Sum-of-the-Years' Digits (SYD) depreciation is supported for Capital Asset Planning

Description

Sum-of-the-Years' Digits (SYD) depreciation is an accelerated method of depreciation where more depreciation is claimed in the initial years of an asset's life. This is useful for assets that decline in value rapidly starting at the time of purchase, either due to technical obsolescence or useful life.

Example Use Case

Scenario: A mid-market manufacturing company is using Excel for its financial budgeting, forecasting, and planning. The company operates machinery and tooling assets which are subject to depreciation. They are struggling to properly depreciate these assets because of the maintenance required in Excel.

Solution: They purchase CPM software that supports the Sum-of-the-Years' Digits depreciation method. The finance department can now add an asset, select SYD, and let the CPM tool run all calculations and allocate depreciation appropriately. They can also apply this to historical assets, helping them quickly move off of Excel for this function.

Considerations

Like double declining balance depreciation, this is meant for assets that depreciate rapidly upfront. SYD is a slightly less aggressive depreciation method. If the CPM system offers it, try modeling the methods side by side to see which one makes the most sense in your plan.

Most CPM systems do not offer this method, as it is a bit redundant with DBD. That said, if this is crucial, as them if they can do this:

For Example:

• Cost of the Asset: $10,000
• Residual Value (Salvage Value at the end of its useful life): $1,000
• Useful Life of the Asset: 5 years

Calculation Steps:

1. Determine the Straight-Line Depreciation Rate:

• Straight-Line Rate = 1 / Useful Life of the Asset
• Straight-Line Rate = 1 / 5 = 20%

1. Double the Straight-Line Rate:

• Double Declining Rate = 2 * Straight-Line Rate = 40%

1. Calculate the Depreciation Expense for the First Year:

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

1. Calculate Depreciation for Subsequent Years:

• For each subsequent year, apply the double declining rate to the book value (Cost - Accumulated Depreciation) at the beginning of the year. Note: Do not depreciate below the residual value.

Example for the Second Year:

• Book Value at Beginning of Year 2: 10,000 (initial cost) -4,000 (year 1 depreciation) = $6,000
• Year 2 Depreciation Expense: 40% * 6,000 =2,400

The calculations in this example take place in steps. For some lower-cost CPM tools, this may be difficult as their calculation engines are less mature. If this is important to you, ask to see the process work live.

Questions to Ask a Vendor

• Method Availability: Does your system support the SYD depreciation method for capital assets planning?
• Use: Is this as simple as selecting this method when adding or editing an asset?
• Calculation Flow: Is there somewhere we can see the resolved calculation?