Explanation of “JP-250DB 10” Depreciation Method in Oracle Formula Setup

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Why Oracle design the formula like this? It looks far different than the requirement description.(See extracted requirement in below passage)

For formula itself, it can be explained easily. 

Guarantee depreciation amount can be calculated as “Cost * Guarantee Rate”

Depreciation Rate before switching can be calculated as “Begin NBV*Original Rate”

Depreciation Rate after switching can be calculated as “NBV when switching*Revised Rate”

The formula can be explained easily as “When depreciation amount less than guarantee amount, we will switch the rate from original rate to revised rate.” And due to “Dual Rate Evaluation” depreciation basis rule, the depreciation basis is changed from NBV of each begin of fiscal year to the NBV of the asset as at the date of the switch from Original rate to the Revised rate. It means after switching rate to revised rate, it is straight line depreciation on the base of the NBV of the asset as at the date of the switch from Original rate to the Revised rate.

The formula is explained, but the formula looks far away from requirement description! Why? And how the figure of revised rate and guarantee rate get from? Is it given by government? NO! It is introduced to design formula. The requirement has not any place mentioned these kind of rate.

Requirement

The Old Declining Balance Method is calculated by multiplying the book value as of the beginning of the fiscal year by a predetermined depreciation rate. The New Declining Balance Method will be calculated by multiplying the book value as of the beginning of the fiscal year by the depreciation rate, which is 2.5 times the depreciation rate under the straight line method. If the amount calculated using the New Declining Balance Method is less than the “amount calculated by dividing the book value as of the beginning of the fiscal year by the remaining years (useful life less the elapsed year)”, then the calculation method will be changed from the declining balance method to the straight line method when calculating the depreciation limit.

It is decided on a fiscal year basis whether the “amount calculated by multiplying the book value as of the beginning of the fiscal year by the depreciation rate which is 2.5 times the depreciation rate under the straight line method” is lower than the “amount calculated by dividing the book value as of the beginning of the fiscal year by the remaining years”. A change of method from the declining balance method to the straight line method in the middle of a fiscal year is not permitted.

Let’s have a look at how revised rate and guarantee rate is gotten.

From requirement description,

Assuming asset cost = a, depreciation year = b, original rate=x, so, there’s a relationship b=1/x*2.5

So, by original rate declining balance deprecation in the first years,

Year

Depreciation Value

NBV

1

xa

(1-x)a

2

x(1-x)a

(1-x)2a

3

X(1-x)2a

(1-x)3a

n

X(1-x)n-1a

(1-x)na

Against the requirement, If the amount calculated using the New Declining Balance Method is less than the “amount calculated by dividing the book value as of the beginning of the fiscal year by the remaining years (useful life less the elapsed year)”, then the calculation method will be changed from the declining balance method to the straight line method when calculating the depreciation limit.,

We can get a inequation as below, assuming n is the switching year

x(1-x)n-1a<(1-x)n-1/(b-(n-1))a                     (b=1/x*2.5)

On the base of total deprecation year, we can get the switch year.

For example, b=10, x=0.25 in above screendump,

Finally, we can get n>7 from above inequation. So, at the eighth year, we need to switch from the declining balance method to the straight line method when calculating the depreciation limit.

On the base of n=8, we can calculate so-called guarantee rate to help design the formula.

Guarantee Rate = right of inequation = (1-x)n-1/(b-(n-1)) = 0.757/3 = 0.0445!

Revised Rate = 1/(b-(n-1))=1/3=0.33

 

As similar as above you can calculate the guarantee rate and revised rate for depreciation year 5, 10, 20 or others.

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For this case, switching year n can be calculated as 14 by inequation.

Guarantee Rate = 0.875^13/7=0..252

Revised Rate = 1/7=0.143

Can you understand it now? Is it interesting? And who designed this formula?Smile

2007 Japan Tax Reforms–Depreciation Method Changes

1. Outline on Revision of the Depreciation Method

(1) With regard to depreciable assets acquired on or after April 1, 2007, the concept of residual value will be abolished such that after the useful life has expired, depreciable assets can be depreciated until their book value is JPY 1.

(2) An accelerated depreciation rule, the so called “250% declining balance method” is introduced (for details, please refer to 2.(2) below).

(3) With regard to depreciable assets acquired on or before March 31, 2007, the residual value of 5% can be depreciable using a straight line method over 5 years starting from the next fiscal year following the fiscal year in which the available limit for depreciation applied to the assets (being 95% of the acquisition cost) is depreciated (“5 Years Average Depreciation”).

(4) The valuation method is maintained with regard to depreciable assets for fixed asset tax purposes.

2. Calculation Method and Example

The calculation method of the depreciation limit for corporation tax purposes has been amended as described below by the 2007 tax reform. We set out the calculation method under the 2007 tax reform and also the depreciation limit and residual book value which have been computed under the straight line method prior to the tax reform (“Old Straight Line Method”), the declining balance method prior to tax reform (“Old Declining Balance Method”), the straight line method after the tax reform (“New Straight Line Method”) and the declining balance method after the tax reform (“New Declining Balance Method”).

(1) Straight Line Method

The Old Straight Line Method is calculated by taking the acquisition price of an asset less its residual value (10% of the acquisition price) and multiplied by the depreciation rate. The New Straight Line Method will be calculated by multiplying the acquisition price by the depreciation rate, now that the residual value has been abolished.

(2) Declining Balance Method

The Old Declining Balance Method is calculated by multiplying the book value as of the beginning of the fiscal year by a predetermined depreciation rate. The New Declining Balance Method will be calculated by multiplying the book value as of the beginning of the fiscal year by the depreciation rate, which is 2.5 times the depreciation rate under the straight line method. If the amount calculated using the New Declining Balance Method is less than the “amount calculated by dividing the book value as of the beginning of the fiscal year by the remaining years (useful life less the elapsed year)”, then the calculation method will be changed from the declining balance method to the straight line method when calculating the depreciation limit.

It is decided on a fiscal year basis whether the “amount calculated by multiplying the book value as of the beginning of the fiscal year by the depreciation rate which is 2.5 times the depreciation rate under the straight line method” is lower than the “amount calculated by dividing the book value as of the beginning of the fiscal year by the remaining years”. A change of method from the declining balance method to the straight line method in the middle of a fiscal year is not permitted.

(3) Example on computation of depreciation limit and residual book value (assuming the acquisition price is JPY 1,000 and useful life is 10 years)

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3. Timing of Application of 5 Years Average Depreciation on the Existing Assets

For depreciable assets acquired on or before March 31, 2007, the residual value of 5% will be depreciable over 5 years starting from the fiscal year after the fiscal year in which the available limit for depreciation (95% of the acquisition cost) is depreciated. The decision whether the available limit has been depreciated will be made on a fiscal year basis. Therefore, 5 Years average depreciation will apply from the next fiscal year when the available limit is depreciated.

 

Mapping to above requirement changes, we developed the Japanese 250% Declining Balance Depreciation Method and Japanese Straight Line Extension Depreciation Method and their corresponding matched functions like what-if analysis etc. in Oracle E-Business Suite and will migrate to Fusion Application.