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Tax Depreciation

Depreciation is the loss of value of an asset. The depreciable amount of an asset is its actual cost or any amount substituted for the actual cost, less the estimated residual value. This amount will be written off over the useful life of the depreciable asset.

Depreciation You can set up depreciation in accordance with the Income Tax Act and

the Companies Act. You can claim depreciation for all assets that meet the following conditions:

You must own the asset.

You must use the asset for your business.

You must have used the asset during the year for which you claim the depreciation.

If the asset is an intangible asset, you must have acquired it after March 31, 1998.

Methods of Depreciation

According to the Companies Act, depreciation is calculated by using the following methods:

(1.)Straight line (2.)Declining-Balance 1 (3.)Declining-Balance 2 (4.)Written down value

(4.)Estimate of useful life of assets

Using these five methods, depreciation must be calculated based on a 365 day year (or a 366 day year, in the case of a leap year). If posted, the monthly depreciation must be based on the actual number of days in a month. For an asset that is purchased or sold during the year, the proportionate depreciation must be calculated.

The Declining-Balance 1 method is an accelerated depreciation method that allocates the largest portion of the cost of an asset to the early years of its useful lifetime. You must enter a fixed yearly percentage. The Declining-Balance 2 method calculates the total depreciation amount every year. If you run the Calculate Depreciation batch job more than once a year, the Declining-Balance 1 method will result in equal depreciation amounts for each depreciation period. The Declining-Balance 2 method will result in depreciation amounts that decline for each period. The Companies Act allows a company to use different depreciation methods for different types of assets. The same methods must be followed every year. A change in the depreciation method can be made only under the following circumstances: If required by statute or for compliance with the accounting standards issued by the Institute of Chartered Accountants of India. If the result would be presented more appropriately in the financial statement.

Straight-Line Depreciation MethodWhen this method is used, a fixed asset is depreciated by the same amount each year.When using the straight-line method, you must specify one of the following options in the FA depreciation book:The depreciation period (years or months) or a depreciation ending dateA fixed yearly percentageA fixed yearly amountDepreciation periodDepreciation PeriodIf you enter the depreciation period (number of depreciation years, the number of depreciation months or the depreciation ending date), the program uses this formula to calculate the depreciation amount:Depreciation Amount = ((Book value - Salvage Value) * Number of Depreciation Days) / Remaining Depreciation DaysRemaining depreciation days are calculated as the number of depreciation days minus the number of days between the depreciation starting date and the last FA entry date.Book value may be reduced by posted appreciation, write-down, custom 1 or custom 2 amounts, depending on whether the Include in Depr. Calculation field is deactivated and whether the Part of Book Value field is activated in the FA Posting Type Setup window.This calculation ensures that the fixed asset is fully depreciated at the depreciation ending date.Fixed Yearly PercentageIf you enter a fixed yearly percentage, the program uses this formula to calculate the depreciation amount:Depreciation Amount = (Straight-Line % * Depreciable Basis * Number of Depr. Days) / (100 * 360)Fixed Yearly AmountIf you enter a fixed yearly amount, the program uses this formula to calculate the depreciation amount:Depreciation Amount =(Fixed Depreciation Amount * Number of Depreciation Days) / 360For an example, see Example - Straight-Line Depreciation for more information.

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Declining-Balance 1

This is an accelerated depreciation method that allocates the largest portion of the cost of an asset to the early years of its useful lifetime. If you use this method, you must enter a fixed yearly percentage.The program uses this formula for calculating depreciation amounts:Depreciation Amount = (Declining-Bal. % * Number of Depreciation Days * Depr. Basis) / (100 * 360)The depreciable basis is calculated as the book value less posted depreciation since the starting date of the current fiscal year.The posted depreciation amount can contain entries with various posting types (write-down, custom1, and custom2) posted since the starting date of the current fiscal year. These posting types are included in the posted depreciation amount if there are check marks in the Depreciation Type and the Part of Book Value fields in the FA Posting Type Setup window

Declining-Balance 2

The Declining-Balance 1 method and the Declining-Balance 2 method calculate the same total depreciation amount for each year. If, however, you run the Calculate Depreciation batch job more than once a year, the DB 1 method will result in equal depreciation amounts for each depreciation period. The DB 2 method, on the other hand, will result in depreciation amounts that decline for each period.For an example, see Example - Declining-Balance 2 Depreciation for more information.

DB1/SL

DB1/SL is an abbreviated combination of Declining-Balance 1 and Straight-Line.The Calculate Depreciation batch job calculates a straight-line amount and a declining balance amount, but only the greater of the two amounts is transferred to the journal.The program can handle declining-balance calculation using various percentages.If you use this method, you must enter the estimated useful lifetime and a declining balance percentage in the FA Depreciation Books window.For an example, see Example - DB1/SL Depreciation for more information.



