Depreciation

Amortisation is recognized in corporate accounting depreciation or impairments of assets. The amortization corresponds with the loss of value of business assets (fixed assets and current assets) for a period. The value loss can be caused by general reasons such as aging and wear and tear or due to special reasons, such as an accident or damage in prices. Depreciation is usually determined from a business perspective and - recognized as an expense in the profit calculation - in compliance with commercial law and tax law peculiarities. The opposite of depreciation is the write-up that comes as an appreciation in question, if excessive losses were recognized in prior years.

The tax law to be determined and deductible as a business expense loss in value is called depreciation for wear and tear ( depreciation ) and is subject to different regulations than the accumulated depreciation. Please refer to the legal situation in different countries.

Depreciation back to the capital expansion and capital release effect ( Lohmann - Ruchti effect), which was first described by Karl Marx and Friedrich Engels.

• 2.1 Straight line depreciation 2.1.1 Example of straight-line depreciation based on chart and amortization schedule

• 2.2.1 Example for geometrically - declining depreciation

• 2.3.1 Example for arithmetic- declining depreciation

• 2.4.1 Example of progressive depreciation

• 2.5.1 Example of performance-related depreciation

• 4.1 Legal situation in Germany

• 5.1 Legislation relating to depreciation

General

Depreciation is calculated in order to always be able to determine the current value of the operating assets from the accounts and understand the loss in value due to wear or aging of the assets as cost accounting and cost accounting to be able to include in the price calculation. Finally, the write-downs were recorded as an operating expense to the taxable profit and influence on the valuation of assets in the balance of trade. There, these assets may not exceed the cost of acquisition or production cost, less the loss in value between the valuation dates (equivalent of depreciation ), are recognized. With some exceptions, the depreciation is not to be understood as a real, periodic effective outflow of cash, but as an impairment of balance sheet assets.

Depreciation of fixed assets

For non-current assets that are to be used over a longer period in the company, the acquisition or production costs are not fully accounted for in the year of acquisition / production as an expense but allocated pro rata by the amortization of the years of use. This depreciation will bring the annual consumption value expressed.

Depreciation methods

Basically, there are two methods to choose from for a depreciation - the direct and indirect deduction. In the direct write off the value of the asset item in the balance sheet is reduced directly to the expensed amount. Alternatively, in the indirect write-off an item for valuation allowance is provided to all future losses are cumulative. The difference is that in the first case, the historical costs to current depreciation reduced directly. In the indirect depreciation of the amortization are collected as allowance account and as such separately with a negative sign on the asset side or with a positive sign on the liabilities side under the " impairment " item.

The beginning of the depreciation

Depreciation for the first time at the time of operation ( and not the beginning of the actual use! ) Made. This is at a purchase usually the day of purchase or delivery. It is expected the exact month (Pro rata ). For example, when purchasing at a date between 1 May and 31 May eight months - assuming that the fiscal year is the calendar year - write off.

End of amortization

Depreciation shall be made until the retirement of the asset from the operation through sale, scrapping or loss. Depreciation usually means that the asset in the last year of use is reduced to a carrying value of 0 money units (FU ). If the asset is continued to be used in the company after its write-off, a reminder of 1,00 GE can be continued in the books.

For purposes of internal accounting sense can also calculate a potential sale proceeds to be, which is to achieve after a sale after the end of its useful life. This realization proceeds would reduce the imputed value loss and thus the depreciable amount. The approach of a suspected exploitation proceeds is usually commercial law not allowed.

Depreciation causes

The reasons for the loss of value can be both general and specific. Qualify

• Consumption- related causes: wear through use or wear
• Time- related causes: wear and degradation
• Economically related causes: Impairment due to technological progress or because of shifts in demand
• Law -related causes: Process of property rights or use rights before the technical life of the asset
• Weather-related causes: Impairment due to various weather conditions ( rain, etc. → about rust on company cars )

Types of amortization

The value for the depreciation per year need not be always the same. Because of different reasons for the loss in value to different types of depreciation can arise:

• Time-proportional depreciation: Alone time determines the value loss (Age impairment )
• Power Proportional Depreciation: Depending on the work done performance (after working hours)
• Asset value depreciation: By using the substance is reduced (for example, gravel pit, quarry, ...)

