Any
time you enter an asset with “Beginning” information (Beginning
Accumulated Depreciation and Beginning Date), the asset may require an
adjustment to make sure that it fully depreciates by the end of the
estimated life. Beginning fields are used when importing assets from
another system into FAS Asset Accounting, or as a result of changing an
asset’s acquired value or estimated life. If the Beginning Accumulated
Depreciation amount is different from what FAS would calculate, then an
adjustment may be required.
How would you know if you
have any assets to adjust? Simply run a Depreciation Adjustment Report,
and you will be able to identify these assets. Using a sample company,
I have entered one asset that is over depreciated, and one that is
under depreciated. The Depreciation Adjustment Report looks like this:
This
report shows you several things. First, the date you entered as the
Beginning Date in the asset is shown. What you have entered as
Beginning Year To Date Depreciation and Beginning Accumulated
Depreciation are shown in those columns. The column entitled
“Calculated Total Accum” shows what the FAS Asset Accounting program
would have calculated as of the Beginning Date if there had been no
Beginning Accumulated entered. The “Adjustment Amount” subtracts the
“Calculated Total Accum” from the “Beginning Accum Depreciation.” The
report will segregate the Under Depreciated Assets and the Over
Depreciated Assets in their own sections and subtotal them. The report
also gives totals reflecting the sum of both sections.
Adjusting Over Depreciated Assets
Once
you have identified these assets, what should you do to correct them?
With the over depreciated assets, you have two choices. The first would
be to do nothing, which would result in an asset using a straight-line
depreciation method (like SL, SF or SH) would be fully depreciated
before the end of its estimated life. The second would be to change the
asset’s depreciation method to Remaining Value over Remaining Life
(RV). RV will make a dynamic calculation every time you run
depreciation, dividing the remaining value of the asset over the
remaining life of the asset. This will yield a straight-line
calculation, which will be within a penny of the same value every
month. This will have the net effect of spreading out the depreciation
amount evenly over the remaining life of the asset.
In
applying RV, there are two things you need to keep in mind. First, this
change must be done asset by asset, so if you have many assets to
adjust, this could take time to implement. Second, when you change the
depreciation method to RV, your estimated life will change to 7 years
automatically. If the asset had a different estimated life, you will
need to correct this to the original value.
When you
change the estimated life or the depreciation method, you will get two
warning boxes. The first states that you are changing a value that is
critical to depreciation, and that this will remove all depreciation.
Push the “Yes” button to this message. The second warning will then
immediately appear, asking if you when want the change to take affect.
You will want to choose either the Beginning Date or the Current
Through Date.
Please note that if you are applying the
RV depreciation method in the tax book, you may affect the IRS form
4562 that is generated by FAS. Assets with a depreciation method of RV
will have their depreciation contributing to the total on line 16
(Other Depreciation), not on line 17 (MACRS deductions for assets
placed in service in prior years) or line 19 (MACRS deduction for
assets placed in service in the current year).
Adjusting Under Depreciated Assets
You
have a few more choices with under depreciated assets. First, you could
do nothing, which will leave you with untaken depreciation at the end
of the asset’s life. Second, you could change your depreciation method
to RV, as described above. As previously mentioned, it will spread out
the remaining depreciation over the estimated life of the asset, but
you will need to apply it to the individual assets. A third option is
to change the Adjustment Convention in the “Edit Company” box. This
will affect all assets in one action.
You can set up
the Adjustment Convention by going to File\Edit Company. In the Edit
Company dialog box, select the “Book Overrides” tab. Go to the row
marked “Adjustments” and select the desired book. When you click on the
cell, you will see a pull-down menu with three choices: None, Immediate
and Post Recovery.
The
first selection, “None,” is the default, will not apply any sort of
adjustment to the calculation. The second choice, “Immediate,” will
apply the adjustment the next time you run depreciation. By selecting
this and then running depreciation, all of your under-depreciated
assets that have not reached the end of life will take the adjustment
amount. This adjustment will take effect the month
after the Begin Date of the asset, regardless of what date the
depreciation is run. The adjustment will have no effect on
over-depreciated assets, or assets that have reached the end of life.
In the Depreciation Expense Report, the assets that take an adjustment
will be designated by an “a” in the “Key” column.
In
this Depreciation Expense Report, asset 1 was under depreciated by $50
and has caught up. Asset 3 is identical but did not have any beginning
information, so it was not under depreciated. Note that for asset, the
$50 adjustment is showing up not only in the Current Accumulated, but
it is also added to the Current Year to Date and Depreciation This Run.
The
Immediate adjustment may seem like an ideal solution, but it does have
a serious drawback. This adjustment is applied to the month immediately
after the Beginning Date. Asset 1 had a Beginning date of 12/2005, so
for the January 2006 depreciation, the $50 adjustment will show up in
the Current Year to Date Depreciation. However, if you were trying to
adjust an asset with a Beginning Date in a previous year, the
adjustment will be applied to that previous year. This would change
your depreciation numbers for previous years, which may not be what you
want. If you are going to apply the Immediate adjustment, check the
beginning dates on your assets. This is listed in the Depreciation
Adjustment Report. Normally, the best time to apply the Immediate
adjustment convention would be immediately after importing assets into
FAS.
The third choice is “Post Recovery.” Selecting
this option will have the program apply the adjustment amount in the
first period of the next fiscal year after the end of the asset’s
estimated life. As with the “Immediate” adjustment, it will only affect
under-depreciated assets that have not yet reached the end of life in
the current year. If you select this, your depreciation for the first
period of a new year will be larger than you might be expecting.
In
conclusion, the best way to deal with assets that need to be adjusted
is to use the RV depreciation method to evenly distribute the remaining
value of the asset over the remaining life. After that, the Post
Recovery and Immediate adjustments are also good options. The only thing to keep in mind when using these adjustments is when the program will apply
them
only for under depreciated assets. The Immediate adjustment will be
applied the month after the beginning date, and the Post Recovery
adjustment will be the first month of the year after the end of the
asset’s life.
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