Accounting depreciation - Initial balances and ongoing capital expenditure

Financial Modelling HANDBOOK ACCOUNTING financialmodellinghandbook.com DEPRECIATION Initial balances and ongoing capital expenditure

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Ongoing capital expenditure programmes give rise to modelling challenges when it comes to accounting depreciation. Care must be taken since assets start and stop depreciating at different times. In this guide, we will also consider how to model accounting depreciation relating to a partially depreciated initial balance. financialmodellinghandbook.comFinancial Modelling DOWNLOAD THIS GUIDE AND THE ACCOMPANYING EXCEL EXAMPLE HANDBOOK ACCOUNTING DEPRECIATION Initial balances and ongoing capital expenditure View slide

financialmodellinghandbook.comFinancial Modelling HANDBOOK REDUCTION IN NCA – INITIAL BALANCE This calculation block removes the gross book value of non current assets introduced to the model as an initial balance. In this example, the assets are assumed to be acquired on 31st December 2010. With a five year life, the gross book value is to be removed period ending 31st December 2015. This is modelled using a flag.

financialmodellinghandbook.comFinancial Modelling HANDBOOK REDUCTION IN NCA – ONGOING CAPEX USING SUMIF Now let us turn to ongoing capital expenditure. This calculation block removes assets from computations once they are fully depreciated. Note the use of the SUMIF function and the model column counter. The SUMIF function adds up data in a range where a condition is met. Here, the condition is based on the model column counter minus the useful economic life.

financialmodellinghandbook.comFinancial Modelling HANDBOOK REDUCTION IN NCA – ONGOING CAPEX USING SUMIF The result of the SUMIF function is to push data back by the period of the useful economic life. So the addition to non-current assets that appears in column K (the first forecast period) is ready for removal in column P. The formula may be explained as adding up the additions to non current assets only where the model column counter minus the useful life is equal to the model column counter. It results in a model period look back equal to the asset life.

financialmodellinghandbook.comFinancial Modelling HANDBOOK NON CURRENT ASSETS DEPRECIABLE BASIS Non current assets depreciable basis balance is calculated separately for initial balance and ongoing capital expenditure. Non current assets initial depreciable basis balance decreases with the reduction in depreciable basis of the initial balance1 1

financialmodellinghandbook.comFinancial Modelling HANDBOOK NON CURRENT ASSETS DEPRECIABLE BASIS Non current assets depreciable basis balance increases with additions to non current assets; Reduction in depreciable basis of additions to NCA causes the balance to decrease. Check out the guide on modelling balances to find out more about corkscrews. 2 2

financialmodellinghandbook.comFinancial Modelling HANDBOOK ACCOUNTING DEPRECIATION In this example, accounting depreciation for both the initial balance and ongoing capital expenditure is calculated on the basis of beginning balances. This assumes that acquisitions are end of period and no accounting depreciation is charged until the period following acquisition. Check out the formulae in L40 and L46: If the forecast period flag is one, then divide the depreciable basis beginning balance by the useful economic life; if the forecast period flag is zero, then return a zero.

financialmodellinghandbook.comFinancial Modelling HANDBOOK NON CURRENT ASSETS Another cork screw is required for non current assets as they appear in the balance sheet. The balance increases with additions to non current assets; accounting depreciation causes the balance to decrease.