Fixed assets and depreciation in Skyline Nexus ERP

What fixed-asset accounting in an ERP does

Fixed-asset accounting in an ERP keeps a register of every long-lived asset, calculates depreciation on each one every month, and posts the results to the general ledger, together with acquisitions, disposals, revaluations and impairments. It matters because property, plant and equipment is often the largest balance on the balance sheet, and a register that disagrees with the ledger undermines both.

This guide follows the asset lifecycle under IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets, with worked numbers for each event, and shows where each step happens in the Asset Management module of Skyline Nexus ERP. Our guide on what depreciation is covers the methods in general terms, and our guide on maintenance and the balance sheet covers the decision to capitalise or expense and componentisation; this guide concentrates on running the register.

The asset lifecycle in five events

Every fixed asset passes through the same accounting events, and each has its own posting. IAS 16 requires an asset to be recognised at cost when future economic benefits are probable and the cost can be measured reliably, and then carried at cost less accumulated depreciation and impairment, or at a revalued amount if the revaluation model is chosen for the whole class. Depreciation allocates the depreciable amount, cost less residual value, systematically over the useful life, and the residual value, useful life and method are reviewed at least at each financial year end.

• Acquisition: Dr Asset at cost / Cr Payables or Bank
• Construction in progress: costs held in CIP until the asset is ready for use, then capitalised
• Depreciation: Dr Depreciation expense / Cr Accumulated depreciation, every month
• Revaluation or impairment: carrying amount moved up to fair value or down to recoverable amount
• Disposal: cost and accumulated depreciation removed, gain or loss recognised

Where it lives in Skyline Nexus ERP

Fixed assets are managed in the Asset Management menu of Skyline Nexus ERP. Assets holds All Assets, Import Assets, Categories, Movements, Allocations and Components, the screen for recording the significant parts that IAS 16 requires to be depreciated separately. Lifecycle holds Depreciation, Revaluation, Impairment, Disposal and CIP. Operations covers Maintenance, Audit, Compliance, Warranty and Insurance, and the Asset Financial Centre includes GL Integration.

The ledger side is configured in Fiscal Authority, Settings, General Settings, where the Asset and Depreciation Accounts are set, and in Auto-Post Settings, where Auto-post Depreciation Entries and Auto-post Asset Disposal Entries are switched on. Acquisition, depreciation, disposal with gain and loss accounts, revaluation surplus, impairment and impairment reversal, and CIP cost and capitalisation all have posting routines; revaluations and impairments post when the user posts them in Asset Management.

Choosing a depreciation method

IAS 16 requires the method to reflect the pattern in which the asset's future economic benefits are expected to be consumed, and prohibits a method based on the revenue the asset generates. The Depreciation screen in Skyline Nexus ERP offers four methods: Straight Line, Declining Balance, Sum of Years Digits and Units of Production. Choose by asset class and document the reason; consistency matters more than precision, and a method change is a change in accounting estimate under IAS 8, applied prospectively.

Depreciation runs monthly on a schedule. Because it is monthly, the choice of method also decides how lumpy the monthly management accounts look: straight line gives an even charge, while accelerated methods front-load it into the first year.

• Straight Line: equal charge each period; buildings, furniture, most office equipment
• Declining Balance: a fixed rate on the falling carrying amount; vehicles, IT equipment
• Sum of Years Digits: accelerated, but reaching residual value exactly at the end of life
• Units of Production: charge follows use, such as kilometres driven or machine hours

Worked example: one vehicle, four methods

A Canadian distributor buys a delivery truck for CAD 60,000, with an expected residual value of 6,000 after five years or 300,000 kilometres. The depreciable amount is 54,000. Under Straight Line the charge is 54,000 divided by 5, CAD 10,800 a year or 900 a month. Under Sum of Years Digits the digits 5, 4, 3, 2 and 1 add to 15, so year one takes 5/15 of 54,000, which is 18,000, then 14,400, 10,800, 7,200 and 3,600, which total 54,000.

Under Declining Balance at 40% a year on the carrying amount, year one is 24,000, year two 40% of 36,000, which is 14,400, and year three 40% of 21,600, which is 8,640, leaving 12,960; the charge then has to be limited so the carrying amount does not fall below the 6,000 residual. Under Units of Production the rate is 54,000 divided by 300,000, CAD 0.18 per kilometre, so a first year of 70,000 kilometres costs 12,600. Four defensible methods give first-year charges from 10,800 to 24,000, which is why the choice must be documented.

