Double-Declining Balance depreciation is supported for Capital Asset Planning

Description

This technique considers the fact that an asset often loses more value in the initial years of its lifespan. For the system to meet this criteria, it must function as in the example below and be easily selectable when adding an asset.

Example Use Case

Scenario: A mid-market company is using CPM software for its capital asset planning. One of its assets includes machinery that, due to technological advancements, is likely to lose value at a more accelerated pace in the initial years of its use.

Solution: The CPM software should be able to support a double-declining balance depreciation method, accounting for the rapid depreciation rate of the asset. This enables a more accurate reflection of the machinery's value on the company's books, leading to more precise budgeting and planning.

Considerations

Organizations use this when purchasing something that depreciates quickly, like computer servers, new cars, and so on. As with other depreciation methods, we expect this to be a drop down when adding an asset.

For Example:

• Cost of the Asset: $10,000
• Residual Value: $0 (For simplicity, we'll assume there's no salvage value)
• Useful Life of the Asset: 5 years

Double Declining Rate = (2 / Useful Life of the Asset) * 100%

Calculation of rate:
Double Declining Rate = (2 / 5) * 100% = 40%

For the first year of depreciation, the calculation is as follows:

Year 1 Depreciation Expense = Cost of the Asset * Double Declining Rate Year 1 Depreciation Expense = $10,000 * 40% = $4,000

For subsequent years, the depreciation expense is calculated on the book value of the asset at the beginning of the year (Cost of Asset - Accumulated Depreciation) multiplied by the same rate:

Assuming no residual value for simplicity, the depreciation for the second year would be calculated on the book value after subtracting the first year's depreciation:

Year 2 Book Value = $10,000 - $4,000 = $6,000 Year 2 Depreciation Expense = Year 2 Book Value * Double Declining Rate Year 2 Depreciation Expense = $6,000 * 40% = $2,400

And so on for the remaining years, until the book value reaches the residual value or the asset is fully depreciated.

Questions to Ask a Vendor

• Method Availability: Does your system support the double-declining balance depreciation method for capital assets planning?
• Use: Is this a dropdown we pick from when adding an asset? Or is it tied to the asset type?
• Calculation Flow: Is there somewhere we can see the resolved calculation?