We are changing the useful life of several asset classes to match the industry average but are having issues with the way depreciation is subsequently calculated. In some cases assets halfway through a ten year life are being extended to a 40 year but are fully depreciated after only 25 years.
Example: Asset with a Book Value of $400,000. Original life of 10 years but after five years the useful live is changed to 40 years.
1) Asset with 10 year life annual deprecating at $40,000 per year ($400,000/10) for 5 years = $200,000 accumulated depreciation and the asset has a net book Value of $200,000.
2) When the useful life is extended to 40 years depreciation is calculated as $10,000 or ($400,000/40).
3) We expected the remaining book value of the asset $200,000 to be depreciated over the new remaining useful life of 35 years (40 years less the 5 years already expired) but depreciation actually runs out after 20 years. Since depreciation is being based on the original Book Value and we have already depreciated a substantial amount in prior years Net Book Value reaches zero well before the asset reaches the assigned useful life.
Is there a way to change the depreciation calculation to look at Net Book Value after an asset life change so the asset is fully depreciated throughout it's entire useful life? These asset life changes are still in our sandbox so we are not set in stone but we will be making changes soon.
Thanks for your ideas,
Jeff