• Straight Line: 10,800 a year; monthly Dr Depreciation expense 900 / Cr Accumulated depreciation 900
• Sum of Years Digits: 18,000; 14,400; 10,800; 7,200; 3,600 = 54,000
• Declining Balance 40%: 24,000; 14,400; 8,640; carrying amount after three years 12,960
• Units of Production: 70,000 km x 0.18 = 12,600 in year one

Worked example: selling the vehicle

After three years of straight-line depreciation the truck is sold for CAD 30,000. Accumulated depreciation is 3 times 10,800, which is 32,400, so the carrying amount is 60,000 minus 32,400, CAD 27,600. The sale proceeds exceed the carrying amount by 2,400, which is a gain on disposal. IAS 16 requires the gain or loss to be recognised in profit or loss, and not presented as revenue.

The disposal entry removes both the cost and the accumulated depreciation, so the asset disappears from the register and the ledger together. In Skyline Nexus ERP the disposal is recorded under Lifecycle, Disposal, and with Auto-post Asset Disposal Entries on it posts to the gain and loss accounts configured in settings. Sales tax on the proceeds, if any, is left out here for clarity.

• Dr Bank 30,000
• Dr Accumulated depreciation 32,400
• Cr Vehicles at cost 60,000
• Cr Gain on disposal 2,400
• Check: 30,000 + 32,400 = 62,400 = 60,000 + 2,400

Revaluation and impairment

Under the IAS 16 revaluation model, an increase in carrying amount goes to other comprehensive income and accumulates in equity as a revaluation surplus, unless it reverses an earlier decrease recognised in profit or loss. A decrease goes to profit or loss unless it can be absorbed by an existing surplus for that asset. Impairment under IAS 36 is different: when an asset's carrying amount exceeds its recoverable amount, the higher of fair value less costs of disposal and value in use, the difference is an impairment loss, recognised in profit or loss for assets carried at cost.

Two short examples. A warehouse carried at EUR 400,000 is revalued to 460,000, giving a surplus of 60,000 in other comprehensive income. A packaging machine carried at 80,000 has a recoverable amount of 65,000 after a product line is discontinued, giving an impairment loss of 15,000; depreciation then continues on the reduced amount. Both are recorded under Lifecycle in Asset Management, and each posts when the user posts it.

• Revaluation (simplified): Dr Buildings 60,000 / Cr Revaluation surplus (OCI) 60,000
• Impairment: Dr Impairment loss 15,000 / Cr Accumulated impairment 15,000
• After impairment: future depreciation based on the carrying amount of 65,000

Construction in progress and capitalisation

Assets built over several months, such as a fit-out, a production line or a software platform, collect their costs in construction in progress (CIP) and are not depreciated until they are available for use. At that point the CIP balance is transferred to the proper asset class and depreciation starts. The discipline lies in the cut-off: costs incurred before the asset is ready are capitalised if they are directly attributable, while training, general overheads and costs after the asset is in use are expensed.

In Skyline Nexus ERP, CIP sits under Lifecycle, CIP, with posting routines for CIP cost and capitalisation. Review the CIP balance at every quarter end: a CIP line that has not moved for six months is either an asset already in use and not yet depreciating, or a project that has stalled and may be impaired.

Financing adds one more rule. Under IAS 23, borrowing costs that are directly attributable to the construction of a qualifying asset, one that necessarily takes a substantial period to get ready for use, are capitalised as part of its cost rather than expensed. If a bank loan was drawn to fund a new warehouse, the interest incurred during construction belongs in CIP; interest after the warehouse is in use is an expense. Capitalisation stops when substantially all the activities needed to prepare the asset are complete, even if it has not yet been brought into use.

Month-end and year-end routine for the register

A register only earns trust if it agrees with the ledger every month. Because the end-to-end ledger results depend on each business's account set-up, check the first depreciation run and the first disposal after go-live line by line against the expected entries, then run the routine below every month.

• Confirm the scheduled depreciation ran and posted for the month
• Agree cost, accumulated depreciation and carrying amount per category to the ledger accounts
• Record additions from supplier invoices in the register the same month
• Record transfers between locations with Movements, and sales and scrapping under Disposal
• Review CIP for projects ready for use
• At year end: review useful lives, residual values and methods, and look for impairment indicators
• At year end: physical verification, recorded with the Audit screen under Operations, and reconcile the result

Importing an existing register

When moving from spreadsheets or another system, Import Assets loads the register rather than keying it. The Import Assets template carries each asset's Asset Tag, Name, Category, Purchase Date, Purchase Cost, Location and Status. Keep each asset's accumulated depreciation at the cut-over date beside it in the migration file, not just its carrying amount, because the disposal entry and the movement schedule in the notes both need cost and accumulated depreciation separately. Then, before the first depreciation run, agree cost, accumulated depreciation and carrying amount by category to the ledger opening balances, so the first monthly charge starts from the right point.

Our guide on migrating to Skyline Nexus ERP covers the rest of the cut-over, and our guide on financial statements and the year-end audit pack explains how the asset figures feed the year-end file.