Depreciation is the loss of value of an asset due to its use, natural wear or obsolescence. In corporate accounting, this depreciation is recorded as a percentage of the book value of the asset that is discounted over time, according to its expected life.
Depreciation is applied in the case of the assets that make up the company’s permanent assets, those that were acquired with the expectation of being used for more than one year. In general, permanent assets usually correspond to real estate assets, that is, the assets that guarantee the company’s activities and that are used to obtain economic benefits. Some examples are real estate, machinery and equipment and vehicles.
How is depreciation accounted for?
When the good is used directly in production, its depreciation rate will be recorded as a cost. Depreciation of goods that are not used directly in production is recorded as an expense.
The difference between one and another form of launch is that the costs can be attributed directly to the final product, which facilitates the analysis of the return that that product is generating. Expenses, since they are of a general nature, can hardly be linked directly to the products and services offered by the company.
Impact on tax calculation
Accounting for the depreciation of the company’s assets is important not only to increase control over finances and risks, but mainly because it has a direct impact on the calculation of taxes. This is because, when recorded as a cost inherent to production, depreciation will be discounted from the company’s net profit.
In addition to the impact on profit, the depreciation record also corrects the value of the asset over the years, which may also have an impact on the taxes due. It is because of this depreciation that, for example, cars have lower rates of IPVA (Property Tax on Motor Vehicles) over the years, since they lose value as time goes by.
Rules for recording depreciation
For tax purposes, depreciation must be recorded in the balance sheet of companies in accordance with the rules and limits established in tax legislation. It is the Federal Revenue Service that determines the estimated useful life of an asset and, based on it, its annual depreciation rate.
Depreciation can begin to be counted from the installation of the asset and, at the end of the useful life, it cannot exceed the acquisition cost of the asset.
According to the tables of the Federal Revenue, the estimated useful life is 25 years for real estate, 5 years for vehicles and computers and 10 years for most machines, equipment, furniture and utensils. The table below shows the annual depreciation rate of some of the main assets, according to the rules of Revenue.
|Depreciation rate of main assets|
|Type of good||Annual
|Furniture and utensils||10%|
|Machines and equipment||10%|
|Vehicles with a capacity of up to 10 passengers||20%|
|Freight vehicles, including most trucks||25%|
|Computers and computer and communication equipment||20%|
The depreciation rate depends on the wear that the good suffers from use. For example, conveyor and transmission belts made of rubber, which need to be changed with some frequency, have annual depreciation rates of 50%. The complete table is in the annexes to Normative Instruction SRF No. 1700, of March 14, 2017.
The existence of an IRS table does not prevent the company from computing a different quota, which is more compatible with the effective conditions of depreciation of its assets. However, if you use a rate based on a different expectation of useful life, you will need to prove this adequacy.
The estimated useful life does not necessarily mean that the asset will have no value after its end, but rather that it has run out of time for economic use. The value of the asset at the end of its useful life is called residual value or scrap value.
In the case of goods that are purchased used, the annual depreciation rate should consider half of the allowable useful life for the new acquired good or the remainder of the useful life (considering the date of the first installation of the good by the former owner). The rate applied should consider the period that is longer between these two formulas.
According to the law, not all assets can be depreciated. The main exceptions are land and buildings and constructions that are not rented or used in production. The same goes for goods that usually increase in value over time, such as works of art and antiques.
How is depreciation calculated?
From this expected life, we can calculate the annual depreciation of a good. The two most common methods of calculating depreciation are linear and sum of digits.
The calculations below consider that the asset will have no residual value after the end of its useful life. If there is an estimated residual value, it must be subtracted from the acquisition value before calculating its depreciation. Residual values are also determined by law.
Linear depreciation is the simplest and most used calculation method. It is a method that assigns an equal depreciation rate for all periods. By this method, it is enough to divide the total value of the asset by its period of useful life to know its monthly depreciation in reais. To calculate the annual loss in percentage, just divide 100% by the total years of useful life.
For example, a vehicle has a book value of US $ 30,000. Its expected life is 5 years. The vehicle will therefore have a depreciation of 20% per year, equivalent to US $ 6 thousand.
Depreciation of sum of digits
This method assigns increasing or decreasing depreciation quotas, but the established useful life is also respected and, at the end of it, the sum of these quotas should also reach the total value of the asset.
To use this method, a denominator must be calculated. This calculation is made by adding the digits of each year of the asset’s useful life. Using the same example above (US $ 30,000 vehicle with a 5-year life span), it would look like this:
1 + 2 + 3 + 4 + 5 = 15
In this example, the denominator is 15.
To calculate an increasing depreciation, this denominator will be applied to the corresponding year to arrive at a fraction that will then be multiplied by the value of the asset. In the example above, it would look like this:
Year 1: 1/15 x US $ 30,000 = US $ 2,000
Year 2: 2/15 x US $ 30,000 = US $ 4,000
Year 3: 3/15 x US $ 30,000 = US $ 6,000
Year 4: 4/15 x US $ 30,000 = $ 8,000
Year 5: 5/15 x $ 30,000 = $ 10,000
That is, in the first year a depreciation of US $ 2,000 would be posted, in the second of US $ 4,000, in the third of US $ 6,000 and so on.
To apply a decreasing depreciation, it would be enough to invert the values, starting with a depreciation of US $ 10,000 in the first year and reducing the cost in the following years.
Note that, in all cases, the sum of the depreciation shares must reach the total value of the asset at the end of its useful life.
What is accelerated depreciation?
The depreciation calculation based on the rules of the Federal Revenue considers a normal journey, of 8 hours of use of the company’s machines and equipment. However, some companies work with more than one shift and their assets suffer from greater wear and tear.
In such cases, accelerated depreciation is considered to exist. If the company works with two shifts (16 hours of operation), the depreciation rate will increase by 50% over the normal rate. If the operation is uninterrupted, that is, if the company does three daily shifts, totaling 24 hours of production, the depreciation rate will be double the normal.
Thus, if an asset has a normal depreciation rate of 20% per year, if the company works with two shifts, the depreciation will be 30% per year. If the asset is used 24 hours a day, the rate applied will be 40% per year.
The accelerated depreciation encouraged is a tax benefit that the government grants to some sectors, through special legislation, which ends up generating a reduction in the taxes due. An example is the allowances for full deduction of the value of certain goods in the year of acquisition granted by some incentive programs for rural activities and technological innovation.