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Formula-based Depreciation
Prepared by
Author: Gladys Leung - Fixed Assets Development

Creation Date: Dec-31-1999
Last Updated: Jan-1-2000
Control Number: 1
Version: 1
Copyright (C) 1995 Oracle Corporation

All Rights Reserved
Product Design and Architecture

Overview 1
Wp_formula_based.doc (v. 1 ) Oracle/Client Confidential - For internal use only
Contributors
Special thanks to these individuals for their input into this document:
Name Position
Sam Cianelli (U.S. tax requirements) Finance Manager, Oracle Corporation

Shawniqua Williams (global requirements) Product Manager, Oracle France
Sundar Narayanan (technical perspective) Development Manager, Oracle Assets
Gary Chen (technical perspective) Senior Application Engineer, Oracle Assets
Change Record
Date Author Version Change Reference
Dec-31-1999 Gladys C. Leung 1.0 Original
Formula-based Depreciation Overview 2

Contents
Contributors ........................................................................................................................................................................ 3
Change Record.................................................................................................................................................................... 3
Overview ............................................................................................................................................................................... 6
A Global Perspective............................................................................................................................................................. 7
U.S. Revenue Codes -- Modified Accelerated Cost Recovery System.................................................................................... 7
Sum-of-the-Years’-Digits .................................................................................................................................................. 14
Japan................................................................................................................................................................................. 15
Portugal ............................................................................................................................................................................ 15
Constant Quotas ............................................................................................................................................................ 15
Digressive Quotas.......................................................................................................................................................... 15
Applications to Vertical Industries..................................................................................................................................... 17

Telecommunications Industry............................................................................................................................................ 17
Depreciate When Placed In Service ............................................................................................................................... 18
Adjusting Depreciable Basis .......................................................................................................................................... 19
A Technical Perspective........................................................................................................................................................ 1
Variables and Functions ...................................................................................................................................................... 1
Life ................................................................................................................................................................................. 1
Salvage Value ................................................................................................................................................................. 1
Remaining Life 1............................................................................................................................................................. 1
Remaining Life 2............................................................................................................................................................. 2
Production Capacity ........................................................................................................................................................ 3
Short Year....................................................................................................................................................................... 3
GREATEST .................................................................................................................................................................... 3
LEAST............................................................................................................................................................................ 3
DECODE ........................................................................................................................................................................ 4
POWER .......................................................................................................................................................................... 4
SQRT.............................................................................................................................................................................. 4
ROUND .......................................................................................................................................................................... 4
SIGN............................................................................................................................................................................... 4
Data Schema ....................................................................................................................................................................... 4
FA_FORMULAS ................................................................................................................................................................ 4
Rate Adjustment Factor....................................................................................................................................................... 5
Formula Factor.................................................................................................................................................................... 5
Diagnostics........................................................................................................................................................................... 12
Appendix -- MACRS Property Classes............................................................................................................................... 16

Overview
One of the challenges of a global enterprise is to meet stringent tax requirements
coming from all over the world. As a worldwide corporation, you need a financial
system that satisfies the needs from operations in different parts of the world. This
financial system has to enable you to meet the ever-changing statutory
requirements while keeping cost low. Oracle Assets is sensitive to your needs in
dealing with complex and diversified tax requirements from a global perspective.
With Release 11i of Oracle Assets, you can comply with tax codes governing asset
depreciation using depreciation formulas.
This paper discusses depreciation requirements in various countries and industries

and sheds some light on how you can meet these requirements using formula-based
depreciation. It also walks you through some complex depreciation calculations.
You will walk away with all the details you need to create your own depreciation
formulas and optimize your asset accounting strategies. This paper answers the
most commonly asked questions on asset depreciation such as ‘How does Oracle
Assets amortize a basis adjustment’ and unveils the mystery of ‘Rate Adjustment
Factor’ – a critical component of the depreciation algorithm. Finally, you are
given diagnostics tips necessary for troubleshooting data discrepancies.

A Global Perspective
Prior to Release 11i, Oracle Assets supports traditional depreciation methods
employed by different countries: MACRS, ACRS, Sum-of-year’s digits, and
straight-line methods are used in the U.S.; Asian countries such as Japan uses
declining balance and flat rate depreciation; European countries often employ flat
rate methods. Oracle Assets offers you the ability to customize depreciation
methods by custom rate tables.
In view of frequently changing statutory requirements governing asset

depreciation, Oracle Assets introduces Formula-Based Depreciation in Release 11i.
In the sections below, we discuss depreciation requirements in various countries,
such as U.S.A., Japan and Portugal. Based on those country-specific
requirements, we derive depreciation formulas for your considerations.
U.S. Revenue Codes -- Modified Accelerated Cost Recovery System
In the U.S., some commonly used tax depreciation methods are ACRS and
MACRS methods. ACRS (Accelerated Cost Recovery System) was a by-product
of the Economic Recovery Tax Act of 1981. With this depreciation method,
capital investments are stimulated due to faster write-offs. This method applies to
assets purchased in the years 1981 through 1986. MACRS (Modified Accelerated
Cost Recovery System) was enacted by Congress in the Tax Reform Act of 1986.
It applies to capitalized assets placed in service in 1987 and later.
The calculation of depreciation under MACRS differs from that under GAAP in
three aspects: (1) a mandated tax life, which is generally shorter than the economic
life; (2) cost recovery on an accelerated basis; and (3) an assigned salvage value of
zero.1 Tax rules on depreciation tend to change every year.
The depreciation expenses is computed based on the tax basis, usually the cost, of
the asset. The depreciation method depends on the life of the assets as mandated
by the MACRS property class. For example, 3-, 5-, 7- and 10-year property
employ double-declining-balance method. (Refer to the Appendix for MACRS
property classes.) When a declining balance or accelerated metho is used, a switch
is made to the straight-line method in the first year in which straight-line
depreciation exceeds the accelerated depreciation. Depreciation computations for
income tax purposes are based on the half-year convention. An asset is
depreciated to zero salvage value at then end of the MACRS life.
IRS provides rate tables for you to compute depreciation of MACRS properties.
Oracle Assets make these tables available for you to meet IRS’ requirements on
MACRS depreciation. However, IRS disallows the use of the MACRS rate tables
in a short tax year. A short tax year is any tax year with less than 12 months. This
can be a result of a merger or acquisition, the first year or last year of a company’s
1 ‘Intermediate Accounting’, 9th Edition, Kieso & Weygandt, Wiley
Formula-based Depreciation A Global Perspective 6

operation. The alternative to rate tables is using manual calculation of accelerated
methods with straight-line switch. With R11i of Oracle Assets, you can however,
compute deductions with your own formula that gives you the MACRS results.
Consider using the following formula for double-declining computation:
Greatest( 2/ Life , 1/Remaining_Life_1) ...Formula 1
Figure 1: Defining a formula for MACRS depreciation in the Depreciation Formula Screen
In Formula 1, 2/Life returns a double-declining rate. The second part of the

formula (1/Remaining Life 1) returns a straight-line rate. The Greatest function
compares the two rates and returns the greater. Applying this formula to a 7-year

property with a half year convention and Net Book Value basis2, you can arrive at
the results below:
Year Cost NBV Remaining 2/Life 1/Remaining Depreciation Accum

Life Life Depreciation
1 10000 10000.00 7 0.285714 0.142857 1428.57 1428.57
2 10000 8571.43 6.5 0.285714 0.153846 2448.98 3877.55
3 10000 6122.45 5.5 0.285714 0.181818 1749.27 5626.82
4 10000 4373.18 4.5 0.285714 0.222222 1249.48 6876.30
5 10000 3123.70 3.5 0.285714 0.285714 892.49 7768.79
6 10000 2231.21 2.5 0.285714 0.4 892.49 8661.27
7 10000 1338.73 1.5 0.285714 0.666667 892.49 9553.76
8 10000 446.24 0.5 0.285714 2 446.24 10000.00
Table 1: MACRS depreciation calculations on a 7-year property with a Half Year prorate convention using Formula-
based Depreciation
Compare the above results with calculations using MACRS tables and a cost basis,
you will discover that the annual depreciation expenses are identical.
Year Cost Rate Depreciation
1 10000 0.14286 1428.60
2 10000 0.2449 2449.00
3 10000 0.17492 1749.20
4 10000 0.12495 1249.50
5 10000 0.08925 892.50
6 10000 0.08925 892.50
7 10000 0.08925 892.50
8 10000 0.04462 446.20
Table 2: MACRS depreciation calculations on a 7-year property with a Half Year prorate convention using rate tables
2 Basis is a way of measuring your investment in assets for tax purposes. You use the basis of assets to calculate deductions for
depreciation, amortization, depletion and casualty losses. Oracle Assets allows you to use either Cost or Net Book Value as the
basis.

