ORACLE APPLICATIONS WHITE PAPER

Depreciation

Product Design and Architecture

Contributors

Name Nancy A. Lanning

Position Sr. Technical Analyst, Fixed Assets Support, Orlando

Change Record

A u t h o r

V e r s i o n

Change Reference

White paper Depreciation.doc

ii Oracle/Client Confidential - For internal use only

Contents

INTRODUCTION ................................................................................................................................... 1 Objective........................................................................................................................................ 1 Scope ............................................................................................................................................. 1 Background.................................................................................................................................... 1 THE BIG PICTURE................................................................................................................................ 2 HOW DOES DEPRECIATION WORK?....................................................................................................... 3 Depreciation Calendar................................................................................................................... 3 Prorate Calendar ........................................................................................................................... 3 Prorate Conventions ...................................................................................................................... 3 Depreciate when placed in service flag .......................................................................................... 4 Depreciation Methods .................................................................................................................... 4 Depreciate Flag ............................................................................................................................. 5 Date placed in service.................................................................................................................... 5 Divide Depreciation Flag............................................................................................................... 5 Submitting Depreciation................................................................................................................. 6 BEHIND THE SCENES ........................................................................................................................... 8 RESERVE ADJUSTMENTS ...................................................................................................................... 9 MASS DEPRECIATION ADJUSTMENTS.................................................................................................. 10 UNPLANNED DEPRECIATION .............................................................................................................. 11 DEPRECIATION PROJECTION .............................................................................................................. 12 WHAT-IF ANALYSIS .......................................................................................................................... 13 INFORMATION SOURCES .................................................................................................................... 14

White paper Depreciation.doc

iii Oracle/Client Confidential - For internal use only

Introduction

Objective

To provide an overview of the Depreciation Process in Fixed Assets with the hopes of giving the reader a well rounded understanding of depreciation.

Scope

This paper will cover the functional and technical side of Depreciation. It will describe how your setup affects depreciation. An overview on how depreciation is calculated will be explained with a behind the scenes look of what really happens. It will briefly touch on how to make adjustments and some depreciation tools that will help in running the program.

Background

The dictionary gives us 3 definitions of Depreciation: 1. A decrease or loss in value, as because of age, wear, or market conditions. 2. Accounting. An allowance made for a loss in value of property. 3. Reduction in the purchasing value of money. These are all correct, but what it basically boils down to is the process of allocating the cost of an asset over the life of that asset. In the United States, The Internal Revenue Service (IRS) determines the lives that apply to an asset category.

White paper Depreciation.doc

Introduction Oracle/Client Confidential - For internal use only

The Big Picture

Data can come into Oracle Assets via the FA_MASS_ADDITIONS table from the following sources: external sources (i.e. legacy systems), Project Accounting (PA), Accounts Payable (AP) and indirectly from Purchasing (PO). Once the data is posted in Oracle Assets, it is then considered to be a true asset. If an asset is setup as a capitalized asset, it can be depreciated. When Depreciation has ran successfully and the period has closed, you can then submit the Create Journal Entries program (FAPOST). The Create Journal Entries program creates the journals for General Ledger (GL) and inserts that data directly into the GL tables, GL_JE_HEADERS, GL_JE_BATCHES, and GL_JE_LINES. Therefore, no journal import from within GL is necessary. If the Create Journals program was successful, the unposted journals can be viewed immediately in GL.

White paper Depreciation.doc

The Big Picture 2 Oracle/Client Confidential - For internal use only

How does Depreciation Work?

When initially implementing Fixed Assets, many of the steps that you take in the setup directly impacts depreciation. Here are just a few of these items.

Depreciation Calendar The depreciation calendar determines the number of accounting periods in a fiscal year. You can use one calendar for multiple depreciation books and as both the depreciation and prorate calendar for a book. Note: The period names in your depreciation calendar must match the period names in your GL calendar. If you are using an adjusting period in your GL calendar, you do not define the adjusting period in your FA calendar. Navigation: SetupAsset SystemCalendars SetupAsset SystemBook Controls

Prorate Calendar The prorate calendar determines the number of prorate periods in your fiscal year. The depreciation program uses the prorate calendar to determine prorate period, which is used to determine the annual depreciation amount. After setting up the prorate calendar, you specify the prorate calendar for each book on the Book Controls form. Navigation: SetupAsset SystemCalendars SetupAsset SystemBook Controls

Prorate Conventions The prorate convention determines how much depreciation to take in the first and last year of an asset's life based on when you place the asset in
White paper Depreciation.doc How does Depreciation Work? 3 Oracle/Client Confidential - For internal use only

service. Your tax department chooses the prorate convention. The prorate calendar and convention must be setup before adding the assets. If you retire an asset before it is fully reserved, the retirement convention determines how much depreciation to take in the period of retirement. The prorate convention, the retirement convention and the depreciation method work together to determine the depreciation for the first and last year of an asset's life. After setting up the prorate convention, you specify the prorate convention for each asset on the Books form and the retirement convention on the Retirements form in Asset Workbench. See the white paper - The Wonderful World of Prorate Conventions, located on MetaLink, for more details. Navigation: Setting up prorate convention SetupAsset SystemProrate Conventions Assigning prorate and retirement conventions to assets Asset workbench Find/Select Asset Books Enter book name and tab down. Asset workbench Find/Select Asset RetirementsEnter book name and tab down.

