Auto-change depreciation makes an automatic change from the declining balance method to the regular linear method (see alternative 1 that follows) or to a linear depreciation of a similar kind (alternative 2) at a certain stage. Using this method, the residual value can be equal to 0.
Auto-change depreciation is used for large investments where the purpose is to maximize the depreciation in the first years of an asset's lifetime. Several countries allow an automatic change from declining to linear depreciation if the linear depreciation of the period is greater than the declining depreciation.
The auto-change method is selected for the depreciation type in (FAS077/E) or (FAS002/E), where the asset's lifetime is entered in months. Daily depreciation, used for the standard linear method, is not used for the auto-change method.
Originally designed for Germany and France, the three auto-change method alternatives differ in when and how the change is made.
The alternatives are:
|1||The depreciation method is changed to linear depreciation when the declining year amount is less than the linear year amount. Balance depreciation is done on the last period.|
|2||The change is made when the depreciation year amount is less than the remaining net value divided by the number of remaining years. In this case, the depreciation amount is equal to the residual value divided by the number of years left.|
|3||The change is made when the depreciation year amount is less than the remaining net value (as in alternative 2). However, the linear depreciation is calculated by dividing the remaining amount by the number of remaining periods.|
Alternatives 2 and 3 differ in their handling of depreciation during the last year.
Economic lifetime = 120 periods; acquisition year/period = 2005/08. With alternative 2, the last depreciation period will be the last period in the tenth year: 2014/12 (that is, 112 periods). With alternative 3, depreciation is calculated over the full 120 periods, making the last depreciation period 2015/07 (120 periods).
An asset was purchased for USD 100,000 and it will be depreciated annually for 5 years (asset lifetime = 60 months). Before the annual depreciation run at the end of year 3, the remaining value is 49,000 according to the declining balance method.
The amount to be depreciated according to the declining depreciation method in the coming period is less than the linearly depreciated amount. The auto-change is triggered, and the depreciation for year 3 and 4 will be 20,000 each year. After depreciation is run for year 4, there is a residual value of 9,000, which is depreciated in year 5.
|Year||Residual Value Before Declining Depr.||Declining Depr. (30%)||Remaining Value Before Linear Depr.||Linear Depreciation (5 Years)||Residual Value Before Depr. with Auto-Change Method 1||Depreciated Amount with Auto-Change Method 1|
* Method 1: 20,000>14,700. Method 2: 14,700<(49,000/3)=16,333.33.
For the second year, the remaining value is 70,000. The declining balance depreciation method is still used. The reason for this is that 30 percent of 70,000 (=21,000) is larger than 20,000.
However, for the third year, the linear depreciation method is applied instead: 30 percent of the remaining net value 49,000 is 14,700, whereas 20,000 is consequently larger. The standard linear method is then used for the rest of the financial life span.
When the transfer to linear is done, this depreciation is done until the residual value is less than the stop value.
The amount to be depreciated according to the declining depreciation method in the coming period is less than the remaining value divided by the number of remaining years (remaining value 49,000 divided by 3 remaining years). The auto-change is triggered, and the depreciation for years 3, 4 and 5 will be 49,000/3 = 16,333.33 each year.
|Year||Residual Value Before Declining Depr.||Declining Depr. (30%)||Remaining Value Divided by Remaining No. of Years||Residual Value Before Depr. with Auto-Change Method 2||Depreciated Amount with Auto-Change Method 2|