User-Defined Method

The program has a facility that allows you to set up user-defined depreciation methods.With a user-defined method, you use the Depreciation Tables window, where you must enter a depreciation percentage for each period (month, quarter, year, or accounting period).The formula for calculating the depreciation amounts is:Depreciation Amount = (Depreciation % * Number of Depreciation Days * Depr. Basis) / (100 * 360)Depreciation Based on Number of UnitsThis user-defined method can also be used to depreciate based on number of units, for example, in the case of production machines with an established lifetime capacity. In the Depreciation Tables window, you can enter the number of units that can be produced in each period (month, quarter, year, or accounting period).For an example, see Example - User-Defined Depreciation Method for more information.

How to: Set Up User-Defined Depreciation Methods

In the Depreciation Table window, you can set up user-defined depreciation methods. For example, you can set up depreciation based on number of units.To set up user-defined depreciation methods1.In the Search box, enter Depreciation Tables, and then choose the related link.2.On the Home tab, in the New group, choose New. Fill in the fields.3.Choose the OK button to close the window.


Half-Year Convention Depreciation Method

The Half-Year Convention method will only be applied if you have placed a check mark in the Use Half-Year Convention field in the FA depreciation book.This depreciation method can be used in conjunction with the following depreciation methods in the program:•Straight-Line •Declining-Balance 1 •DB1/SL When Half-Year Convention is applied, a fixed asset will have six months depreciation in the first fiscal year regardless of the contents of the Depreciation Starting Date field.

Note

The estimated life of the fixed asset that is remaining after the first fiscal year will always contain a half-year using the Half-Year Convention Method. Thus, for the Half-Year Convention method to be applied correctly, the Depreciation Ending Date field in the FA Depreciation Book must always contain a date which is exactly six months before the final date of the fiscal year in which the fixed asset will become fully depreciated.




Pro Rata Depreciation

If a change is made to add to or delete from an asset—such as selling, discarding, or destroying the asset—then the depreciation on the asset is calculated on a pro rata basis. The depreciation is calculated from the date of the addition of the asset, or it is calculated up to the date of the deletion of the asset, based on the actual number of days. If the financial year is more than 12 months or less than 12 months (and not exactly 12 months), then the rate of the depreciation of schedule XIV must be taken proportionately.

Depreciation in Multi-Shift Operations

In accordance with the Companies Act, calculation of the extra depreciation for double-shift and triple-shift work is performed separately. These calculations are made in proportion with the number of days that are added to the normal number of working days during the year.

Additional Depreciation If an asset was acquired or installed after March 31, 2005, this asset is subject to

additional depreciation. The additional depreciation rate is 20 percent. If the asset is put to use for less than 180 days in the acquired year, the rate is 10 percent. Additional depreciation is available only in the year in which the new equipment or machinery is first used.

Classification of AssetsAccording to Schedule VI of the Companies Act, fixed assets must be presented in the balance sheet classification as follows:•Goodwill•Land•Buildings•Leaseholds•Railway sidings•Plant and machinery•Furniture and fittings•Development of property•Patents, trademarks, and trade designs•Livestock•Vehicles

Block of Assets

Depreciation is allowed for a block of assets. A block of assets is a grouping of different types of assets that share the same percentage of depreciation. For a block of assets, there is little or no depreciation in the following cases:

If a block exists, and the written down value for the block is zero. A block value below zero implies short-term capital gain.

If a block ceases to exist, but the written down value still exists. The block value is considered to be a short-term capital loss.

The asset was put to use for less than 180 days in the year when it was acquired, so the depreciation rate is 50% of the normal rate. If the asset is then used in the subsequent year, the depreciation will be calculated at the normal rate.

How to: Set Up Tax Depreciation

To set up tax depreciation in accordance with the Income Tax Act, you must set up the depreciation book, the fixed asset, and the accounting period. To set up depreciation in accordance with the Companies Act, you must set up the depreciation book and the fixed asset.

The following procedure describes how to set up the depreciation book in accordance with the Income Tax Act, but the same steps also apply to setting up the depreciation book in accordance with the Companies Act

To set up depreciation in accordance with the Income Tax Act

In the Search box, enter Depreciation Books, and then choose the related link. On the Home tab, choose New. In the Depreciation Book Card window, on the General FastTab, fill in the required

fields as described in the following tableField Description

Code The unique depreciation book code. You can enter a maximum of 10 alphanumeric characters.

Description The description for the depreciation book.

FA Book Type Specify Income Tax to indicate the fixed asset book type.

Depr. Threshold Days The number of days for the depreciation threshold.

Depr. Reduction % The depreciation reduction rate.

Use FA Ledger Check Select to indicate that the fixed asset ledger will be checked before the journal line is posted.

Use Rounding in Periodic Depr. Select to round the periodic depreciation amounts to whole numbers.