Figure 2: Testing Depreciation Formula
After defining your formula, you can test if it returns a desired depreciation rate.
You do so in Test Formula tabbed region of the Depreciation Formula screen. In
the above example on MACRS depreciation, in the 5th year of the 7-year asset life,
Remaining Life 1 is 3.5 years. Enter these values as illustrated in Figure 2 and
click on the ‘Calculate’ button. The Resulting Depreciation Rate is 0.285714257
and agrees with the result in Table 2.

Figure 3: MACRS Rate table applicable to a 7-year asset with Half-Year Convention
Similar to the Double-Declining method, you can consider employing the following
formula on a 150% declining balance deduction:
Greatest( 1.5/ Life , 1/Remaining_Life_1) ...Formula 2
The deductions on a 15-year property using the 150% declining balance method
are as follows:
Year Cost NBV Remaining 1.5/Life 1/Remaining Life Depreciation Reserve
Life
1 10000 10000.00 15 0.1 0.066667 500.00 500.00
2 10000 9500.00 14.5 0.1 0.068966 950.00 1450.00
3 10000 8550.00 13.5 0.1 0.074074 855.00 2305.00
4 10000 7695.00 12.5 0.1 0.08 769.50 3074.50
5 10000 6925.50 11.5 0.1 0.086957 692.55 3767.05
6 10000 6232.95 10.5 0.1 0.095238 623.30 4390.35
7 10000 5609.66 9.5 0.1 0.105263 590.49 4980.84
8 10000 5019.17 8.5 0.1 0.117647 590.49 5571.33
9 10000 4428.68 7.5 0.1 0.133333 590.49 6161.82
10 10000 3838.19 6.5 0.1 0.153846 590.49 6752.31
11 10000 3247.70 5.5 0.1 0.181818 590.49 7342.80
12 10000 2657.21 4.5 0.1 0.222222 590.49 7933.29

13 10000 2066.72 3.5 0.1 0.285714 590.49 8523.78
14 10000 1476.23 2.5 0.1 0.4 590.49 9114.27
15 10000 885.74 1.5 0.1 0.666667 590.49 9704.76
16 10000 295.25 0.5 0.1 2 295.25 10000.00
Table 3: Results of 150 Declining Balance calculations using Formula-based Depreciation
The annual depreciation expenses based on the rate tables are:

Year Cost Rate Depreciation
1 10000 0.05 500.00
2 10000 0.095 950.00
3 10000 0.0855 855.00
4 10000 0.06926 692.60
5 10000 0.06232 623.20
6 10000 0.05905 590.50
7 10000 0.05905 590.50
8 10000 0.05905 590.50
9 10000 0.05905 590.50
10 10000 0.05904 590.40
11 10000 0.05905 590.50
12 10000 0.05905 590.50
13 10000 0.05905 590.50
14 10000 0.05905 590.50
15 10000 0.05905 590.50
16 10000 0.02952 295.20
Table 4: Depreciation expenses derived from rate tables
IRS stated that figuring out depreciation without rate tables can arrive at slightly
different results. These differences are likely caused by rounding.

Figure 4: Rate table applicable to 15-year properties depreciating under 150 Declining
Balance with Half Year convention
Table 5 exhibits the depreciation rates of 150 double declining method that can be
applied to 15-year assets placed in service at different times of the year. There are
in total 196 rates. With formula-based depreciation, however, you only need to
define one simple formula to handle your needs.
Year/ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
1 0.1 0.09 0.081 0.0729 0.06561 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0
2 0.09167 0.09083 0.08175 0.07358 0.06621 0.0596 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.00492
3 0.08333 0.09167 0.0825 0.07425 0.06683 0.06014 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.00984
4 0.075 0.0925 0.08325 0.07493 0.06743 0.06069 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.01476
5 0.06667 0.09333 0.084 0.0756 0.06804 0.06124 0.05905 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.01968
6 0.05833 0.09417 0.08475 0.07628 0.06864 0.06179 0.05904 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.0246
7 0.05 0.095 0.0855 0.07695 0.06926 0.06232 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.02952
8 0.04167 0.09583 0.08625 0.07763 0.06986 0.06287 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.03445
9 0.03333 0.09667 0.087 0.0783 0.07047 0.06342 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.03937
10 0.025 0.0975 0.08775 0.07898 0.07107 0.06397 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.04429
11 0.01667 0.09833 0.0885 0.07965 0.07169 0.06451 0.05905 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.04921
12 0.00833 0.09917 0.08925 0.08033 0.07229 0.06506 0.05905 0.05905 0.05905 0.05905 0.05905 0.05904 0.05905 0.05905 0.05905 0.05413

Table 5: Annual depreciation rates for assets depreciating under 150 Declining Balance method
Sum-of-the-Years’-Digits
The sum-of-the-years’-digits method results in a decreasing depreciation charge

based on a decreasing fraction of depreciable cost, which is cost less salvage value.
Each fraction uses the sum of the years as the denominator and the number of
remaining useful life as the numerator. In this method, the numerator decreases
every year and the denominator remains constant. For an asset with a life of 5
years, the annual depreciation rates are ( 5/15, 4/15, 3/15, 2/15, 1/15). At the end
of the assets’ life, the balance remaining should be equal to the salvage value.
Oracle Assets provides you with rate tables necessary for the computation of sum-
of-the-years’-digits depreciation. The following example illustrates the calculation
on a 5-year asset placed in service in the first period of the year:
Year Cost Depreciation Accumulated Rate
Expense Depreciation
1 450000 149998.50 149998.50 0.33333
2 450000 120001.50 270000.00 0.26667
3 450000 90000.00 360000.00 0.2
4 450000 59998.50 419998.50 0.13333
5 450000 30001.50 450000.00 0.06667
450000.00
Table 6: Sum-of-the-years’ digits depreciation of a 5-year asset
Consider the following formula:
2* (Remaining_Life_1) / Life / ( Life + 1) ...Formula 3
Using the above formula to depreciate a 5-year assets with cost as the depreciable
basis, the resulting deductions are similar to those from a table-based method. The
discrepancies in the depreciation expenses are due to rounding. Table 7 shows the
annual depreciation expenses using the formula method.
Year Life Remaining Cost Depreciation Rate
Life Expense
1 5 5 450000.00 150000.00 0.333333