Depreciate when placed in service flag Designates whether to start taking depreciation in the accounting period that corresponds to the date placed in service or to start taking depreciation in the accounting period that corresponds to the prorate date. Navigation: SetupAsset SystemProrate Conventions

Depreciation Methods A life based method or calculated method will spread the depreciation out over the fixed life of the asset. It uses the asset's cost or NBV, salvage value, date placed in service, prorate convention, depreciation method and life to calculate depreciation. If the asset uses a flat rate method, it will calculate depreciation based on a fixed rate using the cost or the NBV. This basic rate plus the adjusted rate make up the adjusted rate, which is used as the fixed rate.
White paper Depreciation.doc How does Depreciation Work? 4 Oracle/Client Confidential - For internal use only

Table based methods use the prorate period and the rate tables. Units of Production depreciation method bases depreciation only on how much you use that asset. It divides the production for the period by the capacity and multiplies that value by the recoverable cost to calculate the expense for the period. In Release 11I, formula based depreciation is available. When defining your methods, you specify your calculation basis. For costbased depreciation methods, this is cost-salvage value. For NBV based depreciation methods, this is cost-accumulated depreciation (reserve). Navigation: SetupDepreciationMethods

Depreciate Flag Designates whether or not to depreciate an asset. Navigation: Asset workbench Find/Select Asset Books

Date placed in service The calendar date when you start using an asset. Navigation: Asset workbench Find/Select Asset Books

Divide Depreciation Flag The method for dividing the annual depreciation amount over the periods in you fiscal year for this book. The value of Evenly divides depreciation evenly for each period and the value By Days divides it proportionally based on the number of days in each period. Navigation:
White paper Depreciation.doc How does Depreciation Work? 5 Oracle/Client Confidential - For internal use only

SetupAsset SystemBook Controls The depreciation program uses the depreciation rate, your depreciable basis (calculation basis) and the prorate calendar to calculate the current year depreciation. In tax books, this could be limited by a cost ceiling. Then the current period's depreciation is calculated. In tax books, this could be limited by a cost ceiling or an expense ceiling. For the first period of the asset's life, it will use the depreciation calendar, prorate calendar, depreciation start date and current year depreciation. For the last period of the asset's life, it will use recoverable costaccumulated depreciation. For the last period of the fiscal year, it will use the current year depreciation-year to date depreciation. For other periods, it will use the depreciation calendar and the current year depreciation. If an asset has a depreciation ceiling associated with it, the calculated depreciation amount could be limited by the depreciation-ceiling amount. It then allocates that periodic expense to the assignments of the asset. This is determined by the fraction of the asset unit that is assigned to each depreciation expense account. Accumulated depreciation (reserve) and year to date (YTD) depreciation is also updated.

Submitting Depreciation Release 10.7 and 11: At the end of your accounting period, you will submit the depreciation program for each of your books. Navigation: Depreciation Run Enter the book name and the current open period will default in. This submits a request set, which includes the following programs: Generate Accounts - FAGDA - (Release 11) - generates 16 possible account combinations for each new asset added to your system. It populates the FA_DISTRIBUTION_ACCOUNTS table. This program was a new performance enhancement in release 11 so that workflow does not have to be called each time, an account code combination is needed.

White paper Depreciation.doc

How does Depreciation Work? 6 Oracle/Client Confidential - For internal use only

 Calculate Gains and Losses - FARET - Calculates the gains and losses for pending retirements and reinstatements and performs catch up depreciation for retirements and reinstatements. Depreciation - FADEPR - Calculates depreciation expense and adjustments for the period and closes the period. Accumulated depreciation and year to date depreciation is updated. If depreciation is being run for the last period of the fiscal year, it will check to see if the next fiscal year, prorate and depreciation calendars are defined and if not, it will define them for you. Journal Entry Reserve Ledger report FAS400 Shows how much depreciation expense was charged to a depreciation expense account for any accounting period. If depreciation encounters an error, the program will fail at that point and rollback any depreciation that was committed. Release 11i: In Release 11i, the run depreciation and close periods have been broken out to separate processes. If the profile option, Deprn Single is set to Yes, it will process all the assets and display all of the errored assets in the logfile. Navigation: Signon as System Administrator ProfileSystemIn profile box, enter FA%, and click on Find. This way you can fix all of your errors in one pass, resubmit depreciation and only the corrected assets will process. If you are not satisfied with the depreciation figures or missed some transactions in the period, you have the option to rollback/"undo" depreciation which will allow you to add assets, post transactions, adjustments, etc. The close period option is determined by a checkbox on the submit depreciation form. When you are ready to close the period, you can check the close period box and rerun Depreciation to close the period

Tip on Running Depreciation: To speed up performance of your depreciation run, run the Calculate Gains and Losses and the Generate Accounts programs periodically throughout the period.