Use Same FA+G/L Posting Dates Select to specify that the posting date and the fixed asset posting date must be the same before you can post the journal line.

Allow Changes in Depr. Fields Select to modify the depreciation fields.

4.Choose the OK button.

The following procedure describes how to set up accounting periods in accordance with the Income Tax Act, but the same steps also apply to setting up accounting periods in accordance with the Companies Act.

To set up accounting periods in accordance with the Income Tax Act

In the Search box, enter Accounting Periods, and then choose the related link.

On the Home tab, choose New.

In the Accounting Periods window, on the Actions tab, in the General group, choose Create Year.

In the Create Fiscal Year batch job, on the Options FastTab, fill in the fields as described in the following table.

Field Description

Starting Date The starting date of the fiscal year.

No. of Periods The number of accounting periods into which the fiscal year will be divided.

Period Length The length of the accounting period

• Choose the OK button.

The following procedure describes how to set up fixed assets in accordance with Income Tax Act, but the same steps also apply to setting up fixed assets in accordance with the Companies Act.

To set up fixed assets in accordance with the Income Tax Act

In the Search box, enter Fixed Assets, and then choose the related link.


In the Fixed Asset Card window, on the General FastTab, fill in the required fields as described in the following table.

Field Description

No. The number of the fixed asset.

Description The description of the fixed asset

On the Lines FastTab, fill in the required fields as described in the following table

Field Description

Depreciation Book Code The depreciation book code that is assigned to the fixed asset. The FA Book Type field must already be set to Income Taxin the Depreciation Book Card window.

FA Posting Group The fixed asset posting group that you use when posting entries.

Depreciation Method The depreciation method to calculate the depreciation.

Depreciation Starting Date The starting date of the depreciation.

Depreciation Ending Date The ending date of the depreciation

• On the Posting FastTab, fill in the required fields as described in the following table.

Field Description

FA Class Code The class code of the fixed asset.

FA Subclass Code The subclass code of the fixed asset.

FA Location Code The location code of the fixed asset.

FA Block Code The block code of the fixed asset.

• On the Navigate tab, in the Depr. Book group, choose Shifts.• In the FA Shifts window, in the Straight-Line % field, enter the straight-line percentage to depreciate the fixed

asset

Note

For setting up fixed assets in accordance with the Companies Act, define the shift for the fixed asset if the company is working multiple shifts

• Choose the OK button.The book value will be updated after you acquire the fixed asset through either the general journal, purchase order, or purchase invoice

How to: Calculate Depreciation

In Microsoft Dynamics NAV, with the Calculation Depreciation batch job, you can calculate the following:

Depreciation in accordance with the Income Tax Act

Depreciation in accordance with the Companies Act

Depreciation for multiple shifts

To calculate depreciation, you must set up depreciation books and fixed assets

To calculate depreciation in accordance with the Income Tax Act

In the Search box, enter Fixed Assets, and then choose the related link. Select the required fixed asset, and on the Home tab, in the Manage group,

choose Edit. On the General FastTab, select the Add. Depr. Applicable check box to apply

additional depreciation in accordance with the Income Tax Act. On the Posting FastTab, in the FA Block Code field, enter the block code of the

fixed asset. On the Actions tab, in the General group, choose Calculate Depreciation. In the Calculate Depreciation batch job, on the Options FastTab, fill in the fields

as described in the following table.

Field Description

Depreciation Book The depreciation book that is assigned to the fixed asset.

FA Posting Date The fixed asset posting date.

Use Force No. of Days Select to use the number of days as specified in the depreciation calculation.

Force No. of Days The number of days in the depreciation calculation.

Posting Date The posting date. If you have activated the Use Same FA+G/L Posting Dates field in the Depreciation Book Cardwindow, you can leave this field blank and just fill in the FA Posting Date field. The posting date will be copied to the resulting journal lines.

Document No. The document number.

Posting Description The text to describe the posting.

Insert Bal. Account Select to automatically insert the balancing account.

• On the Fixed Asset FastTab, select the appropriate filters.

Note

To run this batch job, you must select the No. filter and enter the fixed asset number value.

• Choose the OK button

To calculate depreciation in accordance with the Companies Act


Select the required fixed asset, and on the Home tab, in the Manage group, choose Edit.

On the Lines FastTab, in the No. of Depreciation Years field, enter the depreciation period.

On the Actions tab, in the General group, choose Calculate Depreciation.

In the Calculate Depreciation batch job, on the Options FastTab, fill in the fields as described in the following table.

Field Description









• On the Fixed Asset FastTab, select the appropriate filters.

To run this batch job, you must select the No. filter and enter the fixed asset number value.


To calculate depreciation for multiple shifts


Select the required fixed asset, on the Home tab, in the Manage group, choose Edit.