2 5 4 450000.00 120000.00 0.266667
3 5 3 450000.00 90000.00 0.2
4 5 2 450000.00 60000.00 0.133333
5 5 1 450000.00 30000.00 0.066667
450000.00
Table 7: Annual Depreciation calculated by Formula-based deprecation
Here is the derivation of the formula of sum-of-years’-digits method:

n
n(n + 1)
Sum of n Years = ∑p= 2
...Formula 4
p =1

m 2m
Depreciation Rate = = ...Formula 5
n(n + 1) n(n + 1)
2
where m denotes the remaining useful life and n is the estimated asset life.
Japan
Japanese Double Declining method is among the most commonly used

depreciation methods in Japan. Here is an example of asset deduction calculated
on an asset at a basic rate of 0.438 and zero adjusting rate.
Year Cost Accumulated NBV Rate Depreciation
Depreciation Expense
1 9000 3942 9000 0.438 3942
2 9000 6157.40 5058 0.438 2215.40
3 9000 7402.46 2842.60 0.438 1245.06
4 9000 8102.18 1597.54 0.438 699.72
... ... ... ... ... ...
Table 8: Flat Rate Depreciation derived from a formula
Setting up a net book value based formulaic depreciation with a formula of 0.438
can help you arrive at the same results.
Portugal
Portugal has two methods of calculating depreciation : Constant Quotas Method

and Digressive Quotas Method3.
Constant Quotas
Constant Quotas Method is supported in Oracle Assets by Calculated (STL) or
Flat Rate depreciation methods.
Digressive Quotas
Under Digressive Quotas Method, annual depreciation is calculated according to a
sum of the year’s digits formula, as follows :
3 ‘Global Requirements on Depreciation’, Williams, Shawniqua, 1999

( RC)( n − i + 1)
Qi = n ...Formula 6
∑p
p =1
where RC = recoverable cost, i = year of life and n = total life in years. When the
annual depreciation value becomes less than the division of the remaining
depreciation value by the remaining expected life (since the beginning of that FY),
the depreciation value will be the quotient of that division for the remaining years
(becomes a constant value).
Consider using this formula to represent Formula 6:
2* (Remaining_Life_1) / Life / ( Life + 1) ...Formula 7

Applications to Vertical Industries
This section of the document discusses how formula-based depreciation could

potentially meet specific industry’s requirements on asset depreciation.
Telecommunications Industry
There is a requirement from the telecommunications industry to depreciate asset

using a straight-line method with net book value (NBV) as the basis. Depreciating
an asset’s NBV over its remaining useful life results in identical depreciation
expenses as depreciating an asset’s cost over a flat rate of 1/life. The standard
straight-line deduction in Oracle Assets works this way:
AnnualDepreciationExpense = AdjustedCost × AssetLife ...Formula 8
1 1
PeriodicDepreciationExpense = AdjustedCost × ×
AssetLife NumberOfPeriodsPerYe
...Formula 9
The Adjusted Cost is the same as the recoverable cost which is equal to ‘cost less
salvage value’. This Adjusted Cost remains constant throughout the entire life of
the asset until a cost adjustment or revaluation is made.
Formula-based depreciation offers you the option of deriving a straight-line

deduction using Net Book Value as the basis. The formula you can consider using
is:
1/ <Remaining_Life_1> ...Formula 10
With this formula, the system takes the Net Book Value at the beginning of the
Fiscal Year to be the depreciable basis for that Fiscal Year. The asset deductions
for a 5-year property are as follows:
Year Cost Accumulated NBV Depreciation Rate

Depreciation Expense
1 100 20 100 20.00 0.2

2 100 40 80 20.00 0.25
3 100 60 60 20.00 0.33333
4 100 80 40 20.00 0.5
5 100 100 20 20.00 1
100.00
Table 9: Depreciation Calculations of a 5-year asset with NBV as basis
Comparing the above results to the cost-based straight-line method below, you
would notice that the annual deductions are the same across both methods.
Formula-based Depreciation Applications to Vertical Industries 16

Depreciate When Placed In Service
One advantage of using the Formula-based straight-line method over the standard
one is that you can choose when to start allocating the depreciation expense in the
first year of the asset life. When setting up your prorate convention for your
straight-line assets, take the option of ‘Depreciation when placed in service’. By
doing that, you start allocating depreciation expense in the period the asset is
placed in service in case the prorate date falls in a different period. The calculation
presented in Table 10 shows the different ways you could allocate deductions in
the first year of an asset life. In this example, an asset is placed in service in April
in a January to December calendar. The prorate convention is half year. In Case 1,
the asset starts depreciating in the prorate period. In contrast, in case 2, the
system starts allocating depreciation expenses in April when it is placed in service.
Notice that the annual depreciation amount turns out to be the same in both cases.

Case 1:Allocate Depreciate from Prorate Date Case 2: Depreciate When Placed In Service
Periodic Reserve Rate Periodic Reserve Rate
Depreciation Depreciation
Apr 133.33 133.33 0.20
May 133.33 266.67 0.20
Jun 133.33 400.00 0.20
Jul 200.00 200.00 0.20 133.33 533.33 0.20
Aug 200.00 400.00 0.20 133.33 666.67 0.20
Sep 200.00 600.00 0.20 133.33 800.00 0.20
Oct 200.00 800.00 0.20 133.33 933.33 0.20
Nov 200.00 1000.00 0.20 133.33 1066.67 0.20
Dec 200.00 1200.00 0.20 133.33 1200.00 0.20
1200.00 1200.00
Table 10: Comparing depreciation resulted from two methods, one by allocating depreciation from Prorate Date and the
other by allocating depreciation from Date Placed in Service
Adjusting Depreciable Basis
After making improvements to your assets, you adjust the basis to reflect the true
value of your assets. In certain occasions, you may need to back date these
adjustments without affecting the overall impact on the annual depreciation
expenses. In the example given below, you can clearly see how formula-based
depreciation helps you achieve this. You placed in service an asset in Apr, 1998
using a half year prorate convention, and formula-based straight-line over
remaining life method (Formula 10). The asset started depreciating in July, 1998.
In May of the following year, you adjusted the cost from 12,000 to 18,000 and
back dated this adjustment to the start of the year, ie Jan, 1999. In another
scenario, instead of adjusting the cost in May, you performed the transaction in
June. Notice that the resulting annual depreciation amounts in both cases are
identical. The subsequent year’s depreciation expenses are the same, too.

Perform Cost Adjustment in May of second year. Perform Cost Adjustment in Jun of second year.
Original Adjusted Periodic Reserve Rate NBV RAF FF Original Adjusted Periodic Reserve Rate NBV RAF FF
Cost Cost Depreciation Cost Cost Depreciation
Jul 12000 12000 200 200 0.2 11800 1 1 12000 12000 200 200 0.2 11800 1 1
Aug 12000 12000 200 400 0.2 11600 1 1 12000 12000 200 400 0.2 11600 1 1
Sep 12000 12000 200 600 0.2 11400 1 1 12000 12000 200 600 0.2 11400 1 1
Oct 12000 12000 200 800 0.2 11200 1 1 12000 12000 200 800 0.2 11200 1 1
Nov 12000 12000 200 1000 0.2 11000 1 1 12000 12000 200 1000 0.2 11000 1 1
Dec 12000 12000 200 1200 0.2 10800 1 1 12000 12000 200 1200 0.2 10800 1 1
1200 1200
Jan 12000 10800 200 1400 0.22 10600 1 1 12000 10800 200 1400 0.22 10600 1 1
Feb 12000 10800 200 1600 0.22 10400 1 1 12000 10800 200 1600 0.22 10400 1 1
Mar 12000 10800 200 1800 0.22 10200 1 1 12000 10800 200 1800 0.22 10200 1 1
Apr 12000 10800 200 2000 0.22 10000 1 1 12000 10800 200 2000 0.22 10000 1 1
May 14000 12000 240 2240 0.22 11760 0.833 0.9 12000 10800 200 2200 0.22 9800 1 1
Jun 14000 12000 240 2480 0.22 11520 0.83 0.9 14000 11800 220.5996 2420.6 0.22 11579.4 0.875 0.883333
Jul 14000 12000 240 2720 0.22 11280 0.83 0.9 14000 11800 220.5996 2641.199 0.22 11358.8 0.875 0.883333
Aug 14000 12000 240 2960 0.22 11040 0.83 0.9 14000 11800 220.5996 2861.799 0.22 11138.2 0.875 0.883333
Sep 14000 12000 240 3200 0.22 10800 0.83 0.9 14000 11800 220.5996 3082.399 0.22 10917.6 0.875 0.883333
Oct 14000 12000 240 3440 0.22 10560 0.83 0.9 14000 11800 220.5996 3302.998 0.22 10697 0.875 0.883333
Nov 14000 12000 240 3680 0.22 10320 0.83 0.9 14000 11800 220.5996 3523.598 0.22 10476.4 0.875 0.883333
Dec 14000 12000 240 3920 0.22 10080 0.83 0.9 14000 11800 220.5996 3744.198 0.22 10255.8 0.875 0.883333
2720 2720
Jan 14000 10080 300 4220 0.4 9780 0.83 0.744 14000 10255.8 280.9524 4025.15 0.4 9974.85 0.875 0.719105
048
Feb 14000 10080 300 4520 0.4 9480 0.83 0.744 14000 10255.8 280.9524 4306.102 0.4 9693.89 0.875 0.719105
048 8
Mar 14000 10080 300 4820 0.4 9180 0.83 0.744 14000 10255.8 280.9524 4587.055 0.4 9412.94 0.875 0.719105
048 5
Table 11: Comparing the impact of cost adjustments that occurred in different months of the same year

