11i Formula Based Depreciation White Paper

Overview 1Wp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

WHITE PAPER

Formula-based Depreciation

Prepared by

Author: Gladys Leung - Fixed Assets Development

Creation Date: Dec-31-1999

Last Updated: Jan-1-2000

Control Number: 1

Version: 1

Copyright (C) 1995 Oracle CorporationAll Rights Reserved

Product Design and Architecture

Formula-based Depreciation OverviewWp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

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Contributors

Special thanks to these individuals for their input into this document:

Name Position

Sam Cianelli (U.S. tax requirements) Finance Manager, Oracle CorporationShawniqua Williams (global requirements) Product Manager, Oracle FranceSundar Narayanan (technical perspective) Development Manager, Oracle AssetsGary Chen (technical perspective) Senior Application Engineer, Oracle Assets

Change Record

Date Author Version Change Reference

Dec-31-1999 Gladys C. Leung 1.0 Original


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Contents

Contributors ........................................................................................................................................................................ 3Change Record.................................................................................................................................................................... 3

Overview ............................................................................................................................................................................... 6

A Global Perspective............................................................................................................................................................. 7U.S. Revenue Codes -- Modified Accelerated Cost Recovery System.................................................................................... 7Sum-of-the-Years’-Digits .................................................................................................................................................. 14Japan................................................................................................................................................................................. 15Portugal ............................................................................................................................................................................ 15

Constant Quotas ............................................................................................................................................................ 15Digressive Quotas.......................................................................................................................................................... 15

Applications to Vertical Industries..................................................................................................................................... 17Telecommunications Industry............................................................................................................................................ 17

Depreciate When Placed In Service ............................................................................................................................... 18Adjusting Depreciable Basis .......................................................................................................................................... 19

A Technical Perspective........................................................................................................................................................ 1Variables and Functions ...................................................................................................................................................... 1

Life ................................................................................................................................................................................. 1Salvage Value ................................................................................................................................................................. 1Remaining Life 1............................................................................................................................................................. 1Remaining Life 2............................................................................................................................................................. 2Production Capacity ........................................................................................................................................................ 3Short Year....................................................................................................................................................................... 3GREATEST .................................................................................................................................................................... 3LEAST............................................................................................................................................................................ 3DECODE ........................................................................................................................................................................ 4POWER .......................................................................................................................................................................... 4SQRT.............................................................................................................................................................................. 4ROUND .......................................................................................................................................................................... 4SIGN............................................................................................................................................................................... 4

Data Schema ....................................................................................................................................................................... 4FA_FORMULAS ................................................................................................................................................................ 4Rate Adjustment Factor....................................................................................................................................................... 5Formula Factor.................................................................................................................................................................... 5

Diagnostics........................................................................................................................................................................... 12

Appendix -- MACRS Property Classes............................................................................................................................... 16


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Overview

One of the challenges of a global enterprise is to meet stringent tax requirementscoming from all over the world. As a worldwide corporation, you need a financialsystem that satisfies the needs from operations in different parts of the world. Thisfinancial system has to enable you to meet the ever-changing statutoryrequirements while keeping cost low. Oracle Assets is sensitive to your needs indealing with complex and diversified tax requirements from a global perspective.With Release 11i of Oracle Assets, you can comply with tax codes governing assetdepreciation using depreciation formulas.

This paper discusses depreciation requirements in various countries and industriesand sheds some light on how you can meet these requirements using formula-baseddepreciation. It also walks you through some complex depreciation calculations.You will walk away with all the details you need to create your own depreciationformulas and optimize your asset accounting strategies. This paper answers themost commonly asked questions on asset depreciation such as ‘How does OracleAssets amortize a basis adjustment’ and unveils the mystery of ‘Rate AdjustmentFactor’ – a critical component of the depreciation algorithm. Finally, you aregiven diagnostics tips necessary for troubleshooting data discrepancies.

Formula-based Depreciation A Global PerspectiveWp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

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A Global Perspective

Prior to Release 11i, Oracle Assets supports traditional depreciation methodsemployed by different countries: MACRS, ACRS, Sum-of-year’s digits, andstraight-line methods are used in the U.S.; Asian countries such as Japan usesdeclining balance and flat rate depreciation; European countries often employ flatrate methods. Oracle Assets offers you the ability to customize depreciationmethods by custom rate tables.

In view of frequently changing statutory requirements governing assetdepreciation, Oracle Assets introduces Formula-Based Depreciation in Release 11i.In the sections below, we discuss depreciation requirements in various countries,such as U.S.A., Japan and Portugal. Based on those country-specificrequirements, we derive depreciation formulas for your considerations.

U.S. Revenue Codes -- Modified Accelerated Cost Recovery System

In the U.S., some commonly used tax depreciation methods are ACRS andMACRS methods. ACRS (Accelerated Cost Recovery System) was a by-productof the Economic Recovery Tax Act of 1981. With this depreciation method,capital investments are stimulated due to faster write-offs. This method applies toassets purchased in the years 1981 through 1986. MACRS (Modified AcceleratedCost Recovery System) was enacted by Congress in the Tax Reform Act of 1986.It applies to capitalized assets placed in service in 1987 and later.

The calculation of depreciation under MACRS differs from that under GAAP inthree aspects: (1) a mandated tax life, which is generally shorter than the economiclife; (2) cost recovery on an accelerated basis; and (3) an assigned salvage value of

zero.1 Tax rules on depreciation tend to change every year.

The depreciation expenses is computed based on the tax basis, usually the cost, ofthe asset. The depreciation method depends on the life of the assets as mandatedby the MACRS property class. For example, 3-, 5-, 7- and 10-year propertyemploy double-declining-balance method. (Refer to the Appendix for MACRSproperty classes.) When a declining balance or accelerated metho is used, a switchis made to the straight-line method in the first year in which straight-linedepreciation exceeds the accelerated depreciation. Depreciation computations forincome tax purposes are based on the half-year convention. An asset isdepreciated to zero salvage value at then end of the MACRS life.

IRS provides rate tables for you to compute depreciation of MACRS properties.Oracle Assets make these tables available for you to meet IRS’ requirements onMACRS depreciation. However, IRS disallows the use of the MACRS rate tablesin a short tax year. A short tax year is any tax year with less than 12 months. Thiscan be a result of a merger or acquisition, the first year or last year of a company’s

1 ‘Intermediate Accounting’, 9th Edition, Kieso & Weygandt, Wiley


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operation. The alternative to rate tables is using manual calculation of acceleratedmethods with straight-line switch. With R11i of Oracle Assets, you can however,compute deductions with your own formula that gives you the MACRS results.

Consider using the following formula for double-declining computation:

Greatest( 2/ Life , 1/Remaining_Life_1) ...Formula 1

Figure 1: Defining a formula for MACRS depreciation in the Depreciation Formula Screen

In Formula 1, 2/Life returns a double-declining rate. The second part of theformula (1/Remaining Life 1) returns a straight-line rate. The Greatest functioncompares the two rates and returns the greater. Applying this formula to a 7-year


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property with a half year convention and Net Book Value basis2, you can arrive atthe results below:

Year Cost NBV RemainingLife

2/Life 1/RemainingLife

Depreciation AccumDepreciation

1 10000 10000.00 7 0.285714 0.142857 1428.57 1428.572 10000 8571.43 6.5 0.285714 0.153846 2448.98 3877.553 10000 6122.45 5.5 0.285714 0.181818 1749.27 5626.824 10000 4373.18 4.5 0.285714 0.222222 1249.48 6876.305 10000 3123.70 3.5 0.285714 0.285714 892.49 7768.796 10000 2231.21 2.5 0.285714 0.4 892.49 8661.277 10000 1338.73 1.5 0.285714 0.666667 892.49 9553.768 10000 446.24 0.5 0.285714 2 446.24 10000.00

Table 1: MACRS depreciation calculations on a 7-year property with a Half Year prorate convention using Formula-based Depreciation

Compare the above results with calculations using MACRS tables and a cost basis,you will discover that the annual depreciation expenses are identical.

