questions from our clients regarding changing the cost of an asset. Here is an example:

Over the past 6 months we have returned a number of assets. What is the best way to record these returns in Bassets eDepreciation? We need to:

  1. Record the returns and see the offset in depreciation for the current months.
  2. Adjust the books value in a way that future depreciation taken is only the purchased amount less the returns. All of these returns are only part of the original fixed asset cost.

Here is our reply:

The best way to solve this problem is with a negative Adjustment to Basis. The concept of what it does is as follows:

  • Assume computer hardware cost of $5,000.00, acquired October 2012.
  • Depreciation is straight line with a full month convention over 5 years (60 months) which yields $83.33 per month in depreciation ($5,000/60).
  • April 2013, $2,000.00 of damaged material is returned to vendor.
  • The Adjustment to Basis in the case of a refund is entered as a negative$ 2,000.00 with an April 2013 effective date.  This yields a negative or offsetting depreciation of $33.33 per month
  • The six months of prior negative $33.33 per month is taken in April 2013, the effective date of the Adjustment to Basis.  Therefore, your prior accumulated depreciation as of the end of March 2013 will not change.
  • Your April depreciation will be $83.33 minus $233.31 ($83.33 * 7 periods) to result in negative $149.98.
  • May depreciation and going forward would then be $50 ($83.33 – $33.33).

This is a very powerful feature that allows you to adjust depreciation basis without impacting monthly depreciation that has already booked to your general ledger. Use this feature to deal with returns like in the example above or additional charges that are incurred after the initial purchase. For more information on this feature, click on the related post below:

Change The Basis of an Actively Depreciating Asset: http://www.depreciationguru.com/2012/10/change-the-basis-of-an-actively-depreciating-asset/

Questions or comments on this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Canadian Capital Cost Allowance

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The Canadian tax publication T4002’s Chapter 4 defines a Capital Cost Allowance (CCA) as the procedure by which a taxpayer can deduct the cost of a capital asset, such as a building, furniture and/or equipment that is used in a business or professional activity.

To calculate CCA, the business needs to know:

  • When the asset became available for use
  • The capital cost
  • The type of depreciable property
  • The fair market value
  • If the transaction was an “Arm’s Length Transaction”
  • The proceeds of disposition

How much CCA can be claimed is determined by the type of property as defined by the “CCA Classes” table.

 

The calculation of CCA is based upon a declining balance of an asset that is determined by the Capital Cost less the CCA deduction taken in prior tax years.  The 50% Rule for assets “that became available for use” during the current tax year only allows the taxpayer to claim a CCA deduction on one-half of the current tax year’s acquisitions.

The taxpayer does not have to claim the maximum amount of CCA allowed in a given tax year.  For example, if a tax payer does not have a taxable income during a tax year that taxpayer need not claim any CCA for that tax year. Another situation would be that the tax payer only need to deduct a portion of the allowable CCA during a tax year needed to reduce their taxable income to zero.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

How To Plan Depreciation Costs for Next Year

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Frequently here at Depreciation Guru we get asked what report should we use to plan our monthly depreciation costs for next year?

The D3 Report in Bassets eDepreciation presents a twelve month view of your depreciation.

This report can be run in a summary format by asset type, class or other grouping. Additionally you can generate a detail display for each individual asset. The twelve month report period can be the current tax or accounting year for review. To estimate the depreciation expenses for an upcoming year, simply select a range of reporting dates in the future. You can then see the depreciation for each month in the selected year with an annual total.

The Twelve Month View report is a valuable budgeting tool for both the tax and financial depreciation schedules. This report will project the calculated depreciation amounts for all existing assets. You can then add in any anticipated purchases to plan your total expense amounts.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Suspend Depreciation So Selected Periods Do Not Calculate

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Is it possible to have some assets not calculate depreciation for several months?

Yes, this can be accomplished with a type of disposal called suspend. A suspend allows depreciation to be halted for a period of time and then restarted later. The suspend will effectively pause the depreciation calculation and then extend the asset life for the same number of periods to ensure full depreciation.

Let’s say that a piece of machinery was being moved to a new location, but the new location is not completed yet. That piece of machinery might sit idle for several months and not be eligible for depreciation during that time. Once the new location is open and the machinery is placed back in service, then depreciation could restart.

Let’s look at an example:

Here you have a $1,000 asset being depreciated over 5 years with a suspend for the first 6 months of 2013. As you can see, the normal annual depreciation is $200, but 2013 is only taking $100. A normal 5 year life would have finished at the end of 2016, but you can see here that the recovery periods were extended from 60 periods (5 years times 12 months) to 66 periods. The suspended 6 months are tacked on at the end so the asset now finishes in 2017.

As you can see, suspend is a handy utility to deal with this specialized request. By pausing depreciation for a period of time, Bassets eDepreciation allows the net book value to be properly spread over the remaining periods in the asset’s life. This ensures a consistent calculation based on the original asset properties.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Determining the Useful Life of an Asset Under IFRS

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Under IFRS, what is the useful life or recovery period of an asset?

  • This may be equal to, or may be considerably less than, its technical or physical life
  • The determination of the useful life involves a good deal of uncertainty and subjectivity
  • The estimate should be reasonable, fair and prudent

For example:  A laptop computer as a rule of thumb has a five or six year useful life.  The reality is that while there are many old XP operating system laptops still in use that are eight to ten years old.

The key is that the business organization must develop  a depreciation procedures manual that details how the four basic depreciation elements are determined for each of the asset classes or types used by the business organization.  Once these procedures are developed, they must be followed consistently:

  • What is the cost of the asset
  • What is the useful life
  • What is the salvage value of the asset at the end of its useful life
  • What is the pattern of benefit or usefulness derived from the asset likely to be.  Which in turn determines the method of depreciation used.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.