White paper Depreciation.doc

How does Depreciation Work? 7 Oracle/Client Confidential - For internal use only

Behind the Scenes

The two major functions in the FADEPR program are FADCJE, the cost journal entries program and FADDEP, the depreciation module. FADCJE is called at the beginning of the depreciation program. It processes all newly added assets and clears their cost in the FA_ADJUSTMENTS table. After it completes, FADDEP is called. FADDEP calculates depreciation expense for each asset and allocates it to each of the asset's distributions.

Tables that are updated when running depreciation: FA_ADJUSTMENTS - for each distribution line, there will be cost and cost clearing rows for the addition, and a depreciation expense row for any catch up depreciation. FA_DEPRN_SUMMARY - A 'DEPRN' (D) row is inserted to reflect the current month's depreciation expense, year to date depreciation expense, and total depreciation reserve (accumulated depreciation) FA_DEPRN_DETAIL - A 'D' row for each distribution line is inserted FA_DEPRN_PERIODS - Updating the current periods row with a PERIOD_CLOSE_DATE closes the current period, and a new row is inserted for the next period FA_BOOK_CONTROLS - Updates deprn_status, last_period_counter, last_deprn_run_date, deprn_request_id, deprn_status, current_fiscal_year

White paper Depreciation.doc

Behind the Scenes 8 Oracle/Client Confidential - For internal use only

Reserve Adjustments
In your tax books, you can adjust your reserve (accumulated depreciation) for an asset in its prior fiscal years. The reserve adjustment will adjust depreciation for the year and all subsequent years. Navigation: TaxTax WorkbenchFind/select assetReserve Adjustments

White paper Depreciation.doc

Reserve Adjustments 9 Oracle/Client Confidential - For internal use only

Mass Depreciation Adjustments

Mass Depreciation Adjustments allows you to adjust the depreciation expense taken for all the assets in a tax book. Navigation: TaxMass Depreciation Adjustments

White paper Depreciation.doc

Mass Depreciation Adjustments 10 Oracle/Client Confidential - For internal use only

Unplanned Depreciation
Unplanned depreciation is a feature in Fixed Assets to handle unusual accounting situations in which you need to adjust Net Book Value and reserve for an asset without affecting cost. You can enter unplanned depreciation by asset and by book for any current period during the life of an asset in either your tax or your Corporate book. Unplanned depreciation updates the year to date, life to date and net book value of an asset. In release 10.7 and 11, you cannot enter unplanned depreciation for an asset in the period of addition. This restriction has been lifted in release 11i. Also, in release 10.7 and 11, you were only allowed to enter unplanned depreciation for assets that used the Straightline depreciation method. Release 11I, now allows you to enter unplanned depreciation for flat methods, unit of production method as well as Straightline. Navigation: Asset workbenchFind/select assetBooksEnter book and tab down click on unplanned depreciation button

White paper Depreciation.doc

Unplanned Depreciation 11 Oracle/Client Confidential - For internal use only

Depreciation Projection
Oracle Assets provides you with a depreciation projection program and report that will estimate actual depreciation expense. You can project depreciation for any number of periods across any of your depreciation books. Keep in mind, whatever period you are projecting for, must be defined in your calendar. Navigation: DepreciationProjections

White paper Depreciation.doc

Depreciation Projection 12 Oracle/Client Confidential - For internal use only

What-If Analysis
(available in release 11 and forward) What-If depreciation analysis allows you to forecast depreciation for a group of assets in different scenarios without changing your data. You can enter your different combinations of parameters in Oracle Assets or in Report Exchange (ADI). The report itself can only be ran in Report Exchange. Navigation: DepreciationWhat-If Analysis

White paper Depreciation.doc

What-If Analysis 13 Oracle/Client Confidential - For internal use only

Information Sources
Information from this paper came from the following sources: Brown Bag Presentation - Depreciation in Oracle Assets by Halim Hafid Brown Bag Presentation - Adjusting Depreciation by Steve Breland White Paper - Transaction Approval by Brad Ridgway White Paper - The Wonderful World of Prorate Conventions by Eileen Wexler Oracle Assets Reference Manual, Release 10 Oracle Assets Users Guide, Release 11 Oracle Assets Release 11I, New Features

White paper Depreciation.doc

Information Sources 14 Oracle/Client Confidential - For internal use only