Year Cost Rate Depreciation1 10000 0.14286 1428.602 10000 0.2449 2449.003 10000 0.17492 1749.204 10000 0.12495 1249.505 10000 0.08925 892.506 10000 0.08925 892.507 10000 0.08925 892.508 10000 0.04462 446.20

Table 2: MACRS depreciation calculations on a 7-year property with a Half Year prorate convention using rate tables

2 Basis is a way of measuring your investment in assets for tax purposes. You use the basis of assets to calculate deductions for

depreciation, amortization, depletion and casualty losses. Oracle Assets allows you to use either Cost or Net Book Value as thebasis.


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Figure 2: Testing Depreciation Formula

After defining your formula, you can test if it returns a desired depreciation rate.You do so in Test Formula tabbed region of the Depreciation Formula screen. Inthe above example on MACRS depreciation, in the 5th year of the 7-year asset life,Remaining Life 1 is 3.5 years. Enter these values as illustrated in Figure 2 andclick on the ‘Calculate’ button. The Resulting Depreciation Rate is 0.285714257and agrees with the result in Table 2.


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Figure 3: MACRS Rate table applicable to a 7-year asset with Half-Year Convention

Similar to the Double-Declining method, you can consider employing the followingformula on a 150% declining balance deduction:

Greatest( 1.5/ Life , 1/Remaining_Life_1) ...Formula 2

The deductions on a 15-year property using the 150% declining balance methodare as follows:

Year Cost NBV RemainingLife

1.5/Life 1/Remaining Life Depreciation Reserve

1 10000 10000.00 15 0.1 0.066667 500.00 500.002 10000 9500.00 14.5 0.1 0.068966 950.00 1450.003 10000 8550.00 13.5 0.1 0.074074 855.00 2305.004 10000 7695.00 12.5 0.1 0.08 769.50 3074.505 10000 6925.50 11.5 0.1 0.086957 692.55 3767.056 10000 6232.95 10.5 0.1 0.095238 623.30 4390.357 10000 5609.66 9.5 0.1 0.105263 590.49 4980.848 10000 5019.17 8.5 0.1 0.117647 590.49 5571.339 10000 4428.68 7.5 0.1 0.133333 590.49 6161.82

10 10000 3838.19 6.5 0.1 0.153846 590.49 6752.3111 10000 3247.70 5.5 0.1 0.181818 590.49 7342.8012 10000 2657.21 4.5 0.1 0.222222 590.49 7933.29


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13 10000 2066.72 3.5 0.1 0.285714 590.49 8523.7814 10000 1476.23 2.5 0.1 0.4 590.49 9114.2715 10000 885.74 1.5 0.1 0.666667 590.49 9704.7616 10000 295.25 0.5 0.1 2 295.25 10000.00

Table 3: Results of 150 Declining Balance calculations using Formula-based Depreciation

The annual depreciation expenses based on the rate tables are:

Year Cost Rate Depreciation1 10000 0.05 500.002 10000 0.095 950.003 10000 0.0855 855.004 10000 0.06926 692.605 10000 0.06232 623.206 10000 0.05905 590.507 10000 0.05905 590.508 10000 0.05905 590.509 10000 0.05905 590.50

10 10000 0.05904 590.4011 10000 0.05905 590.5012 10000 0.05905 590.5013 10000 0.05905 590.5014 10000 0.05905 590.5015 10000 0.05905 590.5016 10000 0.02952 295.20

Table 4: Depreciation expenses derived from rate tables

IRS stated that figuring out depreciation without rate tables can arrive at slightlydifferent results. These differences are likely caused by rounding.


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Figure 4: Rate table applicable to 15-year properties depreciating under 150 DecliningBalance with Half Year convention

Table 5 exhibits the depreciation rates of 150 double declining method that can beapplied to 15-year assets placed in service at different times of the year. There arein total 196 rates. With formula-based depreciation, however, you only need todefine one simple formula to handle your needs.

Year/Period

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1 0.1 0.09 0.081 0.0729 0.06561 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0

2 0.09167 0.09083 0.08175 0.07358 0.06621 0.0596 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.00492

3 0.08333 0.09167 0.0825 0.07425 0.06683 0.06014 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.00984

4 0.075 0.0925 0.08325 0.07493 0.06743 0.06069 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.01476

5 0.06667 0.09333 0.084 0.0756 0.06804 0.06124 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.01968

6 0.05833 0.09417 0.08475 0.07628 0.06864 0.06179 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.0246

7 0.05 0.095 0.0855 0.07695 0.06926 0.06232 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.02952

8 0.04167 0.09583 0.08625 0.07763 0.06986 0.06287 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.03445

9 0.03333 0.09667 0.087 0.0783 0.07047 0.06342 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.03937

10 0.025 0.0975 0.08775 0.07898 0.07107 0.06397 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.04429

11 0.01667 0.09833 0.0885 0.07965 0.07169 0.06451 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.04921

12 0.00833 0.09917 0.08925 0.08033 0.07229 0.06506 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05413


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Table 5: Annual depreciation rates for assets depreciating under 150 Declining Balance method

Sum-of-the-Years’-Digits

The sum-of-the-years’-digits method results in a decreasing depreciation chargebased on a decreasing fraction of depreciable cost, which is cost less salvage value.Each fraction uses the sum of the years as the denominator and the number ofremaining useful life as the numerator. In this method, the numerator decreasesevery year and the denominator remains constant. For an asset with a life of 5years, the annual depreciation rates are ( 5/15, 4/15, 3/15, 2/15, 1/15). At the endof the assets’ life, the balance remaining should be equal to the salvage value.

Oracle Assets provides you with rate tables necessary for the computation of sum-of-the-years’-digits depreciation. The following example illustrates the calculationon a 5-year asset placed in service in the first period of the year:

Year Cost DepreciationExpense

AccumulatedDepreciation

Rate

1 450000 149998.50 149998.50 0.33333

2 450000 120001.50 270000.00 0.26667

3 450000 90000.00 360000.00 0.2

4 450000 59998.50 419998.50 0.13333

5 450000 30001.50 450000.00 0.06667

450000.00

Table 6: Sum-of-the-years’ digits depreciation of a 5-year asset

Consider the following formula:

2* (Remaining_Life_1) / Life / ( Life + 1) ...Formula 3

Using the above formula to depreciate a 5-year assets with cost as the depreciablebasis, the resulting deductions are similar to those from a table-based method. Thediscrepancies in the depreciation expenses are due to rounding. Table 7 shows theannual depreciation expenses using the formula method.