Table 11: Comparing the impact of cost adjustments that occurred in different months of the same year
a) refer to CRL1 and CRL2 .xls

A Technical Perspective
To help you derive your own formulas to handle specific needs in your
organization, we present the technical details on Formula here.
Variables and Functions
This section of the document describes in detail each variable you can use to build
a depreciation formula. The syntax of each function is also outlined here.
Life
‘Life’ is the useful life of an asset expressed in years.
Salvage Value
Salvage Value is the estimated amount that will be received at the time the asset is
sold or removed from service. It is the amount to which the asset must be written
down or depreciated during its useful life. The value of salvage value is stored in
FA_BOOKS.SALVAGE_VALUE.
Remaining Life 1
In a Short Tax Year context, Remaining_Life_1 is the remaining useful life of an
asset as of the conversion date or prorate date, whichever is later. In the former
case, remaining_life_1 can be interpreted as the number of years between the
conversion date and the end of asset life. If the asset is not added in a short tax
year, then Remaining_Life_1 is identical to Remaining_Life_2.
If the asset is added in a short tax year, Remaining_Life_1 is calculated based on

the conversion date. The original depreciation start date
(orig_deprn_start_date) is the day when the asset started depreciating in the
legacy system, which marks the beginning of the asset life.
Remaining_Life_1 :=
TRUNC{MONTHS_BETWEEN(
ADD_MONTHS[orig_deprn_start_date, Life_In_Months],
<conversion_date + 1>)
};
The depreciation engine converts remaining life and asset life to months before
calculating the annual rates. Therefore, the function MONTHS_BETWEEN is
used. Notice that the value of remaining life is truncated and then added to one.
This ensures that a non-zero number is returned.
When Remaining_Life_1 is used on an asset that was not added in a short year,
then original depreication start date and conversion date become irrelevant:
Formula-based Depreciation A Technical Perspective 1

Remaining_Life_1:=
TRUNC{MONTHS_BETWEEN(
ADD_MONTHS[prorate_date, Life_In_Months],
<current_fiscal_year_start_date >)
};
Remaining Life 2
Remaining_Life_2 is the number of years between the first day of the current fiscal
year and the end of asset life.
Remaining_Life2 :=
FLOOR{MONTHS_BETWEEN(
ADD_MONTHS[orig_deprn_start_date, Life_In_Months],
<curr_fiscal_year_start_date >)
};
Table 12 displays the values of remaining_life_1 in different scenarios.

Prorate_date orig_deprn_start_date curr_fiscal_year_start_date Life_In_ conversion_date
Months
Remaining_Life1=> 40 01-Apr-1992 01-Jan-1994 60
Remaining_Life1 => 40 15-Apr-1992 01-Jan-1994 60
Remaining_Life1 => 29 01-May-1991 60 01-Dec-1993
Remaining_Life2 => 36 01-Jun-1992 01-Jul-1994 60
Table 12: Values of Remaining Life in various scenarios
Notice the limitation to using MONTHS_BETWEEN. MONTHS_BETWEEN is

a database function that calculates the number of months between two dates. It
converts the from and to dates to Jupiter calendar dates. For example, Jupiter
representation of ‘24-MAR-97’ is ‘2450532’. You can experiment this conversion
via sqlplus:
select select to_char( last_update_date, 'J') , last_update_date from fa_books
where rownum < 2;
The output of the query is:
TO_CHAR LAST_UPDATE_DATE
------- ---------
2450532 24-MAR-97

After converting to Jupiter dates, the MONTHS_BETWEEN function finds the
number of days in the date range; then, it divides the value by 31 to arrive at the
number of months between the two dates. Since ‘31’ is simply an ‘averaged’
number of days in a month, the results returned from the MONTHS_BETWEEN
function may not be always desired. Table UUU shows different values returned
by MONTHS_BETWEEN given various date ranges:
From To Round (MONTHS_BETWEEN, 2) Round (MONTHS_BETWEEN, 0)
13-Jul-1994 15-Apr-1997 33.06 33
16-Jul-1994 16-Apr-1997 33 33
19-Jul-1994 17-Apr-1997 32.94 32
19-Jul-1994 18-Apr-1997 32.87 32
22-Jul-1994 19-Apr-1997 32.80 32
Table 13: Results of MONTH_BETWEEN calculations given different date ranges
The from and to dates in the five examples shown are respectively July and Apr;
you would expect the MONTHS_BETWEEN function to give the same result, ie
33 months. However, due to the algorithm of the derivation, the results clearly
show discrepancies.
In view of this, when Oracle Assets calculates the remaining life of an asset, it
converts conversion date and fiscal year start date to the first day of the month
before passing them to the MONTHS_BETWEEN function. This ensures that
remaining life stay constant for any given day of the month. As a result, in the five
examples show above would consistently give the result of 33 months.
Production Capacity
Production Capacity is stored in FA_BOOKS.PRODUCTION_CAPACITY.
Short Year
The Short Year flag has a value of 1 if the current year is a Short Tax Year.
Otherwise, the value is 0. This variable is only relevant to short tax year assets and
is meaningful when in used with the DECODE function.
The following describes the syntax and usage of functions available in formula-based
depreciation.
GREATEST
Syntax:: GREATEST ( expr1, expr2, expr3.... )
Returns the greatest value in a list of values. The expressions expr1, expr2, and so on can be a
number, formula variable or a mathematical expression that returns a number. For example,
Greatest ( 2/Life, Life, 0.4) returns 10 if Life has a value of 10.
LEAST
Syntax:: LEAST ( expr1, expr2, expr3.... )

