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Requirement

Straight-Line depreciation is supported for Capital Asset Planning

Functional Area

Planning

Industries
All
Tags
Capital Assets
Budgeting
Depreciation
DETAILS

Description

In the context of Corporate Performance Management (CPM) Software, supporting straight-line depreciation for capital asset planning allows for a standard allocation of the cost of assets over their useful life.

Example Use Case

Scenario: A mid-market manufacturing company that has numerous capital assets invested heavily in machinery for production. They need to allocate the cost of these assets over their useful life for budgeting and financial planning.

Solution: The company uses CPM software that supports straight-line depreciation. The initial cost of each machine, its useful life, and salvage value are entered into the system, and the software automatically calculates the annual depreciation expense for each asset and incorporates it into the financial planning framework. This simplifies the budgeting process and ensures accurate financial forecasting.

Considerations

This method is about as straightforward as it gets. Just about all products that include a Capital Asset Planning functionality will have this as a selectable dropdown when adding an asset, either owned or forecasted.

For Example:

  • Cost of the Asset: $10,000
  • Residual Value: $2,000 (Salvage Value at the end of its useful life)
  • Useful Life of the Asset: 5 years

Using the formula for straight-line depreciation:

Annual Depreciation Expense = (Cost of the Asset - Residual Value) / Useful Life of the Asset

The calculation is as follows:

Annual Depreciation Expense = (10,000 -2,000) / 5 = $1,600

Therefore, the annual depreciation expense for the asset would be $1,600. This amount would be expensed each year over the asset's useful life of 5 years, reducing its book value until it reaches the residual value of $2,000 at the end of the fifth year.

If the CPM tool can product this simple outcome out of the box, you're all set.

Questions to Ask a Vendor

  • Does it Exist: How does your system automate the straight-line depreciation calculation for capital assets?
  • 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?