Year Life RemainingLife

Cost DepreciationExpense

Rate

1 5 5 450000.00 150000.00 0.3333332 5 4 450000.00 120000.00 0.2666673 5 3 450000.00 90000.00 0.24 5 2 450000.00 60000.00 0.1333335 5 1 450000.00 30000.00 0.066667

450000.00

Table 7: Annual Depreciation calculated by Formula-based deprecation

Here is the derivation of the formula of sum-of-years’-digits method:

Sum of n Years = pn n

p

n

=∑ =

+

1

1

2

( )...Formula 4


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Depreciation Rate = m

n nm

n n( ) ( )+ =+1

2

2

1...Formula 5

where m denotes the remaining useful life and n is the estimated asset life.

Japan

Japanese Double Declining method is among the most commonly useddepreciation methods in Japan. Here is an example of asset deduction calculatedon an asset at a basic rate of 0.438 and zero adjusting rate.

Year Cost AccumulatedDepreciation

NBV Rate DepreciationExpense

1 9000 3942 9000 0.438 3942

2 9000 6157.40 5058 0.438 2215.40

3 9000 7402.46 2842.60 0.438 1245.06

4 9000 8102.18 1597.54 0.438 699.72

... ... ... ... ... ...

Table 8: Flat Rate Depreciation derived from a formula

Setting up a net book value based formulaic depreciation with a formula of 0.438can help you arrive at the same results.

Portugal

Portugal has two methods of calculating depreciation : Constant Quotas Method

and Digressive Quotas Method3.

Constant Quotas

Constant Quotas Method is supported in Oracle Assets by Calculated (STL) orFlat Rate depreciation methods.

Digressive Quotas

Under Digressive Quotas Method, annual depreciation is calculated according to asum of the year’s digits formula, as follows :

3 ‘Global Requirements on Depreciation’, Williams, Shawniqua, 1999


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QRC n i

pi

p

n=− +

=∑

( )( )1

1

...Formula 6

where RC = recoverable cost, i = year of life and n = total life in years. When theannual depreciation value becomes less than the division of the remainingdepreciation value by the remaining expected life (since the beginning of that FY),the depreciation value will be the quotient of that division for the remaining years(becomes a constant value).

Consider using this formula to represent Formula 6:

2* (Remaining_Life_1) / Life / ( Life + 1) ...Formula 7

Formula-based Depreciation Applications to Vertical IndustriesWp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

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Applications to Vertical Industries

This section of the document discusses how formula-based depreciation couldpotentially meet specific industry’s requirements on asset depreciation.

Telecommunications Industry

There is a requirement from the telecommunications industry to depreciate assetusing a straight-line method with net book value (NBV) as the basis. Depreciatingan asset’s NBV over its remaining useful life results in identical depreciationexpenses as depreciating an asset’s cost over a flat rate of 1/life. The standardstraight-line deduction in Oracle Assets works this way:

AnnualDepreciationExpense AdjustedCost AssetLife= × ...Formula 8

PeriodicDepreciationExpense AdjustedCostAssetLife NumberOfPeriodsPerYe

= × ×1 1

...Formula 9

The Adjusted Cost is the same as the recoverable cost which is equal to ‘cost lesssalvage value’. This Adjusted Cost remains constant throughout the entire life ofthe asset until a cost adjustment or revaluation is made.

Formula-based depreciation offers you the option of deriving a straight-linededuction using Net Book Value as the basis. The formula you can consider usingis:

1/ <Remaining_Life_1> ...Formula 10

With this formula, the system takes the Net Book Value at the beginning of theFiscal Year to be the depreciable basis for that Fiscal Year. The asset deductionsfor a 5-year property are as follows:

Year Cost AccumulatedDepreciation

NBV DepreciationExpense

Rate

1 100 20 100 20.00 0.2

2 100 40 80 20.00 0.25

3 100 60 60 20.00 0.33333

4 100 80 40 20.00 0.5

5 100 100 20 20.00 1

100.00

Table 9: Depreciation Calculations of a 5-year asset with NBV as basis

Comparing the above results to the cost-based straight-line method below, youwould notice that the annual deductions are the same across both methods.


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Depreciate When Placed In Service

One advantage of using the Formula-based straight-line method over the standardone is that you can choose when to start allocating the depreciation expense in thefirst year of the asset life. When setting up your prorate convention for yourstraight-line assets, take the option of ‘Depreciation when placed in service’. Bydoing that, you start allocating depreciation expense in the period the asset isplaced in service in case the prorate date falls in a different period. The calculationpresented in Table 10 shows the different ways you could allocate deductions inthe first year of an asset life. In this example, an asset is placed in service in Aprilin a January to December calendar. The prorate convention is half year. In Case 1,the asset starts depreciating in the prorate period. In contrast, in case 2, thesystem starts allocating depreciation expenses in April when it is placed in service.Notice that the annual depreciation amount turns out to be the same in both cases.


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Case 1:Allocate Depreciate from Prorate Date Case 2: Depreciate When Placed In ServicePeriodic

DepreciationReserve Rate Periodic

DepreciationReserve Rate

Apr 133.33 133.33 0.20May 133.33 266.67 0.20Jun 133.33 400.00 0.20Jul 200.00 200.00 0.20 133.33 533.33 0.20

Aug 200.00 400.00 0.20 133.33 666.67 0.20Sep 200.00 600.00 0.20 133.33 800.00 0.20Oct 200.00 800.00 0.20 133.33 933.33 0.20Nov 200.00 1000.00 0.20 133.33 1066.67 0.20Dec 200.00 1200.00 0.20 133.33 1200.00 0.20

1200.00 1200.00

Table 10: Comparing depreciation resulted from two methods, one by allocating depreciation from Prorate Date and theother by allocating depreciation from Date Placed in Service

Adjusting Depreciable Basis

After making improvements to your assets, you adjust the basis to reflect the truevalue of your assets. In certain occasions, you may need to back date theseadjustments without affecting the overall impact on the annual depreciationexpenses. In the example given below, you can clearly see how formula-baseddepreciation helps you achieve this. You placed in service an asset in Apr, 1998using a half year prorate convention, and formula-based straight-line overremaining life method (Formula 10). The asset started depreciating in July, 1998.In May of the following year, you adjusted the cost from 12,000 to 18,000 andback dated this adjustment to the start of the year, ie Jan, 1999. In anotherscenario, instead of adjusting the cost in May, you performed the transaction inJune. Notice that the resulting annual depreciation amounts in both cases areidentical. The subsequent year’s depreciation expenses are the same, too.

