Depreciation policy of an enterprise - definition, elements and characteristics

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-02 13:48

In the criteria for the development of a market economy, one of the vital tasks of society is the support, technical re-equipment and future development of the base of production processes, an important element of which is the means of labor.

In value terms, the latter work as fixed assets belonging to different business entities. Fixed capital in industrial use is subject to depreciation (physical and moral), the source of which is depreciation. The calculated depreciation amounts are created to allocate funds for the introduction of new technologies that reflect the merits of modern scientific and technological development.

The introduction of scientific achievements in almost everything depends on the directions and methods of depreciation policy, which directly affects the formation of financial criteria for the reproduction of labor means. On the contrary, the mismatch between depreciation policy and actions in the economy leads to distortions in the turnover of fixed assets, slowing down the introduction of new and decommissioning of obsolete equipment. Depreciation policy playsextremely central role in the economy of every state.

Depreciation concept

Let's consider the concept of depreciation in the company's depreciation policy. The term refers to two distinct but related concepts. First of all, depreciation is the process of depreciation of fixed assets, caused by their physical consumption as a result of operation, as well as as a result of technical progress associated with the possibility of getting more efficient and cheaper devices on the market, allowing you to get better product quality.

Depreciation can be viewed not only as a reduction in the value of assets, but also as a way of distributing the value of fixed assets during their period of use. This moment affects the net income of the company. Generally, costs are allocated as depreciation expense according to the periods in which these assets will be used. This is important for the company in terms of financial reporting and tax related issues. Methods for calculating depreciation expense may vary depending on the nature of the assets and the type of business the company is engaged in.

Regulating its activities, any organization is obliged to apply a certain accounting policy, the depreciation premium for which can be calculated by the established methods. The principal part of this policy is its depreciation component, since it specifically has a stronger impact on the company's cash background.

Essence of an idea

Any organization carries out its activities,managing both tangible and intangible assets. During use, fixed assets are subject to wear, failure, obsolescence, etc. They depreciate, losing value. It is necessary to determine how best to manage these amounts using such a company policy. Depreciation is the basis for investment and the source of funds for the development of the company.

The depreciation policy implies how exactly you can organize the transfer of the cost of the OS at cost in order to return this amount as soon as possible, using it for modernization. This phenomenon is determined by the speed of this transfer and the collection of funds for the exchange of already depreciated fixed assets of production.

Reason for depreciation policy

When developing the principles of such a policy, the following reasons should be taken into account:

• quantitative properties of the organization's assets;
• what exactly are assets and how do they affect each other;
• methods for estimating the value of funds created for depreciation;
• how long the asset subject to depreciation in the organization is used;
• what methods of accounting for depreciation are chosen (from those allowed by law);
• investment potential and plans of the organization;
• Government inflation rate.

Shaping basics

The following methods of depreciation policy of companies can be distinguished:

1. Policy and selection of allocation sourcesfunds.

The category under study should be based on the relationship with the financial strategy and capital formation in relation to the choice of source of financing funds. All sources of investment are divided into internal and external. They entirely depend on the scope of the organization's work, its financial situation, the possibilities of financing from its own resources, permanent income and the level of depreciation.

Now enterprises almost always use their own and borrowed resources as sources of financing.

Combining depreciation policy with strategies to create money capital is the choice of sources. In this case, the introduction of borrowed funds is the least profitable. It is best to use your capital, not counting depreciation and amortization. The advantages of depreciation as a source of investment financing are as follows:

• degree of accessibility for the organization;
• cost level (depreciation write-off is an investment resource that has no value and is "free" for companies).

2. Investment policy and planning.

In the course of the formation of depreciation policy, the main condition should be the consideration of actions that are related to the planning and management of depreciation write-offs, their transformation into a source of investment. The result is an increase in the company's cash flows.

This approach implies that the formation of depreciation policy will be carried out in closer connection with the element of monetary policy, and specifically with investments. The compilation of cash flows of an investment project is carried out taking into account different sources of financing, depreciation methods, as well as determining the timing for fixed assets.

These relationships are aimed at creating investment projects for the intended future investments.

This approach requires solving the following tasks for the company:

• designation of the current project cycle, which will fully coincide with the period of use of the product;
• selection of investment sources;
• determine depreciation calculation methods.

More fundamental, based on the conviction of increasing the level of the investment potential of the company, is the choice of a short period of use of fixed assets and the predominant introduction of accelerated depreciation methods.

3. Politics and formation, income distribution.

Formation of the company's depreciation policy should take place in close connection with the strategy of income generation and distribution. It is the result of determining the company's profitability.

