MSDyn365FO: Fixed assets. Straight line service life Depreciation method

Fixed Assets (FAs) depreciation is a periodic transaction that reduces the value of the fixed asset on the balance sheet and is charged as an expenditure to a profit and loss account.

In accordance with financial accounting standards in Microsoft Dynamics 365 for Finance and Operation, there are several approaches for FAs depreciation that are configured through Depreciation methods.

In this blog post we will cover Straight line Depreciation method. I am not going to take into account all setups used for the depreciation calculation, but I am going to dive into the main formulas used.

In Microsoft Dynamics 365 for Finance and Operation, the following formula is used for the Straight line depreciation:

Period Amount = Amount to depreciate / Life Time

where

Amount to depreciate = Asset cost – Salvage value

Salvage value = Expected scrap value on the value model of the fixed asset (Fixed assets > Fixed assets > Books > Depreciation tab)

Life Time = Depreciation periods on the value model of the fixed asset (Fixed assets > Fixed assets > Books > Depreciation tab)

Business scenario:

Fixed asset is acquired on 5/5/2016. Acquisition amount is 1000 USD

Depreciation starting date in this case, is 5/5/2016

Acquisition amount is 1000 USD

Salvage value = 45 USD

Service life is 2 years

Depreciation periods will be calculated as 2 years* 12 months = 24 periods to depreciate

Depreciation periods remaining will be calculated as 2 years = 24 periods

Let’s calculate period amount, using the formula above.

Period Amount = (1000 USD – 45 USD) / 24 = 39.79 amount each period

Since the fixed asset was not acquired 5/1/2016, but on 5/5/2016, for the first period – we will have partial depreciation instead full depreciation of the month.

The logic for the depreciation of the first period would be the following:

1. Calculate the full length of the first period that should be depreciated

Period Length = Period End – Start Of Period + 1

 In our case it would be:

Period Length = 5/31/2014 – 5/1/2014 +1 = 31

2. Calculate the length of the first period that should be depreciated taking into account that fixed asset was not acquired at the beginning of the month

Rest Period = ((Period End – Period Start + 1) / Period Length)

In our case it would be:

Rest Period = (5/31/2014 – 5/1/2014 +1)/31 = 0.870967742

If Rest Period = 1, it means that full month should be depreciated, but in our case it was less than full month.

3. Calculate the depreciation amount in the first period knowing the length of the first month was not full.

Depreciation amount = Period amount * Rest Period

Depreciation amount = 39.79*0.87096 = 34.6555

As the result, in first period the system will not depreciate 39.79; it will depreciate 34.66.

It may be turned out that in the last period, the full period amount cannot be depreciated. So, for the last period, period amount needs to be re-calculated.

The logic for the depreciation of the last period would be the following:

1. Validate that full period amount can be depreciated

Amount To Depreciate < (Previously Depreciated Amount + Period Amount)

(1000 USD – 45 USD) < (949.83 + 39.79)

As you can see, the amount to depreciate is actually less than amount that we are trying to depreciate in the last period. In fact, we need to calculate the remaining amount that needs to depreciated

2. Calculate the remaining amount that needs to depreciated

Period amount = Amount To Depreciate – Previously Depreciated Amount

In our case it would be:

Period amount = (1000 USD – 45 USD) – 949.83 = 955 – 949.83 = 5.17

As the result, in the last period the system will not depreciate 39.79; it will depreciate only 5.17.

Walk-through:

Navigate to Fixed assets > Fixed assets > Fixed assets > Books

Confirm all the needed details based on the business scenario.

Let’s run the depreciation process by a functionality that calculates automatically a proposal depreciation amount for each fixed asset according to the information selected on the fixed asset value model.

Set the filter to run the depreciation proposal by dedicated fixed asset.

Review the results of the depreciation proposal.

Pay attention to the first period amount ….

And the last period amount….

As you can see, the results of the depreciation proposal are the same based on the formula provided in this blog post.

That’s it!