Management Depreciation Method

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Fixed Asset provides management depreciation method usually used by accounting and equity professionals, in order to measure fixed asset real value, according to convergence process of the Brazilian accounting rules into international rules, based on CPC 27 Instruction – Fixed Asset and ICPC 10 - Interpretation on Initial Investment to Fixed Asset and on Property to Investment of Technical Pronouncements CPCs 27, 28, 37 and 43.

System now uses the following methods of management depreciation:

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CPC 27 – Fixed Asset: Depreciation paragraphs 31 to 37

Depreciation Rules Definition:

Depreciation: Each component of fixed asset item with meaningful cost in relation to item total cost must be depreciated apart.

The entity enters initial value of a fixed asset item to meaningful components and depreciate them apart. For example, depreciate aircraft structure and engines, owned by the entity or obtained through financial leasing. If lessor acquires a fixed asset subject to leasing, it is recommended the depreciate separately the amounts related to relative cost of the item under leasing term or not favorable to market conditions.

An important component of fixed asset item may have useful life and depreciation method equal to another component of the same item. These components can be grouped in depreciation expense calculation.

As the entity depreciates some fixed asset components apart, the remaining is depreciated apart too. Remaining means components of an item that are not meaningful individually. If entity presents different expectation for these parts, approximation techniques may be necessary to depreciate the remaining as it represents consumption standard and/or useful life of these components.

The entity can choose by depreciating apart components of an item that does not present significant cost related to item total cost.

Depreciation expense of each period must be acknowledged in the result, unless it is added in another asset accounting value.

Depreciation in the period must be regularly acknowledged in the result. Future economic benefits added to the asset are absorbed for the production of other assets. In these cases, depreciation is part of the cost of another asset, being added in its accounting value. Depreciation of machines and production parts is added to the inventory production costs (check Technical Pronouncement CPC 16 – Inventory). Similarly, depreciation of fixed assets used for development activities may be added to the cost of an intangible asset, according to Technical Pronouncement CPC 04 – Intangible Asset.

CPC 27 – Fixed Asset: Depreciable value and depreciation period paragraphs 50 to 62

Depreciation Rules Definition:

Depreciable value and depreciation period: Depreciable value of an asset may be appropriated systematically during its expected useful life.

Residual value and asset useful life are reviewed at least at the end of each fiscal year and if expectation differ from previous expectation, change must be accounted as accounting expectation, according to Technical Pronouncement CPC 23 – Accounting Policies, Expectation Change and Error Rectification.

Depreciation is acknowledged even if asset value exceeds its accounting value, since asset residual value does not exceed accounting value. Asset repair and maintenance do not avoid depreciation need.

Asset depreciable value is established after reducing its residual value. Residual value is not significant, so it is not considered for depreciable value.

The residual value of an asset can increase. Depreciation expense is equal to zero while subsequent residual value is equal to or higher than accounting value.

Asset depreciation starts when it is available for use, which means, it is in the location and working condition established by the management. Asset depreciation ceases when asset is classified as for sales (or added to assets group classified as for sales according to Technical Pronouncement CPC 31 – Non-Current Asset For Sales and Discontinued Operation), or even, when asset is written-off, whichever happens first. Depreciation does not cease when asset becomes idle or is taken from regular use, unless asset is fully depreciated. According to depreciation methods per use, depreciation expense can be zero while there is no production.

Future economic benefits added to the asset are consumed per entity specially through its use. Other factors as technical or commercial obsolescence and regular wear as asset remains idle, many times decrease economic benefits. As a consequence, all the other factors are considered in asset useful life:

Asset useful life is established concerning expected use for the entity. Asset management policy can consider assets sales after a certain period or after consumption of a specific proportion of economic benefits added to the asset. That's why the asset useful life can be shorter than its economic life. Asset useful life expectation is based on entities experience with similar assets.

Lands and buildings are detachable assets and are accounted separately, even when acquired together. Despite exceptions, as quarries and areas used as landfills, lands present an unlimited useful life, therefore, they are not depreciated. Buildings have a limited useful life, so they are depreciated. Value increase of a land where there is a building does not impact the building accounting value.

If land cost includes dismantling, removal and restoring, this portion of land accounting value is depreciated during the benefits period. In some cases, the land present a limited useful life, being depreciated reflecting benefits to be taken from it. Depreciation Method

The applied depreciation method reflects consumption standard of the entity of future benefits.

Applied depreciation method of an asset must be reviewed at the end of each fiscal period. In the event of a significant change in the expected consumption standard, said method must present the change. Said change must be registered as change in accounting expectation, according to Technical Pronouncement CPC 23 – Accounting Policies, Expectation Change and Error Rectification.

Many depreciation methods can be used to systematically adapt asset depreciation value during its life. These methods include linear, decreasing balances and produces units methods. Linear method is a constant expense in asset's useful life, in the event residual value does not change. Decreasing balances results is a decreasing expense in asset's useful life. Produced units method is an expense based on expected use or production. The entity selects the method that best reflect consumption standard of future economic benefits added to the asset. This method is applied in periods, unless there is a change in this standard.