Similar to the Greatest function, Least returns the least value in a list of values. The expressions
expr1, expr2, and so on can be a number , formula variable a mathematical expression that
returns a number. For instance, Least ( 2/Life, Life, 0.4) returns 0.2 if Life has a value of 10.
DECODE
Syntax:: Decode (expr, search1, result1 [, search2, result2] ... [default])
The expression expr is compared to each search value. If expr equals a search value, the
corresponding result is returned. If no match is found, DECODE returns the default value, or
NULL if a default value was missing. In case a NULL value is returned by the DECODE
function, the resulting annual depreciation is zero.
POWER
Syntax:: POWER (expr1 , expr2 )
POWER returns the number expr1 raised to the power of expr2. Both expr1 and expr2 can be a
number or formula variable; but if expr1 is negative, then expr2 must be an integer.
SQRT
Syntax:: SQRT (expr1)
SQRT returns the square root of the number or variable expr1, which cannot be negative.
ROUND
Syntax:: ROUND ( expr1 [ , expr2])
Use the ROUND function to round the number or variable expr1 to expr2 decimal places. If you
do not supply expr2, expr1 is rounded to zero decimal places. The number expr2 can be
negative, in which case ROUND rounds the digits to the left of the decimal point.
SIGN
Syntax:: SIGN ( expr1 )
Returns -1 if expr1 is less than 0, 0 if expr1 equals 0, or 1 if expr1 is greater than 0.
Data Schema
FA_FORMULAS stores user-defined depreciation formulas. This schema is a child of

FA_METHODS which contains all depreciation methods. The two schemas are related by a
primary key, METHOD_ID. For a given formula-based depreciation method, there can be one or
more formulas.
FA_FORMULAS
Name Null? Type

------------------------------- -------- ----
METHOD_ID NOT NULL NUMBER(15)
FORMULA_ACTUAL NOT NULL VARCHAR2(4000)

FORMULA_DISPLAYED NOT NULL VARCHAR2(4000)
FORMULA_PARSED NOT NULL VARCHAR2(4000)
CREATED_BY NUMBER(15)
CREATION_DATE DATE
LAST_UPDATE_DATE NOT NULL DATE
LAST_UPDATED_BY NOT NULL NUMBER(15)
LAST_UPDATE_LOGIN NUMBER(15)
FORMULA_DISPLAYED is the formula that the user inputs into the Depreciation Formula
screen. When the user saves the record, the form converts <Life> into LIFE_IN_YEARS and
store it in FORMULA_ACTUAL. At the same time, the variable is translated to
NVL(LIFE_IN_MONTHS,0)/12. During actual calculation of depreciation, the depreciation
engine parses LIFE_IN_MONTHS and selects the value of life in months from FA_BOOKS.
The NVL function ensures that any null value be converted to zero in case the value zero exist in
the denominator in the formula.
FORMULA_ACTUAL
--------------------------------------------------------------------------------
FORMULA_DISPLAYED
--------------------------------------------------------------------------------
FORMULA_PARSED
--------------------------------------------------------------------------------
LIFE_IN_YEARS * 0.0145
<Life> * 0.0145
NVL(LIFE_IN_MONTHS,0) / 12 * 0.0145
Rate Adjustment Factor
Oracle Assets calculates the rate adjustment factor as follows:
NewCost − Re serve NewCost

RAF = ...Formula 11
NewCost
where NewCost is the new adjusted cost and ReserveNewCost is the accumulated
depreciation in the current period had the Cost been the NewCost from the
beginning of the asset life. Refer to the section on Formula Factor for more
discussions on Rate Adjustment Factor.
Formula Factor
To account for the change in net book value at the time of adjustment and at the
turn of fiscal year, Oracle Assets introduced the formula factor. During a cost
adjustment, the adjusted cost is reset to:

New Adjusted Cost = Current Recoverable Cost - Reserve4 ...Formula 12
Current Recoverable Cost is the new cost less salvage value. Reserve denotes the
reserve at the beginning of the period where amortization start date falls into.
From the period of adjustment onwards, the new adjusted cost is the basis of
depreciation.
If you choose to amortize the adjustment, the Rate Adjustment Factor is reset to
ensure that the difference between the old and new bases are allocated throughout
the remaining useful life of the asset. In the case where the depreciable basis is Net
Book Value, the formula factor is set to a non-zero value to account for the
change in net book value:
NBV NewCost NewCost − Re serve NewCost

FormulaFactor = = ...Formula 13
NewCost NewCost
ReserveNewCost is equal to the Reserve based on the New Cost at the beginning of
the period where the amortization start date falls into. The New Cost is the New
Recoverable Cost. The resulting periodic depreciation amount becomes:
1 1
PeriodicDepreciation = AdjustedCost × Rate × × FF ×
RAF NumberofPeriodsPerYear
...Formula 14
Since the basis adjusted at the end of the fiscal year for an NBV based
depreciation, the Formula Factor is reset accordingly:
1 1
FormulaFactor = AdjustedCost adj × NBV fy × ×
Current Re cov erableCost NBVcurrent
...Formula 15
Adjusted Costadj is the adjusted cost at the time of adjustment. NBVfy denotes the
Net Book Value at the beginning of the Fiscal Year based on the New Cost had
there been no adjustment at all. Current Recoverable Cost is the Current Cost
less salvage value. NBVcurrent is Current Recoverable Cost less reserve.
The following example illustrates the calculation of amortization using Formula-

Based straight-line method.

A 5 year asset is placed in service in Apr-98 with a cost of 12,000. The asset is
depreciated at Net Book Value with a formula method of 1/remaining life. Since
there is no salvage value, this asset will depreciate to zero cost. The depreciation
calendar is monthly and the fiscal year starts in January. With a half year prorate
convention, the asset starts depreciating in July, 1998. In the first year, the annual
depreciation is:
1 6months
AnnualDepreciation = AdjustedCost * Rate * * FF * ...Formula 16
RAF 12months
1 1 6months
AnnualDepreciation = 12000 * * *1* = 1200 ...Formula 17
60 1 12months
At the end of year 98, the reserve is 1200 and the net book value is 10800. At the
beginning of 1999, the adjusted cost is set to the net book value, 10800, since this
is an NBV based deduction. The Remaining Life is also re-calculated at the turn of
the fiscal year to 54. The resulting annual depreciation rate is 1/54. Therefore, in
Jan-99, the deduction is:
1 1 1month
AnnualDepreciation = 10800 * * *1 * = 200 ...Formula 18
54 1 12months
In May-99, the cost of the asset is adjusted to 18000. Since the amortization is
backdated to Jan-99, the new adjusted cost is taken to be Cost less Reserve at the
beginning of Jan-99, ie, 18000-1200 = 16800. Rate adjustment factor becomes
NBV NewCost
RAF =
NewCost
NewCost − Re serve NewCost

RAF =
NewCost
18000 − 1800
RAF = = 0.9
18000
NBVnewcost is the net book value had the cost been 18,000 from the beginning
and had there been no adjustments. The resulting periodic depreciation is 311.11.
At this point, you are required to take into account the depreciation expenses that
were missed from the Amortization Start Date up to the current period.
Therefore, the total periodic depreciation in May-99 is 911. Moving on to the next
year, the Net Book Value is reset to (18000-508.89)=12911.11. Annual
depreciation rate is changed to 1/(60-18)=0.29 due to the reduction on remaining
life. Formula Factor needs to be adjusted to account for the change in basis:

16800 − 5400 1
FormulaFactor = * = 0.91084
18000 12922.11
The periodic depreciation expense in year 2000 is
1 1month
PeriodicDepreciation = 16800 * 0.29 * * 0.91084 * = 31111
.
0.9 12months
Notice that this periodic amount after the cost adjustment remains constant and
agrees with the requirement of a straight-line depreciation method.