Formula-based Depreciation Applications to Vertical Industries 1Wp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

Perform Cost Adjustment in May of second year. Perform Cost Adjustment in Jun of second year.OriginalCost

AdjustedCost

PeriodicDepreciation

Reserve Rate NBV RAF FF OriginalCost

AdjustedCost


Reserve Rate NBV RAF FF

Jul 12000 12000 200 200 0.2 11800 1 1 12000 12000 200 200 0.2 11800 1 1Aug 12000 12000 200 400 0.2 11600 1 1 12000 12000 200 400 0.2 11600 1 1Sep 12000 12000 200 600 0.2 11400 1 1 12000 12000 200 600 0.2 11400 1 1Oct 12000 12000 200 800 0.2 11200 1 1 12000 12000 200 800 0.2 11200 1 1Nov 12000 12000 200 1000 0.2 11000 1 1 12000 12000 200 1000 0.2 11000 1 1Dec 12000 12000 200 1200 0.2 10800 1 1 12000 12000 200 1200 0.2 10800 1 1

1200 1200Jan 12000 10800 200 1400 0.22 10600 1 1 12000 10800 200 1400 0.22 10600 1 1Feb 12000 10800 200 1600 0.22 10400 1 1 12000 10800 200 1600 0.22 10400 1 1Mar 12000 10800 200 1800 0.22 10200 1 1 12000 10800 200 1800 0.22 10200 1 1Apr 12000 10800 200 2000 0.22 10000 1 1 12000 10800 200 2000 0.22 10000 1 1May 14000 12000 240 2240 0.22 11760 0.833 0.9 12000 10800 200 2200 0.22 9800 1 1Jun 14000 12000 240 2480 0.22 11520 0.83 0.9 14000 11800 220.5996 2420.6 0.22 11579.4 0.875 0.883333Jul 14000 12000 240 2720 0.22 11280 0.83 0.9 14000 11800 220.5996 2641.199 0.22 11358.8 0.875 0.883333Aug 14000 12000 240 2960 0.22 11040 0.83 0.9 14000 11800 220.5996 2861.799 0.22 11138.2 0.875 0.883333Sep 14000 12000 240 3200 0.22 10800 0.83 0.9 14000 11800 220.5996 3082.399 0.22 10917.6 0.875 0.883333Oct 14000 12000 240 3440 0.22 10560 0.83 0.9 14000 11800 220.5996 3302.998 0.22 10697 0.875 0.883333Nov 14000 12000 240 3680 0.22 10320 0.83 0.9 14000 11800 220.5996 3523.598 0.22 10476.4 0.875 0.883333Dec 14000 12000 240 3920 0.22 10080 0.83 0.9 14000 11800 220.5996 3744.198 0.22 10255.8 0.875 0.883333

2720 2720Jan 14000 10080 300 4220 0.4 9780 0.83 0.744

04814000 10255.8 280.9524 4025.15 0.4 9974.85 0.875 0.719105

Feb 14000 10080 300 4520 0.4 9480 0.83 0.744048

14000 10255.8 280.9524 4306.102 0.4 9693.898

0.875 0.719105

Mar 14000 10080 300 4820 0.4 9180 0.83 0.744048

14000 10255.8 280.9524 4587.055 0.4 9412.945

0.875 0.719105

Table 11: Comparing the impact of cost adjustments that occurred in different months of the same year

Formula-based Depreciation Applications to Vertical Industries 1Wp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

Table 11: Comparing the impact of cost adjustments that occurred in different months of the same year

a) refer to CRL1 and CRL2 .xls

Formula-based Depreciation A Technical Perspective 1Wp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

A Technical Perspective

To help you derive your own formulas to handle specific needs in yourorganization, we present the technical details on Formula here.

Variables and Functions

This section of the document describes in detail each variable you can use to builda depreciation formula. The syntax of each function is also outlined here.

Life

‘Life’ is the useful life of an asset expressed in years.

Salvage Value

Salvage Value is the estimated amount that will be received at the time the asset issold or removed from service. It is the amount to which the asset must be writtendown or depreciated during its useful life. The value of salvage value is stored inFA_BOOKS.SALVAGE_VALUE.

Remaining Life 1

In a Short Tax Year context, Remaining_Life_1 is the remaining useful life of anasset as of the conversion date or prorate date, whichever is later. In the formercase, remaining_life_1 can be interpreted as the number of years between theconversion date and the end of asset life. If the asset is not added in a short taxyear, then Remaining_Life_1 is identical to Remaining_Life_2.

If the asset is added in a short tax year, Remaining_Life_1 is calculated based onthe conversion date. The original depreciation start date(orig_deprn_start_date) is the day when the asset started depreciating in thelegacy system, which marks the beginning of the asset life.

Remaining_Life_1 :=TRUNC{MONTHS_BETWEEN(

ADD_MONTHS[orig_deprn_start_date, Life_In_Months],<conversion_date + 1>)

} ;The depreciation engine converts remaining life and asset life to months beforecalculating the annual rates. Therefore, the function MONTHS_BETWEEN isused. Notice that the value of remaining life is truncated and then added to one.This ensures that a non-zero number is returned.

When Remaining_Life_1 is used on an asset that was not added in a short year,then original depreication start date and conversion date become irrelevant:

Formula-based Depreciation A Technical PerspectiveWp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

2

Remaining_Life_1:=TRUNC{MONTHS_BETWEEN(

ADD_MONTHS[prorate_date, Life_In_Months],<current_fiscal_year_start_date >)

} ;

Remaining Life 2

Remaining_Life_2 is the number of years between the first day of the current fiscalyear and the end of asset life.

Remaining_Life2 := FLOOR{MONTHS_BETWEEN(

ADD_MONTHS[orig_deprn_start_date, Life_In_Months], <curr_fiscal_year_start_date >)

} ;

Table 12 displays the values of remaining_life_1 in different scenarios.

Prorate_date orig_deprn_start_date curr_fiscal_year_start_date Life_In_Months

conversion_date

Remaining_Life1=> 40 01-Apr-1992 01-Jan-1994 60Remaining_Life1 => 40 15-Apr-1992 01-Jan-1994 60Remaining_Life1 => 40 30-Apr-1992 01-Jan-1994 60Remaining_Life1 => 40 06-Apr-1992 01-Jan-1994 60Remaining_Life1 => 29 01-May-1991 60 01-Dec-1993Remaining_Life1 => 29 15-May-1991 60 01-Dec-1993Remaining_Life1 => 29 31-May-1991 60 31-Dec-1993Remaining_Life1 => 54 31-May-1991 84 01-Dec-1993Remaining_Life1 => 90 01-May-1991 120 01-Dec-1993Remaining_Life1 => 90 15-May-1991 120 01-Dec-1993Remaining_Life1 => 90 31-May-1991 120 01-Dec-1993Remaining_Life2 => 36 01-Jun-1992 01-Jul-1994 60Remaining_Life2 => 36 15-Jun-1992 01-Jul-1994 60Remaining_Life2 => 36 30-Jun-1992 01-Jul-1994 60

Table 12: Values of Remaining Life in various scenarios

Notice the limitation to using MONTHS_BETWEEN. MONTHS_BETWEEN isa database function that calculates the number of months between two dates. Itconverts the from and to dates to Jupiter calendar dates. For example, Jupiterrepresentation of ‘24-MAR-97’ is ‘2450532’. You can experiment this conversionvia sqlplus:

select select to_char( last_update_date, 'J') , last_update_date from fa_books

where rownum < 2;

The output of the query is:

TO_CHAR LAST_UPDATE_DATE

------- ---------

2450532 24-MAR-97


3

After converting to Jupiter dates, the MONTHS_BETWEEN function finds thenumber of days in the date range; then, it divides the value by 31 to arrive at thenumber of months between the two dates. Since ‘31’ is simply an ‘averaged’number of days in a month, the results returned from the MONTHS_BETWEENfunction may not be always desired. Table UUU shows different values returnedby MONTHS_BETWEEN given various date ranges:

From To Round (MONTHS_BETWEEN, 2) Round (MONTHS_BETWEEN, 0)13-Jul-1994 15-Apr-1997 33.06 3316-Jul-1994 16-Apr-1997 33 3319-Jul-1994 17-Apr-1997 32.94 3219-Jul-1994 18-Apr-1997 32.87 3222-Jul-1994 19-Apr-1997 32.80 32

Table 13: Results of MONTH_BETWEEN calculations given different date ranges

The from and to dates in the five examples shown are respectively July and Apr;you would expect the MONTHS_BETWEEN function to give the same result, ie33 months. However, due to the algorithm of the derivation, the results clearlyshow discrepancies.