The write-off of depreciation included in the cost of production directly affects the profitability of the company. As a result, accelerated depreciation methods are more profitable from an investment point of view, they allow you to write off a significantly large part of the assets in the initial period of their use, at the same time increase industrial costs and, thus, have a negative impact on profitability characteristics. A fall in the absolute characteristics of income can lead to a decrease in profitcompany.

The implementation of the elements of the depreciation policy is carried out on the basis of a preparatory study of the financial situation and in determining the more optimal ratios of income and profitability of the company.

Main methods

At the present stage of companies' activities, the cost price is not an important factor that determines the price of products. It is much more dependent on the state of the market, which cannot be changed by the policy of the firm. It turns out that depreciation is the only cost element that can be controlled. As it follows, the choice of a profitable depreciation method can significantly increase the company's profitability.

Linear method

This is the simplest and most commonly used depreciation method, which consists of the evenly distributed cost of an asset at a time, which assumes that the asset is used evenly throughout its life. The calculation formula is as follows:

A _r=(W _p - W _r) / Ou,

where A _{r - annual depreciation rate;}

W _{p - initial value;}

W _{r - residual value (the price of the object at the time of its resale);}

O _{U – life.}

Shrinking way

This method assumes that the utility of an asset declines over time, which means that depreciation in early years is much higher than in later years. ATTherefore, most of the depreciation is included in the first years of use of the asset. This approach is beneficial for the enterprise. When calculating the amount, the depreciation factor does not change, but the basis on which we rely is calculated from net worth, that is, after deducting existing write-offs.

The formula in the calculation of the organization's depreciation policy looks like this:

A=ONB, where A is the annual depreciation expense;

NA - depreciation rate;

B - book value since the beginning of the year.

The simplest form is doubling the straight-line depreciation rate. The process continues until the residual value is reached.

Calculation by units (in kind)

It is assumed that the consumption of an object is the same for each unit of work (for example, artwork, kilogram, hour, etc.), so the depreciation amount depends on the amount of work completed in a given time period.

Calculation formula:

A _r=(W _p - W _r) x (Pr _{/ P} z_),

where A _{r - annual depreciation rate;}

W _{p - initial value;}

W _{r - residual value;}

P _{p - real products;}

P _{z - estimated profit.}

Progressive method

According to this method, the amount of depreciation increases with the end of the service life. It's connected withthe assumption that the older the OS object, the more funds need to be allocated for its repair. Therefore, the cost of its operation increases. This method is beneficial for companies that suffer losses in the first few years.

Performance evaluation

Amortization policy is considered effective if it helps to make up for the "savings" of income (that is, the function of saving a significant part of it for the company's internal tasks) and existing funds of the organization, which can be paid as dividends. As a result, the interests of both the staff and the owners of the company are ensured: the former can hope for an increase in salaries, the number of jobs, an improvement in the technological process, etc. The latter - for the huge funds that their organization brings.

The productivity of the depreciation policy is determined by the financial condition of the firm. It is necessary to take into account such characteristics as:

• depreciation rate of fixed assets;
• capital intensity (when the price of the fixed asset corresponds to one ruble of proceeds from product sales);
• profitability (how much income per ruble of fixed assets).

The correct depreciation policy of the enterprise increases the investment attractiveness of the organization and its financial potential, which directly affects the growth of the company's income.

Public sector and depreciation

The following basic principles for the development of the statedepreciation policy:

• re-evaluation of the OS must be fast and true;
• depreciation rates should be differentiated depending on the multifunctional purpose of the OS;
• accounting for the moral and physical depreciation of OS objects;
• depreciation rates should be sufficient and promote extensive reproduction;
• depreciation write-offs for companies of all forms of ownership and OPF management should be used only on the basis of their multifunctional purpose;
• accelerated depreciation can be applied to all companies;
• policy must promote the renewal of fixed assets and accelerate the pace of scientific and technological progress;
• greater rights should be given to commercial organizations in the area of their depreciation policies.

All these principles underlie the formation of the concept under study. Subject to the correct depreciation policy of the state, companies can form a sufficient level of investment capital for the expanded reproduction of fixed assets.

Conclusion

The depreciation policy is an inseparable part of the strategy for creating your own money resources, which consists in managing the write-off of deductions from the cost of fixed assets and intangible assets that are used to reinvest them.

When choosing depreciation methods, they proceed from the legislative framework in this area. The company decides to apply the straight-line method or accelerated depreciation of fixed assets, depending on the established accounting rules.