Cost Adjusted Cost Periodic Accumulated Rate RAF FF
Depreciation Depreciation
1998
Jul 12000 12000 200.00 200.00 0.20 1 1
Aug 12000 12000 200.00 400.00 0.20 1 1
Sep 12000 12000 200.00 600.00 0.20 1 1
Oct 12000 12000 200.00 800.00 0.20 1 1
Nov 12000 12000 200.00 1000.00 0.20 1 1
Dec 12000 12000 200.00 1200.00 0.20 1 1
1999
Jan 12000 10800 200.00 1400.00 0.22 1 1
Feb 12000 10800 200.00 1600.00 0.22 1 1
Mar 12000 10800 200.00 1800.00 0.22 1 1
Apr 12000 10800 200.00 2000.00 0.22 1 1
May (adjust) 18000 16800.00 911.11 2911.11 0.22 0.9 0.9
Jun 18000 16800 311.11 3222.22 0.22 0.9 0.9
Jul 18000 16800 311.11 3533.33 0.22 0.9 0.9
Aug 18000 16800 311.11 3844.44 0.22 0.9 0.9
Sep 18000 16800 311.11 4155.56 0.22 0.9 0.9
Oct 18000 16800 311.11 4466.67 0.22 0.9 0.9
Nov 18000 16800 311.11 4777.78 0.22 0.9 0.9
Dec 18000 16800 311.11 5088.89 0.22 0.9 0.9
2000
Jan 18000 12911.11 311.11 5400.00 0.29 0.9 0.910843
Feb 18000 12911.11 311.11 5711.11 0.29 0.9 0.910843
Mar 18000 12911.11 311.11 6022.22 0.29 0.9 0.910843
Apr 18000 12911.11 311.11 6333.33 0.29 0.9 0.910843
May 18000 12911.11 311.11 6644.44 0.29 0.9 0.910843
Jun 18000 12911.11 311.11 6955.56 0.29 0.9 0.910843
Jul 18000 12911.11 311.11 7266.67 0.29 0.9 0.910843
Aug 18000 12911.11 311.11 7577.78 0.29 0.9 0.910843
Sep 18000 12911.11 311.11 7888.89 0.29 0.9 0.910843
Oct 18000 12911.11 311.11 8200.00 0.29 0.9 0.910843
Nov 18000 12911.11 311.11 8511.11 0.29 0.9 0.910843
Dec 18000 12911.11 311.11 8822.22 0.29 0.9 0.910843
2001
Jan 18000 9177.778 311.11 9133.33 0.40 0.9 0.915254
Feb 18000 9177.778 311.11 9444.44 0.40 0.9 0.915254
Mar 18000 9177.778 311.11 9755.56 0.40 0.9 0.915254
Apr 18000 9177.778 311.11 10066.67 0.40 0.9 0.915254
May 18000 9177.778 311.11 10377.78 0.40 0.9 0.915254
Jun 18000 9177.778 311.11 10688.89 0.40 0.9 0.915254
Jul 18000 9177.778 311.11 11000.00 0.40 0.9 0.915254
Aug 18000 9177.778 311.11 11311.11 0.40 0.9 0.915254
Sep 18000 9177.778 311.11 11622.22 0.40 0.9 0.915254
Oct 18000 9177.778 311.11 11933.33 0.40 0.9 0.915254
Nov 18000 9177.778 311.11 12244.44 0.40 0.9 0.915254
Dec 18000 9177.778 311.11 12555.56 0.40 0.9 0.915254
2001
Jan 18000 5444.444 311.11 12866.67 0.67 0.9 0.925714
Feb 18000 5444.444 311.11 13177.78 0.67 0.9 0.925714
Mar 18000 5444.444 311.11 13488.89 0.67 0.9 0.925714

Apr 18000 5444.444 311.11 13800.00 0.67 0.9 0.925714
May 18000 5444.444 311.11 14111.11 0.67 0.9 0.925714
Jun 18000 5444.444 311.11 14422.22 0.67 0.9 0.925714
Table 14: Setting Rate Adjustment Factor and Formula Factor during cost adjustment
Cost Adjusted Periodic Accumulated Rate NBV

Cost Depreciation Depreciation
1998
Jul 18000 18000 300.00 300.00 0.20 17700.00
Aug 18000 18000 300.00 600.00 0.20 17400.00
Sep 18000 18000 300.00 900.00 0.20 17100.00
Oct 18000 18000 300.00 1200.00 0.20 16800.00
Nov 18000 18000 300.00 1500.00 0.20 16500.00
Dec 18000 18000 300.00 1800.00 0.20 16200.00
1999
Jan 18000 16200 300.00 2100.00 0.22 15900.00
Feb 18000 16200 300.00 2400.00 0.22 15600.00
Mar 18000 16200 300.00 2700.00 0.22 15300.00
Apr 18000 16200 300.00 3000.00 0.22 15000.00
May 18000 16200 300.00 3300.00 0.22 14700.00
Jun 18000 16200 300.00 3600.00 0.22 14400.00
Jul 18000 16200 300.00 3900.00 0.22 14100.00
Aug 18000 16200 300.00 4200.00 0.22 13800.00
Sep 18000 16200 300.00 4500.00 0.22 13500.00
Oct 18000 16200 300.00 4800.00 0.22 13200.00
Nov 18000 16200 300.00 5100.00 0.22 12900.00
Dec 18000 16200 300.00 5400.00 0.22 12600.00
2000
Jan 18000 12600 300.00 5700.00 0.29 12300.00
Feb 18000 12600 300.00 6000.00 0.29 12000.00
Mar 18000 12600 300.00 6300.00 0.29 11700.00
Apr 18000 12600 300.00 6600.00 0.29 11400.00
May 18000 12600 300.00 6900.00 0.29 11100.00
Jun 18000 12600 300.00 7200.00 0.29 10800.00
Jul 18000 12600 300.00 7500.00 0.29 10500.00
Aug 18000 12600 300.00 7800.00 0.29 10200.00
Sep 18000 12600 300.00 8100.00 0.29 9900.00
Oct 18000 12600 300.00 8400.00 0.29 9600.00
Nov 18000 12600 300.00 8700.00 0.29 9300.00
Dec 18000 12600 300.00 9000.00 0.29 9000.00
2001
Jan 18000 9000 300.00 9300.00 0.40 8700.00
Feb 18000 9000 300.00 9600.00 0.40 8400.00
Mar 18000 9000 300.00 9900.00 0.40 8100.00
Apr 18000 9000 300.00 10200.00 0.40 7800.00
May 18000 9000 300.00 10500.00 0.40 7500.00
Jun 18000 9000 300.00 10800.00 0.40 7200.00
Jul 18000 9000 300.00 11100.00 0.40 6900.00
Aug 18000 9000 300.00 11400.00 0.40 6600.00
Sep 18000 9000 300.00 11700.00 0.40 6300.00
Oct 18000 9000 300.00 12000.00 0.40 6000.00
Nov 18000 9000 300.00 12300.00 0.40 5700.00
Dec 18000 9000 300.00 12600.00 0.40 5400.00

2002
Jan 18000 5400 900.00 13500.00 2.00 4500.00
Feb 18000 5400 900.00 14400.00 2.00 3600.00
Mar 18000 5400 900.00 15300.00 2.00 2700.00
Apr 18000 5400 900.00 16200.00 2.00 1800.00
May 18000 5400 900.00 17100.00 2.00 900.00
Jun 18000 5400 900.00 18000.00 2.00 0.00
Table 15: Depreciation expenses had the cost been 18,000 from Date Placed In Service

Diagnostics
To trace the depreciation rate being used in formulaic depreciation, you can turn
PRINT_DEBUG on before running depreciation. Values of depreciation rates and
other parameters are written to the depreciation log file once you correctly set the
profile option PRINT_DEBUG. To enable this debug message mechanism, set the
FA: Print Debug profile option to ‘Yes’.
+---------------------------------------------------------------------------+
Oracle Assets: Version : 11.5.41 - Development
Copyright (c) 1979, 1999, Oracle Corporation. All rights reserved.
FADEPR module: Depreciation Run

+---------------------------------------------------------------------------+
Current system time is 17-JAN-2000 21:01:45
+---------------------------------------------------------------------------+
Depreciation Program Exception Report