In view of this, when Oracle Assets calculates the remaining life of an asset, itconverts conversion date and fiscal year start date to the first day of the monthbefore passing them to the MONTHS_BETWEEN function. This ensures thatremaining life stay constant for any given day of the month. As a result, in the fiveexamples show above would consistently give the result of 33 months.

Production Capacity

Production Capacity is stored in FA_BOOKS.PRODUCTION_CAPACITY.

Short Year

The Short Year flag has a value of 1 if the current year is a Short Tax Year.Otherwise, the value is 0. This variable is only relevant to short tax year assets andis meaningful when in used with the DECODE function.

The following describes the syntax and usage of functions available in formula-baseddepreciation.

GREATEST

Syntax:: GREATEST ( expr1, expr2, expr3.... )

Returns the greatest value in a list of values. The expressions expr1, expr2, and so on can be anumber, formula variable or a mathematical expression that returns a number. For example,Greatest ( 2/Life, Life, 0.4) returns 10 if Life has a value of 10.

LEAST

Syntax:: LEAST ( expr1, expr2, expr3.... )


4

Similar to the Greatest function, Least returns the least value in a list of values. The expressionsexpr1, expr2, and so on can be a number , formula variable a mathematical expression thatreturns a number. For instance, Least ( 2/Life, Life, 0.4) returns 0.2 if Life has a value of 10.

DECODE

Syntax:: Decode (expr, search1, result1 [, search2, result2] ... [default])

The expression expr is compared to each search value. If expr equals a search value, thecorresponding result is returned. If no match is found, DECODE returns the default value, orNULL if a default value was missing. In case a NULL value is returned by the DECODEfunction, the resulting annual depreciation is zero.

POWER

Syntax:: POWER (expr1 , expr2 )

POWER returns the number expr1 raised to the power of expr2. Both expr1 and expr2 can be anumber or formula variable; but if expr1 is negative, then expr2 must be an integer.

SQRT

Syntax:: SQRT (expr1)

SQRT returns the square root of the number or variable expr1, which cannot be negative.

ROUND

Syntax:: ROUND ( expr1 [ , expr2])

Use the ROUND function to round the number or variable expr1 to expr2 decimal places. If youdo not supply expr2, expr1 is rounded to zero decimal places. The number expr2 can benegative, in which case ROUND rounds the digits to the left of the decimal point.

SIGN

Syntax:: SIGN ( expr1 )

Returns -1 if expr1 is less than 0, 0 if expr1 equals 0, or 1 if expr1 is greater than 0.

Data Schema

FA_FORMULAS stores user-defined depreciation formulas. This schema is a child ofFA_METHODS which contains all depreciation methods. The two schemas are related by aprimary key, METHOD_ID. For a given formula-based depreciation method, there can be one ormore formulas.

FA_FORMULAS

Name Null? Type ------------------------------- -------- ---- METHOD_ID NOT NULL NUMBER(15) FORMULA_ACTUAL NOT NULL VARCHAR2(4000)


5

FORMULA_DISPLAYED NOT NULL VARCHAR2(4000) FORMULA_PARSED NOT NULL VARCHAR2(4000) CREATED_BY NUMBER(15) CREATION_DATE DATE LAST_UPDATE_DATE NOT NULL DATE LAST_UPDATED_BY NOT NULL NUMBER(15) LAST_UPDATE_LOGIN NUMBER(15)

FORMULA_DISPLAYED is the formula that the user inputs into the Depreciation Formulascreen. When the user saves the record, the form converts <Life> into LIFE_IN_YEARS andstore it in FORMULA_ACTUAL. At the same time, the variable is translated toNVL(LIFE_IN_MONTHS,0)/12. During actual calculation of depreciation, the depreciationengine parses LIFE_IN_MONTHS and selects the value of life in months from FA_BOOKS.The NVL function ensures that any null value be converted to zero in case the value zero exist inthe denominator in the formula.

FORMULA_ACTUAL--------------------------------------------------------------------------------FORMULA_DISPLAYED--------------------------------------------------------------------------------FORMULA_PARSED--------------------------------------------------------------------------------

LIFE_IN_YEARS * 0.0145 <Life> * 0.0145NVL(LIFE_IN_MONTHS,0) / 12 * 0.0145

Rate Adjustment Factor

Oracle Assets calculates the rate adjustment factor as follows:

RAFNewCost serve

NewCostNewCost=

− Re...Formula 11

where NewCost is the new adjusted cost and ReserveNewCost is the accumulateddepreciation in the current period had the Cost been the NewCost from thebeginning of the asset life. Refer to the section on Formula Factor for morediscussions on Rate Adjustment Factor.

Formula Factor

To account for the change in net book value at the time of adjustment and at theturn of fiscal year, Oracle Assets introduced the formula factor. During a costadjustment, the adjusted cost is reset to:


6

New Adjusted Cost = Current Recoverable Cost - Reserve4 ...Formula 12

Current Recoverable Cost is the new cost less salvage value. Reserve denotes thereserve at the beginning of the period where amortization start date falls into.From the period of adjustment onwards, the new adjusted cost is the basis ofdepreciation.

If you choose to amortize the adjustment, the Rate Adjustment Factor is reset toensure that the difference between the old and new bases are allocated throughoutthe remaining useful life of the asset. In the case where the depreciable basis is NetBook Value, the formula factor is set to a non-zero value to account for thechange in net book value:

FormulaFactorNBV

NewCost

NewCost serve

NewCostNewCost NewCost= =

− Re ...Formula 13

ReserveNewCost is equal to the Reserve based on the New Cost at the beginning ofthe period where the amortization start date falls into. The New Cost is the NewRecoverable Cost. The resulting periodic depreciation amount becomes:

PeriodicDepreciation AdjustedCost RateRAF

FFNumberofPeriodsPerYear

= × × × ×1 1

...Formula 14

Since the basis adjusted at the end of the fiscal year for an NBV baseddepreciation, the Formula Factor is reset accordingly:

FormulaFactor AdjustedCost NBVCurrent erableCost NBVadj fy

current

= × × ×1 1

Re cov

...Formula 15

Adjusted Costadj is the adjusted cost at the time of adjustment. NBVfy denotes theNet Book Value at the beginning of the Fiscal Year based on the New Cost hadthere been no adjustment at all. Current Recoverable Cost is the Current Costless salvage value. NBVcurrent is Current Recoverable Cost less reserve.

The following example illustrates the calculation of amortization using Formula-Based straight-line method.

