Depreciation area and Chart of depreciation


Lets understand depreciation area and chart of depreciation with the help of examples. Consider below scenario: 

 

Group Company is in USA and subsidiary company is in India.

Company code in India is required to perform asset accounting in multiple accounting principles as discussed below:

use of depreciation area
  1. Every company needs to present financial report using local accounting principle in local currency for local authority. In above example: Indian subsidiary needs to prepared financial report (balance sheet and P&L) as per Indian GAAP (Indian accounting principle) in currency INR for Indian authority. Hence asset accounting needs to be performed using Indian GAAP in INR.

 

  1. Company is required to produce financial report as per international accounting standards (IFRS) as well. Hence asset accounting needs to be performed using IFRS in INR.

 

  1. Group company needs to produce consolidated financial report in USD:

→Using accounting principle US GAAP for US authorities

→Using accounting principle IFRS as per international standards.

 

For consolidation to happen at group level, Indian subsidiary needs to perform asset accounting using US GAAP in USD and IFRS in USD.

In order to fulfill various requirements, Same asset needs to be managed using different accounting principle and currency.

Hence Indian subsidiary should be able to carry out asset accounting in multiple accounting principles and currency.

 

Let’s take example to understand the requirement better

Indian subsidiary purchases an asset for 60,000 INR.

Each month asset is depreciated.

depreciation-area-in-asset-accounting

Asset accounting requirement:

Asset needs to be managed using multiple accounting principles and currency. Each accounting principle may recommend different useful life and method of depreciation. In our example, only useful life is different but method of depreciation is kept same for understanding purpose.

 

As can see, transactions (asset purchase & asset depreciation) are valuated in four different view point (IFRS+INR, IFRS+USD, Indian GAAP+INR & US GAAP+USD).

Similarly, each transaction will be valued in four different viewpoints.

In SAP, the viewpoint in which asset needs to be valued is referred as Depreciation Area. To be able to achieve above asset accounting requirement in sap, we need to create multiple depreciation areas.

depreciation-area in sap

Indian company code requires above depreciation area but company code in USA may not require asset accounting in Indian GAAP.

Company code in USA may require asset accounting as per below.

→Using accounting principle IFRS as per international standards in currency USD.

→Using accounting principle US GAAP for US authorities in currency USD.

 

Depreciation areas needed for company code in USA is different from company code in India.

Hence the number of depreciation areas needed for asset accounting in a company code depends upon the country to which the company code belongs.

The list of depreciation areas applicable to a country is referred as Chart of Depreciation.

Chart of depreciation is basically list of all the depreciation areas which are applicable in a country. Depreciation area in the chart of depreciation is applicable to all the company codes belonging to the country.

Asset in a company code can be managed in depreciation areas of chart of depreciation which is assigned to country.

depreciation area and chart-of-depreciation

Asset in company code 1 and company code 2 can be valued in four different valuation viewpoints (depreciation area).

Asset in company code 3 and company code 4 can be valued in two different valuation viewpoints (depreciation area).

 

Different accounting principles may recommend different useful life and method of depreciation for the same asset. Hence an asset can have different useful life in depreciation areas.

Depreciation method (linear depreciation, double depreciation, accelerated depreciation etc.) is captured in depreciation key in sap. Depreciation key encompasses rules for depreciation calculation.

Depending upon the accounting principle, appropriate depreciation key is maintained in depreciation areas.