Cost Initial Journal Entry program completed
APP-OFA-48208: fadpods FA_DEPRN_SINGLE: has the value of Y.
APP-OFA-48208: deprn_cache: has the value of 1.
APP-OFA-48152: Asset number 8923
Current Depreciation Reserve is 291.66 (fadcrsv)
APP-OFA-48208:
Contents of dpr_struct for asset_id has the value of 8923.
APP-OFA-48208: asset_num has the value of 8923.
APP-OFA-48208: book has the value of ACORP.
APP-OFA-48208: calendar_type has the value of MONTHLY.
APP-OFA-48208: ceil_name has the value of .
APP-OFA-48208: bonus_rule has the value of .
APP-OFA-48208: method_code has the value of FBSTL1. ßCheck the method code to
see if it is a formula-based method; query
against FA_FORMULAS for the formula
APP-OFA-48208: adj_cost has the value of 10000. ß adjust_cost is the basis

APP-OFA-48208: rec_cost has the value of 10000.
APP-OFA-48208: reval_amo_basis has the value of 0.
APP-OFA-48208: deprn_rsv has the value of 291.66.
APP-OFA-48208: reval_rsv has the value of 0.
APP-OFA-48208: adj_rate has the value of 0.
APP-OFA-48208: rate_adj_factor has the value of 1.
APP-OFA-48208: capacity has the value of 0.
APP-OFA-48208: adj_capacity has the value of 0.
APP-OFA-48208: ltd_prod has the value of 0.
APP-OFA-48208: adj_rec_cost has the value of 10000.
APP-OFA-48208: salvage_value has the value of 0.
APP-OFA-48208: prior_fy_exp has the value of 0.
APP-OFA-48208: ytd_deprn has the value of 291.66.
APP-OFA-48208: asset_id has the value of 8923.
Formula-based Depreciation Diagnostics 12

APP-OFA-48208: jdate_in_service has the value of 2451327.
APP-OFA-48208: prorate_jdate has the value of 2451339.
APP-OFA-48208: deprn_start_jdate has the value of 2451327. ßdepreciation start date
converted the Jupiter date format
APP-OFA-48208: jdate_retired has the value of 0.
APP-OFA-48208: ret_prorate_jdate has the value of 0.
APP-OFA-48208: life has the value of 60. ß life expressed in months
APP-OFA-48208: y_begin has the value of 1999.
APP-OFA-48208: y_end has the value of 1999.
APP-OFA-48208: p_cl_begin has the value of 7.
APP-OFA-48208: p_cl_end has the value of 7.
APP-OFA-48208: pc_life_end has the value of 0.
APP-OFA-48208: rsv_known_flag has the value of 1.
APP-OFA-48208: deprn_rounding_flag has the value of 0.
APP-OFA-48208: fadpdp(1.1): cur_deprn_rsv has the value of 291.66.
APP-OFA-48208: cur_reval_rsv has the value of 0.
APP-OFA-48208: cur_adj_cost has the value of 10000.
APP-OFA-48208: by_factor has the value of .875. ß this value dictates how
depreciation is spread in the first year
APP-OFA-48208: bp_frac has the value of .0833333. ß 1 divided by number of periods
in a year
APP-OFA-48208: dp_frac has the value of 0.
APP-OFA-48208: rp_frac has the value of 0.
APP-OFA-48208: by_frac has the value of .5833333.
APP-OFA-48208: dy_frac has the value of 1.
APP-OFA-48208: ry_frac has the value of 1.
APP-OFA-48208: h_short_fiscal_year_flag has the value of NO.
APP-OFA-48208: h_conversion_date has the value of DD-MON-YYYY.
APP-OFA-48208: h_prorate_date has the value of 09-JUN-1999.
APP-OFA-48208: h_orig_deprn_start_date has the value of DD-MON-YYYY.
APP-OFA-48208: Rate has the value of .2. ßVerify the annual depreciation rate
APP-OFA-48208: fadpdp(2): rate has the value of .2.
APP-OFA-48208: fadpdp(3) temp_r_amt has the value of 2000.
APP-OFA-48208: fadpdp(4): fy_amt has the value of 1750.
APP-OFA-48208: ann_deprn_amt has the value of 1166.66. ßVerify the annual
depreciation amount
APP-OFA-48208: fadpdp(4.0): fy_amt has the value of 1750.
APP-OFA-48208: use_frac has the value of .0833333.
APP-OFA-48208: p_deprn_exp has the value of 145.8333333.
APP-OFA-48208: fadpdp(7): adj_rec_cost has the value of 10000.
APP-OFA-48208: cur_deprn_rsv has the value of 291.66.
APP-OFA-48208: y_deprn_exp has the value of 0.
APP-OFA-48208: p_deprn_exp has the value of 145.8333333.
APP-OFA-48208: nbv_fabs has the value of 9562.5066667.
APP-OFA-48208: nbv_frac_thresh has the value of .0001.
APP-OFA-48208: nbv_amt_thresh has the value of .1.
APP-OFA-48208: fadgpout FA_USE_THRESHOLD: has the value of .
APP-OFA-48208: fadpdp(8): p_deprn_exp has the value of 145.8333333.
APP-OFA-48208: y_deprn_exp has the value of 145.8333333.
APP-OFA-48208: adj_rec_cost has the value of 10000.
APP-OFA-48208: p_prod has the value of 0.
APP-OFA-48208: y_prod has the value of 0.
APP-OFA-48208: fadpdp(9): deprn_exp_sum has the value of 145.83.
APP-OFA-48208: cur_deprn_rsv has the value of 437.49.
APP-OFA-48208: reval_exp_sum has the value of 0.
APP-OFA-48208: reval_amo_sum has the value of 0.
APP-OFA-48208: cur_reval_rsv has the value of 0.
APP-OFA-48208: prod_sum has the value of 0.

APP-OFA-48208: cur_ltd_prod has the value of 0.
APP-OFA-48208: y_deprn_exp has the value of 145.83.
APP-OFA-48208: ytd_deprn_sum has the value of 145.8333333.
Contents of dpr_out
new_deprn_rsv has the value of 437.49.
APP-OFA-48208: new_adj_cost has the value of 10000.
APP-OFA-48208: new_reval_rsv has the value of 0.
APP-OFA-48208: new_reval_amo_basis has the value of 0.
APP-OFA-48208: new_adj_capacity has the value of 0.
APP-OFA-48208: new_ltd_prod has the value of 0.
APP-OFA-48208: deprn_exp has the value of 145.83. ß Verify the rounded periodic
depreciation expense
APP-OFA-48208: reval_exp has the value of 0.
APP-OFA-48208: reval_amo has the value of 0.
APP-OFA-48208: prod has the value of 0.
APP-OFA-48208: ann_adj_exp has the value of 1750.
APP-OFA-48208: ann_adj_reval_exp has the value of 0.
APP-OFA-48208: ann_adj_reval_amo has the value of 0.
APP-OFA-48208: bonus_rate_used has the value of -1.
APP-OFA-48208: new_prior_fy_exp has the value of 0.
APP-OFA-48208: full_rsv_flag has the value of 0.
APP-OFA-48208: life_comp_flag has the value of 0.
Current Depreciation Reserve is 437.49 (faxcde)
Depreciation Expense for asset number 8923 is 145.83
Depreciation: 1 assets processed
APP-FND-01388: Cannot read value for profile option
FA_LARGE_ROLLBACK_SEGMENT in routine &ROUTINE.
Do_dep routine completed
Program FADEPR completed successfully
The above depreciation debug file shows the values derived by the depreciation
engine when depreciating an asset in the third month it was placed in service. The
asset had a five year life and was placed in service in May-99. The prorate period
is Jun-99. The calendar is monthly and is a Jan-Dec one. No transactions were
performed on this asset aside from depreciation. Here are the suggested
diagnostics steps for this simple depreciation scenario:
1. Identify the method code.