4


7

A 5 year asset is placed in service in Apr-98 with a cost of 12,000. The asset isdepreciated at Net Book Value with a formula method of 1/remaining life. Sincethere is no salvage value, this asset will depreciate to zero cost. The depreciationcalendar is monthly and the fiscal year starts in January. With a half year prorateconvention, the asset starts depreciating in July, 1998. In the first year, the annualdepreciation is:

AnnualDepreciation AdjustedCost RateRAF

FFmonths

months= * * * *

1 6

12 ...Formula 16

AnnualDepreciationmonths

months= =12000

1

60

1

11

6

121200* * * * ...Formula 17

At the end of year 98, the reserve is 1200 and the net book value is 10800. At thebeginning of 1999, the adjusted cost is set to the net book value, 10800, since thisis an NBV based deduction. The Remaining Life is also re-calculated at the turn ofthe fiscal year to 54. The resulting annual depreciation rate is 1/54. Therefore, inJan-99, the deduction is:

AnnualDepreciationmonth

months= =10800

1

54

1

11

1

12200* * * * ...Formula 18

In May-99, the cost of the asset is adjusted to 18000. Since the amortization isbackdated to Jan-99, the new adjusted cost is taken to be Cost less Reserve at thebeginning of Jan-99, ie, 18000-1200 = 16800. Rate adjustment factor becomes

RAFNBV

NewCostNewCost=

RAFNewCost serve

NewCostNewCost=

− Re

RAF =−

=18000 1800

180000 9.

NBVnewcost is the net book value had the cost been 18,000 from the beginningand had there been no adjustments. The resulting periodic depreciation is 311.11.At this point, you are required to take into account the depreciation expenses thatwere missed from the Amortization Start Date up to the current period.Therefore, the total periodic depreciation in May-99 is 911. Moving on to the nextyear, the Net Book Value is reset to (18000-508.89)=12911.11. Annualdepreciation rate is changed to 1/(60-18)=0.29 due to the reduction on remaininglife. Formula Factor needs to be adjusted to account for the change in basis:


8

FormulaFactor =−

=16800 5400

18000

1

12922110 91084*

..

The periodic depreciation expense in year 2000 is

PeriodicDepreciationmonth

months= =16800 0 29

1

0 90 91084

1

1231111* . *

.* . * .

Notice that this periodic amount after the cost adjustment remains constant andagrees with the requirement of a straight-line depreciation method.


9

Cost Adjusted Cost PeriodicDepreciation


Rate RAF FF

1998

Jul 12000 12000 200.00 200.00 0.20 1 1

Aug 12000 12000 200.00 400.00 0.20 1 1

Sep 12000 12000 200.00 600.00 0.20 1 1

Oct 12000 12000 200.00 800.00 0.20 1 1

Nov 12000 12000 200.00 1000.00 0.20 1 1

Dec 12000 12000 200.00 1200.00 0.20 1 1

1999

Jan 12000 10800 200.00 1400.00 0.22 1 1

Feb 12000 10800 200.00 1600.00 0.22 1 1

Mar 12000 10800 200.00 1800.00 0.22 1 1

Apr 12000 10800 200.00 2000.00 0.22 1 1

May (adjust) 18000 16800.00 911.11 2911.11 0.22 0.9 0.9

Jun 18000 16800 311.11 3222.22 0.22 0.9 0.9

Jul 18000 16800 311.11 3533.33 0.22 0.9 0.9

Aug 18000 16800 311.11 3844.44 0.22 0.9 0.9

Sep 18000 16800 311.11 4155.56 0.22 0.9 0.9

Oct 18000 16800 311.11 4466.67 0.22 0.9 0.9

Nov 18000 16800 311.11 4777.78 0.22 0.9 0.9

Dec 18000 16800 311.11 5088.89 0.22 0.9 0.9

2000

Jan 18000 12911.11 311.11 5400.00 0.29 0.9 0.910843

Feb 18000 12911.11 311.11 5711.11 0.29 0.9 0.910843

Mar 18000 12911.11 311.11 6022.22 0.29 0.9 0.910843

Apr 18000 12911.11 311.11 6333.33 0.29 0.9 0.910843

May 18000 12911.11 311.11 6644.44 0.29 0.9 0.910843

Jun 18000 12911.11 311.11 6955.56 0.29 0.9 0.910843

Jul 18000 12911.11 311.11 7266.67 0.29 0.9 0.910843

Aug 18000 12911.11 311.11 7577.78 0.29 0.9 0.910843

Sep 18000 12911.11 311.11 7888.89 0.29 0.9 0.910843

Oct 18000 12911.11 311.11 8200.00 0.29 0.9 0.910843

Nov 18000 12911.11 311.11 8511.11 0.29 0.9 0.910843

Dec 18000 12911.11 311.11 8822.22 0.29 0.9 0.910843

2001

Jan 18000 9177.778 311.11 9133.33 0.40 0.9 0.915254

Feb 18000 9177.778 311.11 9444.44 0.40 0.9 0.915254

Mar 18000 9177.778 311.11 9755.56 0.40 0.9 0.915254

Apr 18000 9177.778 311.11 10066.67 0.40 0.9 0.915254

May 18000 9177.778 311.11 10377.78 0.40 0.9 0.915254

Jun 18000 9177.778 311.11 10688.89 0.40 0.9 0.915254

Jul 18000 9177.778 311.11 11000.00 0.40 0.9 0.915254

Aug 18000 9177.778 311.11 11311.11 0.40 0.9 0.915254

Sep 18000 9177.778 311.11 11622.22 0.40 0.9 0.915254

Oct 18000 9177.778 311.11 11933.33 0.40 0.9 0.915254

Nov 18000 9177.778 311.11 12244.44 0.40 0.9 0.915254

Dec 18000 9177.778 311.11 12555.56 0.40 0.9 0.915254

2001

Jan 18000 5444.444 311.11 12866.67 0.67 0.9 0.925714

Feb 18000 5444.444 311.11 13177.78 0.67 0.9 0.925714

Mar 18000 5444.444 311.11 13488.89 0.67 0.9 0.925714


10

Apr 18000 5444.444 311.11 13800.00 0.67 0.9 0.925714

May 18000 5444.444 311.11 14111.11 0.67 0.9 0.925714

Jun 18000 5444.444 311.11 14422.22 0.67 0.9 0.925714

Table 14: Setting Rate Adjustment Factor and Formula Factor during cost adjustment