On the Navigate tab, in the Depr. Book group, choose Shifts.

In the FA Shifts window, fill in the required fields as described in the following table.

Field Description

Shift Type The working shift type.

Industry Type The industry type.

Used No. of Days The number of working days of the fixed asset

• Choose the OK button.• In the Fixed Asset Card window, on the Actions tab, in the General group,

choose Calculate Depreciation.• In the Calculate Depreciation batch job, on the Options FastTab, fill in the fields as

described in the following table.

Field Description









• On the Fixed Asset FastTab, select the appropriate filters.Note

To run this batch job, you must select the No. filter and enter the fixed asset number value


How to: Calculate Retrospective Depreciation

Microsoft Dynamics NAV includes enhancements for India that allow you to calculate retrospective depreciation.

If updates are made to the Companies Act or the Income Tax Act, then you must create a new entry in the Retrospective Effect of Depr. window, and change the depreciation method accordingly. For example, when you create an entry using the Declining-Balance 1 depreciation method, you must enter a value in the Proposed Declining-Balance 1 % field

After you enter the value in the Proposed Declining-Balance 1 % field, run the Calc. Retrospective Method batch job to view the changes in the balance sheet.

To calculate retrospective depreciation

In the Search box, enter Retrospective Effect Of Depr., and then choose the related link.


In the Retrospective Effect Of Depr. window, on the General FastTab, fill in the fields as described in the following table.

Field Description

Depreciation Book The depreciation book code.

Proposed Depreciation Method Specify Declining-Balance 1 as the proposed depreciation method.

FA Class Code The fixed asset class code.

FA Subclass Code The fixed asset subclass code.

FA Filter The fixed asset number.

• On the FA Retro Books Subform FastTab, fill in the fields as described in the following table

Field Description

FA No. The fixed asset number.

FA Posting Group The fixed asset posting group.

Depreciation Starting Date The starting date for the depreciation.

Depreciation Ending Date The ending date for the depreciation.

Proposed Declining-Balance % The declining balance percentage.

• On the Navigate tab, in the Function group, choose Calc. Retrospective Method.The retrospective depreciation is calculated.• Choose the OK button.

How to: Print Retrospective DepreciationIn Microsoft Dynamics NAV, you can use the Retrospective batch job to generate the retrospective calculation details for fixed assets.

To print retrospective depreciation1.In the Search box, enter Retrospective, and then choose the related link.2.On the Options FastTab, fill in the fields as described in the following table.

Field Description

Depreciation Book The depreciation book assigned to the fixed asset.

Proposed Method The proposed method for calculating the depreciation.

Starting Date The starting date for the report.

Ending Date The ending date for the report.

Department Filter The department to which the fixed asset belongs.

Project Filter The project under which the fixed asset is listed.

Summary Select to display the details summary.

Show SubClass Select to show the subclass for the fixed asset. This check box is selected automatically when you select the Summarycheck box.

3.On the Fixed Asset FastTab, select the appropriate filters.4.Choose Print to print the report or choose Preview to view it on the screen.

How to: Print a Depreciation Schedule

You can generate the fixed assets depreciation schedule using the following reports:•Depr. Schedule for Comp. Act report in accordance with the Companies Act.•Depr. Schedule for IT Act report in accordance with the Income Tax Act.

To print the depreciation schedule in accordance with the Companies Act1.In the Search box, enter Dep. Schedule for Comp. Act, and then choose the related link.2.In the Depr. Schedule for Comp. Act window, on the Options FastTab, fill in the fields as described in the following table.

Field Description

Start Date The starting date for the report.

End Date The ending date for the report.

3.Choose Print to print the report or choose Preview to view it on the screen

To print the depreciation schedule in accordance with the Income Tax Act1.In the Search box, enter Dep. Schedule for IT Act, and then choose the related link.2.In the Depr. Schedule for IT Act window, on the Options FastTab, fill in the fields as described in the following table.

Field Description

Depreciation Book The depreciation book assigned to the fixed asset.

Starting Date The starting date for the report.

Ending Date The ending date for the report

3.Choose Print to print the report or choose Preview to view it on the screen.

How to: Print a List of Missing Fixed Assets

You can use the Missing Asset - Ret. Dep Calc. batch job to generate a list of missing fixed assets for which depreciation has not been calculated.To print a list of missing fixed assets1.In the Search box, enter Missing Asset- Ret. Dep Calc., and then choose the related link.2.On the Options FastTab, fill in the fields as described in the following table.

Field Description

Proposed Depreciation Method The proposed method for calculating depreciation.

Class Code The class code for the fixed asset.

Subclass Code The subclass code for the fixed asset.

3.On the FA Depreciation Book FastTab, select the appropriate filters.4.Choose Print to print the report or choose Preview to view it on the screen.

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Tax depreciation