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Dynamics 365 Community / Forums / Microsoft Dynamics AX (Archived) / Fixed Asset
Microsoft Dynamics AX (Archived)

Fixed Asset

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Posted on by lally 8

Hi All ,

Even though it is domain related question ,just I would like to hear from the AX pioneers that Why we need to calculate the depreciation for an Asset ?

What is the difference between Fixed Asset Vs Captial Item ?

How to decide that which depreciation method need to select and which rate applicable ? On what basis these parameters will be defined ?

Could any guide me with detail explanation and rule ?

Thanks in advance.

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  • Suggested answer
    Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi lally,

    A fixed asset is typically used over a couple of years. Take a production machine as an example. This machine costs lets say 1 Mio and is used for lets assume 5 years. If you would directly put 1 Mio as expense in your P&L statement, you would experience a lower profit in the year you purchase the machine. This would not be justified from an economic perspective because the machine is used for a couple of years. That's why you shift the acquisition costs initially to the Balance sheet and successively move it to the P&L through depreciations.

    Can you explain more about capital item? That's a term I hardly hear.

    About the depreciation methods:

    Typically accounting and tax bodies define the rules that are applicable for different assets based on an assumed lifetime. The government is of course interested to see low depreciations because your profit will be higher and also your tax payments. In general there is no single method and lifetime that can be setup for all of your fixed assets because those setups are highly country specific. Please note that some companies do some parallel fixed assets accounting by making use of separate books to overcome those country specific regulations and to make the depreciations comparable especially within a large international operating conglomerate.

    Does this answer your questions?

    Best regards

    Ludwig

  • lally Profile Picture
    lally 8 on at

    Thanks for the reply ,

    One more question is that normally what is the offset account that we need to define in the fixed asset posting profile.

    Because we normally purchase the fixed asset through PO , vendor invoice journal ... why I am asking the above question is that if we do not define the FA offset account in posting profile , system does not allow to post FA acquisition through PO , vendor invoice journal.

    Any light on this ?

  • Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hello lally,

    Each posting type (acquisition, depreciation, etc.) has the option to specify an offset account. If you refer to the acquisition posting type then the offset account is usually not needed because the offset account is your vendor respectively the vendor summary account.

    It is interesting that you get an error message because there should be none as long as you post DR fixed asset CR vendor.

    Can you provide more Details on this error message that you receive?

    Best regards,

    Ludwig

  • Suggested answer
    guk1964 Profile Picture
    guk1964 10,888 on at

    Not much to add.

    If your asset had limited value i.e. tis life is less than year then you would treat it as an expense and by the end of the year depreciation of 100% would give the same impact on your P&L as would a direct expense.

    When an asset has a life beyond one financial period then to match expense to revenue the asset value is spread over its expected useful life  so that its value is expensed to the business over that time.

    Think  of depreciation  as the rate you charge for the use of an asset in the business .

    Think of inventory why do we no just write off the cost on purchase? The profit will be the same Sales cost  less purchase cost- so how we value inventory does not impact P@L in the long run.  However it has a big impact month to month.  Think of inventory as another  currency and your stores as a bank. As your withdraw money form an ATM your bank balance goes down -till you spend it still has value.  Owners would not be able to judge the value of their investment or their day to day profits.

    Similarly with assets, they have value and that value does not  all get consumed at once.

    A capital project is typically one that has a large value , that is 'capitalised' I,e. is converted into an asset so it value appears on the balance sheet.

    Another way to think of depreciation is as a saving find to buy another asset when the first one wears out.  If  no depreciation is charged to the business and included in the overheads, then it may be difficult to change your costs alter to reflect the cost of a new asset.

  • lally Profile Picture
    lally 8 on at

    Thanks for the reply ,

    FA broadly can be classified into two types as Tangible and Intangible .

    Intangible Assets amortize in future periods ... what does it mean ?

  • Suggested answer
    Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi lally,

    Accounting theory differentiates between the term amortization - which is typically used for intangible assets - and the term depreciation - which is typically used for tangible assets.

    From an AX-perspective there is no difference as you can run 'depreciations' for tangible as well as for intangible items. Companies regularly have separate fixed asset groups setup for tangible and intangible items to separate them in their financial statements. That's the main thing you have to look out for when setting up the fixed asset module in this respect.

    Best regards,

    Ludwig

  • lally Profile Picture
    lally 8 on at

    Thanks the reply ludwig,

    As per your explanation for intangible assets amortization term will be used  that means does intangiable fixed asset value would not be change ?

    How intangiable asset value will reduce ?( as you said that we will not do depreciation )

    Thanks in advance

  • Suggested answer
    Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi lally,

    Intangible assets can also be depreciated. What I wanted to express is that auditors and accountants do not use the word 'depreciate' when they talk about intangible assets but the word 'amortize'. That's all. For AX this does not make a difference and you can 'depreciate' intangible assets as any other assets.

    Best regards,

    Ludwig

  • lally Profile Picture
    lally 8 on at

    Thanks Ludwig for the reply,

    Intangible

    For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.

    Tangible 

    For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

    As per your statement and my statements , both type of assets can be depreciated , and that depreciated amount will be postec to P&L .  Then what is the major difference between these two and some posts says that Intangible assets value cannot be amortized (not depreciated ) , what does it mean and why ?

    Thanks in advance.

  • Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi lally,

    Some countries do not allow the depreciation (amortization) of self-created intangible assets.Lets take your patent as an example. In some countries so called self-created patents that are the result of the work of your own R&D department are not allowed to be depreciated (amortized). This is sometimes often allowed for externally purchased patents.

    In other words, whether or not an intangible asset can be depreciated (amortized) or not requires a detailed local knowledge of the accounting and tax regulations in your country. I cannot tell you what is allowed in your country. Probably try to talk with your company's auditor or a representative of the tax office; they usually help you getting this clarified.

    Best regards,

    Ludwig

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