Creating depreciation rule

This page allows you to define the depreciation rule, which is combination of methods, rates, useful life, basis and convention. Tell me more.

Select the “Create Depreciation Setup” link under the “Asset Depreciation Setup” business component.

The “Create Depreciation Rule” page appears.

The system displays the following field:

Status	The status of the depreciation rule.
	Active – The depreciation rule on creation attains the “Active” status.
	Inactive – The depreciation rule on inactivation attains the “Inactive” status. The depreciation rule can be inactivated in the “Activate / Inactivate Depreciation Setup” activity. The depreciation rule once assigned to depreciation category cannot be inactivated.

Enter the following fields:

Asset Class Code	Use the drop-down list box to select the code identifying the asset class. The system loads all the asset class defined in the “Create Asset Class” activity of the “Asset Type Definition” business component, for selection. The system displays the first asset class by default on launch of the page.
Effective From Date	The date from which the depreciation rule is effective (Date Format). Mandatory.

Note: The effective from date must be later than the date on which the Fixed Asset is installed.

Depreciation Rule No.	The unique number identifying the depreciation rule (Integer). Mandatory.
Rule Description	The textual description pertaining to the description rule (Alphanumeric, 100). Mandatory.
Depreciation Method	Use the drop-down list box to select the method by which you want the asset to be depreciated. The various methods available are
	Straight Line- A fixed percentage on the original cost of the asset is charged every year as depreciation, so that the asset account may be reduced to zero or scrap value at the end of definite period representing its estimated life.
	Diminishing Balance – The asset is depreciated by a fixed percentage every year on the diminishing balance of the asset account. For example, this method is usually adopted in the Plant and Machinery.
	Sum of Years Digits – The assets are depreciated based on the useful life of an asset. This is the method where you charge maximum depreciation during the initial years and gradually decrease the depreciation charge towards the end of the useful life of the asset. For example, this method will be adopted when an asset is leased or in financial sectors.
	Example: The useful life of the asset is 5. The sum of years digit = (5*(5+1)) / 2 = 15. Depreciation for year 1 = 5/15 = 33.333 Depreciation for year 2 = (5-1)/15 = 26.667 and so on.
	The system displays the “Straight Line” by default on launch of the page.
Basis	Use the drop-down list box to select the basis on which the depreciation has to be calculated. The depreciation can be calculated on the following basis
	Acqn. Cost – The depreciation is calculated on the original amount in which the asset is acquired.
	Acqn. Cost – Salvage – The depreciation is calculated for the asset after deducting the salvage.
	The system displays the “Acqn. Cost” by default on launch of the page.
Yearly Percent	Use the drop-down list box to select “Yes” to specify the yearly percent to be depreciated on an asset. The options available are “Yes” and “No”.
	The system displays “Yes” by default on launch of the page.

Note: The “Yearly Percent” cannot be selected as “Yes”, if the depreciation method is “Diminishing Balance”.

Depreciation Rate Id	The code identifying the depreciation ID (Alphanumeric, 10). The depreciation ID must have been defined in the “Create Depreciation Rate” page of the “Create Depreciation Setup” activity.
	Help facility available.

Note: The effective date of the rate ID must be earlier than the “Effective Date From” of the depreciation rule.

Useful Life of Asset	The number of years in which the assets could be of use (Integer). The useful life must be greater than 1. This field must be left blank, if the depreciation rate ID is specified.
	For example, the useful life of an asset could be 2 years or 3 years.
Depreciation Convention	Use the drop-down list box to select the depreciation convention. The various conventions available are
	Prorate – Indicates that the depreciation will be applied from the date when the asset is put to use.
	Mid Year – Indicates that the half-year of depreciation is taken for the first year when the asset is placed in service, regardless of in service date. If the asset is disposed before the end of its useful life, a half-year of depreciation is taken for the year of disposal regardless of the month in which the asset was disposed. If the asset is kept for the asset's entire useful life, a half-year of depreciation is taken in the year following the last year of its useful life.
	Mid Period - Indicates that half-period of depreciation is taken for the first period when the asset is placed in service, regardless of in-service date. If the asset is disposed before the end of its useful life, a half-period of depreciation is taken for the period of disposal regardless of the month in which the asset was disposed. If the asset is kept for the asset's entire useful life, a half-period of depreciation is taken in the period following the last period of its useful life.
	Mid Month - Indicates that the depreciation will be applied on the asset for a full period if the in service date of the asset is on or before 15th of the depreciation processing period. Else, no depreciation will be charged for that period.
	Full Period – Indicates that the full-period of depreciation is taken for the first period when the asset is placed in service, regardless of in-service date.
	User Defined – Indicates that the depreciation will be applied on the asset based on the value given in the first year convention %.
	The system displays “Prorate” by default on launch of the page.
First Year Convention %	The percentage based on which the depreciation must be calculated (Decimal). This field is mandatory, if the “Depreciation Convention” selected is “User Defined”.
Maximum Depreciation	The maximum depreciation that can be provided for a depreciation calendar year for a set of assets (Decimal).
Minimum Depreciation	The minimum depreciation that can be provided for a depreciation calendar year for a set of assets (Decimal). The value entered here must be less than the value entered in the “Maximum Depreciation” field and greater than zero.