2. Query FA_FORMULAS to see the formula and calculation basis being
used. In this example, the values are 1/LIFE and Cost respectively.
3. The value of the calculation basis is reflected in adj_cost. Verify this value,
taking into considerations the salvage value, depreciation reserve, and any
adjustments previously made. In this case, the basis is 10,000 which is the
cost of the asset.
4. Check the values of the variables in the formula. In this example, the only
variable is LIFE and its value is shown in Life, expressed in months.
5. Validate the annual depreciation rate against Rate. The debug file shows
the Rate as 0.2, ie 1/(Life in Years) or 12/(Life in Months) or 12/60.
6. Verify the ann_deprn_value, taking into account the prorate date. In this
case, ann_deprn_value is 10000 * 0.2 * 7/12 = 1166.66667, i.e.,
adjusted_cost * annual rate * number of periods in the year since prorate
period / total periods in the year.

7. Since ‘depreciation when placed in service’ is selected in the prorate
convention setup, the system starts allocating depreciation expenses in the
period of asset addition, i.e. May-99. Hence, the annual depreciation
expense is spread in 8 months instead of 7. The resulting periodic
depreciation amount is 145.8333333.
8. Rounding the depreciation expense to 2 decimal places, the system shows
the final result to be 145.83.

Appendix -- MACRS Property Classes
MACRS consists of two systems, namely General Depreciation System (GDS) and
Alternative Depreciation System (ADS). GDS is more commonly used and ADS
is selected only if required by law. The difference between the two system is
mainly that ADS provides a longer recovery period.
Tax lives of an asset depends on the property class. The MACRS property classes
under the General Depreciation System are presented below5:
3-year property includes:
a. Tractor units for over-the-road use.
b. Any race horse over 2 years old when placed in service.
c. Any other horse over 12 years old when placed in service.
d. Qualified rent-to-own property.
a. Automobiles, taxis, buses, and trucks.
b. Computers and peripheral equipment.
c. Office machinery (such as typewriters, calculators, and copiers).
d. Any property used in research and experimentation.
e. Breeding cattle and dairy cattle.
a. Office furniture and fixtures (such as desks, files, and safes).
b. Any property that does not have a class life and that has not been
designated by law as being in any other class.
a. Vessels, barges, tugs, and similar water transportation equipment.
b. Any single purpose agricultural or horticultural structure.
c. Any tree or vine bearing fruits or nuts.
a. Certain depreciable improvements made directly to land or added to
5 Http://www.irs.gov/
Formula-based Depreciation Appendix -- MACRS Property Classes 16

it (such as shrubbery, fences, roads, and bridges).
b. Service station buildings and other land improvements used in the
marketing of petroleum and petroleum products (but not facilities
related to petroleum and natural gas trunk pipelines).
20-year property includes farm buildings (other than single purpose agricultural or horticultural
structures).
Residential rental property includes real property such as a rental home or structure (including a
mobile home) if 80% or more of its gross rental income for the tax year is from dwelling units. A
dwelling unit is a house or apartment used to provide living accommodations in a building or
structure. It does not include a unit in a hotel, motel, inn, or other establishment where more than
half the units are used on a transient basis. If you occupy any part of the building or structure for
personal use, its gross rental income includes the fair rental value of the part you occupy. The
recovery period for this property is 27.5 years.
Nonresidential real property includes section 1250 property that is neither of the following.
a. Residential rental property (defined in (7)).
b. Property with a class life of less than 27.5 years.
The recovery period for nonresidential real property is:
39 years for property you placed in service after May 12, 1993, or
31.5 years for property you placed in service before May 13, 1993.
Depreciation Methods are mandated by the MACRS property classes6:
MACRS Property Class Depreciation Method Benefits
Provides a greater deduction

Non-farm 3-, 5-, 7-, and 10-year Double Declining Balance
during the earlier recovery yea
property
Switches to SL when that met
provides a greater deduction.
All farm property (except real
150% Declining Balance Provides a greater deduction
property)
during the earlier years of asse
lives
All 15- and 20-year property
Nonfarm 3-, 5-, 7-, and 10-year
property
27.5 and 39-year property Straight-line Straight-line
Table 16: Depreciation Methods as mandated by various MACRS property classes
6 http://www.irs.gov


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Author: Gladys Leung - Fixed Assets Development

Copyright (C) 1995 Oracle Corporation

Product Design and Architecture

Sam Cianelli (U.S. tax requirements) Finance Manager, Oracle Corporation

Date Author Version Change Reference

Dec-31-1999 Gladys C. Leung 1.0 Original

Formula-based Depreciation Overview 2

Applications to Vertical Industries..................................................................................................................................... 17

Appendix -- MACRS Property Classes............................................................................................................................... 16

Formula-based Depreciation Overview 3

This paper discusses depreciation requirements in various countries and industries

Formula-based Depreciation Overview 5

In view of frequently changing statutory requirements governing asset

U.S. Revenue Codes -- Modified Accelerated Cost Recovery System

1 ‘Intermediate Accounting’, 9th Edition, Kieso & Weygandt, Wiley

Formula-based Depreciation A Global Perspective 6

Consider using the following formula for double-declining computation:

Greatest( 2/ Life , 1/Remaining_Life_1) ...Formula 1

In Formula 1, 2/Life returns a double-declining rate. The second part of the

Formula-based Depreciation A Global Perspective 7

Year Cost NBV Remaining 2/Life 1/Remaining Depreciation Accum

Formula-based Depreciation A Global Perspective 8

Formula-based Depreciation A Global Perspective 9

Greatest( 1.5/ Life , 1/Remaining_Life_1) ...Formula 2

Formula-based Depreciation A Global Perspective 10

The annual depreciation expenses based on the rate tables are:

Formula-based Depreciation A Global Perspective 11

Formula-based Depreciation A Global Perspective 12

The sum-of-the-years’-digits method results in a decreasing depreciation charge

Table 6: Sum-of-the-years’ digits depreciation of a 5-year asset

Consider the following formula:

2* (Remaining_Life_1) / Life / ( Life + 1) ...Formula 3

1 5 5 450000.00 150000.00 0.333333

Here is the derivation of the formula of sum-of-years’-digits method:

Formula-based Depreciation A Global Perspective 13

Japanese Double Declining method is among the most commonly used

Table 8: Flat Rate Depreciation derived from a formula

Portugal has two methods of calculating depreciation : Constant Quotas Method

3 ‘Global Requirements on Depreciation’, Williams, Shawniqua, 1999

Formula-based Depreciation A Global Perspective 14

Consider using this formula to represent Formula 6:

2* (Remaining_Life_1) / Life / ( Life + 1) ...Formula 7

Formula-based Depreciation A Global Perspective 15

This section of the document discusses how formula-based depreciation could

There is a requirement from the telecommunications industry to depreciate asset

AnnualDepreciationExpense = AdjustedCost × AssetLife ...Formula 8

Formula-based depreciation offers you the option of deriving a straight-line

Year Cost Accumulated NBV Depreciation Rate

1 100 20 100 20.00 0.2

Table 9: Depreciation Calculations of a 5-year asset with NBV as basis

Formula-based Depreciation Applications to Vertical Industries 16

Formula-based Depreciation Applications to Vertical Industries 17

Adjusting Depreciable Basis

Formula-based Depreciation Applications to Vertical Industries 18

Formula-based Depreciation Applications to Vertical Industries 1

a) refer to CRL1 and CRL2 .xls

Formula-based Depreciation Applications to Vertical Industries 1

Variables and Functions

If the asset is added in a short tax year, Remaining_Life_1 is calculated based on

Formula-based Depreciation A Technical Perspective 1

Table 12 displays the values of remaining_life_1 in different scenarios.

Table 12: Values of Remaining Life in various scenarios