Straight-line depreciation

The acquisition or production cost of the depreciable economic good (WG) will be divided equally between the years of useful life. Here, every year, the same amount will be amortized and at the end of its useful life, the WG is fully depreciated. The depreciation value is calculated with the following formula:

, where

Cost: Useful life = annual ( depreciation ) rate

Meaning of symbols: = depreciation period t, S = depreciation starting amount ( acquisition cost - residual value ), n = useful life Depreciation = depreciation in

In general, the value of an asset, at cost c and the useful life is n, after x years:

Example of straight-line depreciation based on chart and amortization schedule

A machine is purchased for € 21,000.00 (net, without VAT ). In a normal useful life of seven years and the application of straight-line depreciation must for seven years per year 1/7 of the cost, so each 3.000,00 Euro, are calculated as an expense.

Geometric - declining depreciation

The asset depreciation is measured in decreasing annual amounts with a constant multiplication factor.

Example of geometric- degressive depreciation

A machine is purchased for 21,000.00 monetary units (GE) (net, without VAT ). Using the declining balance 20 % of the reported value may be deducted as an expense about seven years per year.

In order to ensure that the asset is fully depreciated after the end of its useful life, it is allowed in some countries to move from the geometrically - declining balance to straight-line depreciation. In the year of change, the net book value is divided by the number of years remaining amortization, so that from the exchange constant, ie straight-line depreciation amounts arise, all of which are greater than those that would have resulted from a continuing declining-balance depreciation. With the condition

Follows that the optimal time for the exchange year

Results, where i = menopausal, n = useful life, p = degressive depreciation rate.

In the year of change, the net book value is divided by the number of years remaining amortization, so that from the exchange constant, ie straight-line depreciation amounts arise, all of which are greater than those that would have resulted from a continuing declining-balance depreciation. In example, the geometric- degressive depreciation so the change in the 4th year would be advisable. The end of the 3rd year (= after 3 straight-line depreciation ) any remaining net book value of 10752.00 GE would put on the remaining useful life of 4 years distributed a write-off of GE 2,688.00 per year result. With the declining balance method only 2150.40 GE would generally written off in the fourth year.

Arithmetic-declining depreciation

The arithmetic- declining depreciation is a commercial law approved method, in which the amount of depreciation decreases every year by a fixed amount ( the amount of degression ). The amount of degression is the ratio of acquisition cost and the sum of the planned use years ( at about three years of use: 1 2 3 = 6). Thus, the asset is fully depreciated at the end of its useful life. The most common form of the arithmetic - declining balance depreciation, the digital depreciation in which the depreciation in the last year of use is just as high as the annual difference, dar. in the following example

According to the digital depreciation of the value of an asset, at cost c and the useful life is n, after x years:

Example of arithmetic- declining depreciation

A machine is purchased for 21,000.00 GE (net, without VAT ). In a normal useful life of seven years, the depreciation charge in each year must be reduced by 750.00 GE. (1 2 3 ... 7 = 28; 21,000.00 GE / 28 = 750.00 GE)

Progressive depreciation

In contrast to the declining balance increasing annual depreciation is made in the progressive depreciation with increased duration of use. The Economic Foundations is this depreciation in a higher depreciation at the end of its useful life. One example is coal mines, or similar structures, because with increased duration of use of the degradation of the material and more complicated, technically demanding and thus more expensive. The progression amount is the quotient of cost and the sum of the planned use years ( at about three years of use: 1 2 3 = 6). Thus, the asset is fully depreciated at the end of its useful life.

In general, the value of an asset, at cost c and the useful life is n, after x years:

Example of progressive depreciation

A machine is purchased for 21,000.00 GE (net, without VAT ). The useful life of seven years, with the value loss increases linearly and is in the final year of use is greatest. Thus, the amount of depreciation in each year will increase by 750.00 GE. (1 2 3 ... 7 = 28; 21,000.00 GE / 28 = 750.00 GE)

Performance -related amortization

The depreciable amount is determined annually from the actual use of the asset in a given year. Thus, it can be completely written off in a specified time, an estimate of the overall performance must be assumed.