The system displays the following field in the “Yearly Depreciation Rates” multiline:

Year

The number of years specified in the “Useful Life of Asset” field. If the useful life of the asset specified is 2, then the system displays 1 and 2 in this field.

Enter the following field:

Yearly Percentage

The percentage on which the depreciation must be calculated every year (Decimal). The value entered here must be greater than zero. This field is mandatory if “Yearly Percent” selected is “Yes”.

Note: The aggregate of the yearly percent must be 100, if the depreciation method is “Straight Line”.

Creating rule

The following conditions must be checked before creating a rule

	Rate ID	Yearly Rates	Useful Life
SLM	Y	Y	Y
WDV	Y	N	Y
SYD	N	N	Y

Note: For an asset class, the combination of depreciation rate ID, useful life, basis, method, yearly percent, depreciation convention, maximum / minimum depreciation must be unique.

Click the “Create Rule” pushbutton to create the depreciation rule.

The system updates the status of the depreciation rule to “Active” on creation.

The system also updates the login ID of the user to the created by and the system date to the created date.

The system displays the following fields:

Created By	The login ID of the user who created the depreciation rule.
Created Date	The date on which the depreciation rule was created.

To proceed, carry out the following

Select the “Create Rate” link at the bottom of the page to create the depreciation rate.
Select the “Create Category” link at the bottom of the page to create the depreciation category.
Select the “Create Calendar” link at the bottom of the page to create the depreciation calendar.
Select the “Assign Rule” link at the bottom of the page to assign the depreciation rule to the depreciation book.
Select the “View Rules” link at the bottom of the page to view the depreciation rule.
Select the “Function Defaults” link at the bottom of the page to view the function defaults.

Creating depreciation rule – An overview

You can define a depreciation rule for each asset class. You can provide a unique Rule No. and description along with the date from which the depreciation rule is effective. You can specify the method by which the depreciation has to be calculated for an asset. You can also select the basis on which the depreciation must be calculated which could be acquisition cost or the acquisition cost after deducting the salvage. You can provide a useful life of an asset and specify the percentage for each year. This page also allows you to select the depreciation convention to be followed in calculating the depreciation for an asset. You can also specify the maximum and the minimum depreciation allowed for an asset.

The system updates the status of the depreciation rule to “Active” on creation. The system also updates the login ID of the user to the created by and the system date to the created date.

Prerequisite

The “Finance Book” must have been defined in the “Organization Set Up” business component.
The “Financial Calendar” must have been defined in the “Accounting Setup” business component.
The “Asset Class” must have been defined in the “Asset Type Definition” business component.
The “Depreciation Book” must have been defined in this business component.

What you can do in this page

Charge depreciation based on convention

Process depreciation based on the method

Calculate depreciation on the asset

Charge depreciation based on convention

You can calculate the depreciation based on certain convention.

Set the “Depreciation Convention” field to the “Prorate” to apply depreciation from the date when the asset is put to use.
Set the “Depreciation Convention” field to the “Mid Year” to calculate the depreciation on a half-yearly basis.
Set the “Depreciation Convention” field to the “Mid Period”” to calculate the depreciation on a mid period basis.
Set the “Depreciation Convention” field to the “User Defined” to apply depreciation on the asset based on the value given in the first year convention %.
Set the “Depreciation Convention” field to the “Mid Month” to calculate depreciation on a mid month basis.

Process depreciation based on the method

You can calculate the depreciation based on the method applied.

Set the “Depreciation Method” field to the “Straight Line” to apply straight-line method in calculating the depreciation.
Set the “Depreciation Method” field to the “Diminishing Balance” to apply diminishing balance method in calculating the depreciation.
Set the “Depreciation Method” field to the “Sum of Years Digits” to apply sum of year’s digits method in calculating the depreciation.

Calculate depreciation on the asset

You can calculate the depreciation on the asset on any basis.

Set the “Basis” field to “Acqn. Cost” to calculate depreciation on the acquisition cost of the asset.
Set the “Basis” field to “Acqn. Cost – Salvage” to calculate the depreciation on the acquisition cost after deducting the salvage from the acquisition cost.