Cost AdjustedCost



Rate NBV

1998

Jul 18000 18000 300.00 300.00 0.20 17700.00

Aug 18000 18000 300.00 600.00 0.20 17400.00

Sep 18000 18000 300.00 900.00 0.20 17100.00

Oct 18000 18000 300.00 1200.00 0.20 16800.00

Nov 18000 18000 300.00 1500.00 0.20 16500.00

Dec 18000 18000 300.00 1800.00 0.20 16200.00

1999

Jan 18000 16200 300.00 2100.00 0.22 15900.00

Feb 18000 16200 300.00 2400.00 0.22 15600.00

Mar 18000 16200 300.00 2700.00 0.22 15300.00

Apr 18000 16200 300.00 3000.00 0.22 15000.00

May 18000 16200 300.00 3300.00 0.22 14700.00

Jun 18000 16200 300.00 3600.00 0.22 14400.00

Jul 18000 16200 300.00 3900.00 0.22 14100.00

Aug 18000 16200 300.00 4200.00 0.22 13800.00

Sep 18000 16200 300.00 4500.00 0.22 13500.00

Oct 18000 16200 300.00 4800.00 0.22 13200.00

Nov 18000 16200 300.00 5100.00 0.22 12900.00

Dec 18000 16200 300.00 5400.00 0.22 12600.00

2000

Jan 18000 12600 300.00 5700.00 0.29 12300.00

Feb 18000 12600 300.00 6000.00 0.29 12000.00

Mar 18000 12600 300.00 6300.00 0.29 11700.00

Apr 18000 12600 300.00 6600.00 0.29 11400.00

May 18000 12600 300.00 6900.00 0.29 11100.00

Jun 18000 12600 300.00 7200.00 0.29 10800.00

Jul 18000 12600 300.00 7500.00 0.29 10500.00

Aug 18000 12600 300.00 7800.00 0.29 10200.00

Sep 18000 12600 300.00 8100.00 0.29 9900.00

Oct 18000 12600 300.00 8400.00 0.29 9600.00

Nov 18000 12600 300.00 8700.00 0.29 9300.00

Dec 18000 12600 300.00 9000.00 0.29 9000.00

2001

Jan 18000 9000 300.00 9300.00 0.40 8700.00

Feb 18000 9000 300.00 9600.00 0.40 8400.00

Mar 18000 9000 300.00 9900.00 0.40 8100.00

Apr 18000 9000 300.00 10200.00 0.40 7800.00

May 18000 9000 300.00 10500.00 0.40 7500.00

Jun 18000 9000 300.00 10800.00 0.40 7200.00

Jul 18000 9000 300.00 11100.00 0.40 6900.00

Aug 18000 9000 300.00 11400.00 0.40 6600.00

Sep 18000 9000 300.00 11700.00 0.40 6300.00

Oct 18000 9000 300.00 12000.00 0.40 6000.00

Nov 18000 9000 300.00 12300.00 0.40 5700.00

Dec 18000 9000 300.00 12600.00 0.40 5400.00


11

2002

Jan 18000 5400 900.00 13500.00 2.00 4500.00

Feb 18000 5400 900.00 14400.00 2.00 3600.00

Mar 18000 5400 900.00 15300.00 2.00 2700.00

Apr 18000 5400 900.00 16200.00 2.00 1800.00

May 18000 5400 900.00 17100.00 2.00 900.00

Jun 18000 5400 900.00 18000.00 2.00 0.00

Table 15: Depreciation expenses had the cost been 18,000 from Date Placed In Service

Formula-based Depreciation DiagnosticsWp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

12

Diagnostics

To trace the depreciation rate being used in formulaic depreciation, you can turnPRINT_DEBUG on before running depreciation. Values of depreciation rates andother parameters are written to the depreciation log file once you correctly set theprofile option PRINT_DEBUG. To enable this debug message mechanism, set theFA: Print Debug profile option to ‘Yes’.

+---------------------------------------------------------------------------+Oracle Assets: Version : 11.5.41 - Development

Copyright (c) 1979, 1999, Oracle Corporation. All rights reserved.

FADEPR module: Depreciation Run+---------------------------------------------------------------------------+

Current system time is 17-JAN-2000 21:01:45

+---------------------------------------------------------------------------+

Depreciation Program Exception ReportCost Initial Journal Entry program completedAPP-OFA-48208: fadpods FA_DEPRN_SINGLE: has the value of Y.APP-OFA-48208: deprn_cache: has the value of 1.APP-OFA-48152: Asset number 8923Current Depreciation Reserve is 291.66 (fadcrsv)APP-OFA-48208:Contents of dpr_struct for asset_id has the value of 8923.APP-OFA-48208: asset_num has the value of 8923.APP-OFA-48208: book has the value of ACORP.APP-OFA-48208: calendar_type has the value of MONTHLY.APP-OFA-48208: ceil_name has the value of .APP-OFA-48208: bonus_rule has the value of .APP-OFA-48208: method_code has the value of FBSTL1. ßßCheck the method code to

see if it is a formula-based method; queryagainst FA_FORMULAS for the formula

APP-OFA-48208: adj_cost has the value of 10000. ßß adjust_cost is the basisAPP-OFA-48208: rec_cost has the value of 10000.APP-OFA-48208: reval_amo_basis has the value of 0.APP-OFA-48208: deprn_rsv has the value of 291.66.APP-OFA-48208: reval_rsv has the value of 0.APP-OFA-48208: adj_rate has the value of 0.APP-OFA-48208: rate_adj_factor has the value of 1.APP-OFA-48208: capacity has the value of 0.APP-OFA-48208: adj_capacity has the value of 0.APP-OFA-48208: ltd_prod has the value of 0.APP-OFA-48208: adj_rec_cost has the value of 10000.APP-OFA-48208: salvage_value has the value of 0.APP-OFA-48208: prior_fy_exp has the value of 0.APP-OFA-48208: ytd_deprn has the value of 291.66.APP-OFA-48208: asset_id has the value of 8923.


13

APP-OFA-48208: jdate_in_service has the value of 2451327.APP-OFA-48208: prorate_jdate has the value of 2451339.APP-OFA-48208: deprn_start_jdate has the value of 2451327. ßßdepreciation start date

converted the Jupiter date formatAPP-OFA-48208: jdate_retired has the value of 0.APP-OFA-48208: ret_prorate_jdate has the value of 0.APP-OFA-48208: life has the value of 60. ßß life expressed in monthsAPP-OFA-48208: y_begin has the value of 1999.APP-OFA-48208: y_end has the value of 1999.APP-OFA-48208: p_cl_begin has the value of 7.APP-OFA-48208: p_cl_end has the value of 7.APP-OFA-48208: pc_life_end has the value of 0.APP-OFA-48208: rsv_known_flag has the value of 1.APP-OFA-48208: deprn_rounding_flag has the value of 0.APP-OFA-48208: fadpdp(1.1): cur_deprn_rsv has the value of 291.66.APP-OFA-48208: cur_reval_rsv has the value of 0.APP-OFA-48208: cur_adj_cost has the value of 10000.APP-OFA-48208: by_factor has the value of .875. ßß this value dictates how

depreciation is spread in the first yearAPP-OFA-48208: bp_frac has the value of .0833333. ßß 1 divided by number of periods

in a yearAPP-OFA-48208: dp_frac has the value of 0.APP-OFA-48208: rp_frac has the value of 0.APP-OFA-48208: by_frac has the value of .5833333.APP-OFA-48208: dy_frac has the value of 1.APP-OFA-48208: ry_frac has the value of 1.APP-OFA-48208: h_short_fiscal_year_flag has the value of NO.APP-OFA-48208: h_conversion_date has the value of DD-MON-YYYY.APP-OFA-48208: h_prorate_date has the value of 09-JUN-1999.APP-OFA-48208: h_orig_deprn_start_date has the value of DD-MON-YYYY.APP-OFA-48208: Rate has the value of .2. ßßVerify the annual depreciation rateAPP-OFA-48208: fadpdp(2): rate has the value of .2.APP-OFA-48208: fadpdp(3) temp_r_amt has the value of 2000.APP-OFA-48208: fadpdp(4): fy_amt has the value of 1750.APP-OFA-48208: ann_deprn_amt has the value of 1166.66. ßßVerify the annual

depreciation amountAPP-OFA-48208: fadpdp(4.0): fy_amt has the value of 1750.APP-OFA-48208: use_frac has the value of .0833333.APP-OFA-48208: p_deprn_exp has the value of 145.8333333.APP-OFA-48208: fadpdp(7): adj_rec_cost has the value of 10000.APP-OFA-48208: cur_deprn_rsv has the value of 291.66.APP-OFA-48208: y_deprn_exp has the value of 0.APP-OFA-48208: p_deprn_exp has the value of 145.8333333.APP-OFA-48208: nbv_fabs has the value of 9562.5066667.APP-OFA-48208: nbv_frac_thresh has the value of .0001.APP-OFA-48208: nbv_amt_thresh has the value of .1.APP-OFA-48208: fadgpout FA_USE_THRESHOLD: has the value of .APP-OFA-48208: fadpdp(8): p_deprn_exp has the value of 145.8333333.APP-OFA-48208: y_deprn_exp has the value of 145.8333333.APP-OFA-48208: adj_rec_cost has the value of 10000.APP-OFA-48208: p_prod has the value of 0.APP-OFA-48208: y_prod has the value of 0.APP-OFA-48208: fadpdp(9): deprn_exp_sum has the value of 145.83.APP-OFA-48208: cur_deprn_rsv has the value of 437.49.APP-OFA-48208: reval_exp_sum has the value of 0.APP-OFA-48208: reval_amo_sum has the value of 0.APP-OFA-48208: cur_reval_rsv has the value of 0.APP-OFA-48208: prod_sum has the value of 0.