Example of performance-related depreciation

A machine is purchased for 21,000.00 GE (net, without VAT ). The expected hours of operation totaled 19,320 h The actual operating hours are determined in each case at the end and in the appropriate ratio (expected hours of operation at cost, about 0.92 here ) are assessed as loss of value.

Which method is best?

Basically, there is no universally "best" method of depreciation, since the choice of the appropriate depreciation method depends on the objectives of accounting policy. Although the balance sheet should reflect a realistic picture of the company's financial situation, but not least, the choice of depreciation method, the value of depreciable assets is dependent. Beyond the actual value loss exceeding depreciation lead to hidden reserves and serve the internal financing of companies.

National Accounts

In the National Accounts, depreciation is defined as a measure of the amount of fixed assets during a period (year)

• Normal wear and tear
• Economic behavior (see moral wear)
• Including a provision for losses caused by insurable accidental damage.

In the national accounts, depreciation is calculated at replacement costs. As a replacement prices the prices of the assets of the respective year are taken.

Legal

Legal situation in Germany

There are additional depreciation allowed if increased under German tax law depreciation and write-downs were made ​​so that the asset can be recognized by commercial law with the same value. A special case of this depreciation is the depreciation of low-value items that can be adopted for the trade balance due to the tax admissibility.

For current assets only partial write-downs are permitted by tax law, as reduces the value of current assets is usually not by time run and, by definition, not by use. Prerequisite for depreciation is a " sustained impairment losses " that can occur, for example due to damage or even new technologies. Seasonal fluctuations in the market are usually not a reason for a write-down. The reference in § 6 (1 ) No 2 Clause 3 Income Tax Act § 6 (1 ) No 1 set of 4 Income Tax Act establishes the obligation to provide evidence of the taxpayer with respect to the permanent impairment. With a further increase in value must be attributed to the original values ​​.

For immovable property (buildings ) and extensive trades (service contract ) is the depreciation to commence on the day of delivery or acceptance.

In the balance sheet in accordance with German commercial law of current assets are in accordance with § 253Abs. 4 HGB write off on their quoted market value or their fair value if this is lower than the previous carrying amount of the asset. This depreciation should be revised by a write- in so far as the stock exchange or market value or fair value in subsequent years exceeds the carrying value. However, the upper limit for the valuation of assets remain its original acquisition and production costs.

The approach of a presumed sales proceeds is not permitted, however, commercial law, commercial law as a result of the precautionary principle is always the asset fully depreciated, because not yet realized gains ( revenues from end use ) in advance may not be reported ( strict lower ).

For an asset that is performed in the system directory, the maintenance of a memory value is not mandatory.

After 31 December 2010 procured assets can only be depreciated on a straight. According to § 7 ​​para 2 Income Tax Act may, after a steady percentage of the respective book value ( residual value ) the depreciation to be made, the applicable percentage at most twice the straight-line depreciation, a maximum of 20 % ( to 31 December 2005 ), three times the linear depreciation, more than 30% ( from 1 January 2006 to 31 December 2007), or 2.5 times the straight-line depreciation, a maximum of 25 percent ( from 1 January 2009 to 31 December 2010) may be allowed. In the following years, the respective percentage is amortized from the at the end of the financial year remaining net book value. The depreciation charge is in this method therefore getting smaller and the asset would be fully depreciated at the end of the planned period of use. For this reason, you can switch from declining balance depreciation to straight-line geometric depreciation, the net book value is recognized over the remaining useful life ( § 7 paragraph 3 ITA ). The economic depreciation is not limited to twice the straight-line depreciation rate, since these alone tax-relevant limitation applies only to the deductions for wear.

In Germany, the performance-related depreciation is only allowed if the annual performance is highly variable and therefore is practically almost any application.

Through the Accounting Law Modernization Act, some changes occur.