14

APP-OFA-48208: cur_ltd_prod has the value of 0.APP-OFA-48208: y_deprn_exp has the value of 145.83.APP-OFA-48208: ytd_deprn_sum has the value of 145.8333333.Contents of dpr_outnew_deprn_rsv has the value of 437.49.APP-OFA-48208: new_adj_cost has the value of 10000.APP-OFA-48208: new_reval_rsv has the value of 0.APP-OFA-48208: new_reval_amo_basis has the value of 0.APP-OFA-48208: new_adj_capacity has the value of 0.APP-OFA-48208: new_ltd_prod has the value of 0.APP-OFA-48208: deprn_exp has the value of 145.83. ßß Verify the rounded periodicdepreciation expenseAPP-OFA-48208: reval_exp has the value of 0.APP-OFA-48208: reval_amo has the value of 0.APP-OFA-48208: prod has the value of 0.APP-OFA-48208: ann_adj_exp has the value of 1750.APP-OFA-48208: ann_adj_reval_exp has the value of 0.APP-OFA-48208: ann_adj_reval_amo has the value of 0.APP-OFA-48208: bonus_rate_used has the value of -1.APP-OFA-48208: new_prior_fy_exp has the value of 0.APP-OFA-48208: full_rsv_flag has the value of 0.APP-OFA-48208: life_comp_flag has the value of 0.Current Depreciation Reserve is 437.49 (faxcde)Depreciation Expense for asset number 8923 is 145.83Depreciation: 1 assets processedAPP-FND-01388: Cannot read value for profile optionFA_LARGE_ROLLBACK_SEGMENT in routine &ROUTINE.Do_dep routine completedProgram FADEPR completed successfully

The above depreciation debug file shows the values derived by the depreciationengine when depreciating an asset in the third month it was placed in service. Theasset had a five year life and was placed in service in May-99. The prorate periodis Jun-99. The calendar is monthly and is a Jan-Dec one. No transactions wereperformed on this asset aside from depreciation. Here are the suggesteddiagnostics steps for this simple depreciation scenario:

1. Identify the method code.2. Query FA_FORMULAS to see the formula and calculation basis being

used. In this example, the values are 1/LIFE and Cost respectively.3. The value of the calculation basis is reflected in adj_cost. Verify this value,

taking into considerations the salvage value, depreciation reserve, and anyadjustments previously made. In this case, the basis is 10,000 which is thecost of the asset.

4. Check the values of the variables in the formula. In this example, the onlyvariable is LIFE and its value is shown in Life, expressed in months.

5. Validate the annual depreciation rate against Rate. The debug file showsthe Rate as 0.2, ie 1/(Life in Years) or 12/(Life in Months) or 12/60.

6. Verify the ann_deprn_value, taking into account the prorate date. In this

case, ann_deprn_value is 10000 * 0.2 * 7/12 = 1166.66667, i.e.,adjusted_cost * annual rate * number of periods in the year since prorateperiod / total periods in the year.


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7. Since ‘depreciation when placed in service’ is selected in the prorateconvention setup, the system starts allocating depreciation expenses in theperiod of asset addition, i.e. May-99. Hence, the annual depreciationexpense is spread in 8 months instead of 7. The resulting periodicdepreciation amount is 145.8333333.

8. Rounding the depreciation expense to 2 decimal places, the system showsthe final result to be 145.83.

Formula-based Depreciation Appendix -- MACRS Property ClassesWp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only

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Appendix -- MACRS Property Classes

MACRS consists of two systems, namely General Depreciation System (GDS) andAlternative Depreciation System (ADS). GDS is more commonly used and ADSis selected only if required by law. The difference between the two system ismainly that ADS provides a longer recovery period.

Tax lives of an asset depends on the property class. The MACRS property classes

under the General Depreciation System are presented below5:

3-year property includes:

a. Tractor units for over-the-road use.

b. Any race horse over 2 years old when placed in service.

c. Any other horse over 12 years old when placed in service.

d. Qualified rent-to-own property.


a. Automobiles, taxis, buses, and trucks.

b. Computers and peripheral equipment.

c. Office machinery (such as typewriters, calculators, and copiers).

d. Any property used in research and experimentation.

e. Breeding cattle and dairy cattle.


a. Office furniture and fixtures (such as desks, files, and safes).

b. Any property that does not have a class life and that has not been

designated by law as being in any other class.


a. Vessels, barges, tugs, and similar water transportation equipment.

b. Any single purpose agricultural or horticultural structure.

c. Any tree or vine bearing fruits or nuts.


a. Certain depreciable improvements made directly to land or added to

5 Http://www.irs.gov/


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it (such as shrubbery, fences, roads, and bridges).

b. Service station buildings and other land improvements used in the

marketing of petroleum and petroleum products (but not facilities

related to petroleum and natural gas trunk pipelines).

20-year property includes farm buildings (other than single purpose agricultural or horticulturalstructures).

Residential rental property includes real property such as a rental home or structure (including amobile home) if 80% or more of its gross rental income for the tax year is from dwelling units. Adwelling unit is a house or apartment used to provide living accommodations in a building orstructure. It does not include a unit in a hotel, motel, inn, or other establishment where more thanhalf the units are used on a transient basis. If you occupy any part of the building or structure forpersonal use, its gross rental income includes the fair rental value of the part you occupy. Therecovery period for this property is 27.5 years.

Nonresidential real property includes section 1250 property that is neither of the following.

a. Residential rental property (defined in (7)).

b. Property with a class life of less than 27.5 years.

The recovery period for nonresidential real property is:

39 years for property you placed in service after May 12, 1993, or

31.5 years for property you placed in service before May 13, 1993.

Depreciation Methods are mandated by the MACRS property classes6:

MACRS Property Class Depreciation Method Benefits

Non-farm 3-, 5-, 7-, and 10-yearproperty

Double Declining BalanceProvides a greater deductionduring the earlier recovery years.

Switches to SL when that methodprovides a greater deduction.

All farm property (except realproperty)

All 15- and 20-year property

Nonfarm 3-, 5-, 7-, and 10-yearproperty

150% Declining Balance Provides a greater deductionduring the earlier years of assetlives

27.5 and 39-year property Straight-line Straight-line

Table 16: Depreciation Methods as mandated by various MACRS property classes

6 http://www.irs.gov


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11i Formula Based Depreciation White Paper

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