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In last post, you have seen what is difference between Amortized Adjustment & Amortized Adjustment , this post we will explore more on Oracle treatment for those two options.
Consider an asset (For e.g. a machine) who's cost is $100 and has a life in years = 5. Now at the end of 3 yrs, you perform a life adjustment to increase the life of the asset to10 yrs. The table below shows how the accumulated depreciation amount and the calculation will differ for Expensed and Amortized adjustment.
Asset Cost :$100
Life in Years :5
At the end of 3 yrs :60
An expensed adjustment recalculates accumulated depreciation as if the adjustment has been in effect since the asset has been added to service.
In an expense adjustment, accumulated depreciation is recalculated. For 5 yrs STL method, at the end of 3 years accumulated depreciation would be $60. For 10 yrs STL method, at the end of 3 years accumulated depreciation would be $30. When a life change is effected, the accumulated depreciation is adjusted to $30 (60-30) and then on annual depreciation of 10 gets accumulated till the asset gets fully depreciated.
On the other hand an amortized adjustment spreads the change over the remaining period of life
So with the same example, if you instead AMORTIZED the change, the accumulated depreciation will still be $60 (that is, not reduced to $30), and annual depreciation of new depreciable amount (cost - accumulated depreciation - salvage value)/remaining asset life (assume salvage value = 0) = (100-60-0)/7 = $5.71 will be taken. The remaining life is taken to the new life in months (If life adjustment has been performed) multiplied by the Rate Adjustment Factor.
Rate Adjustment Factor aka RAF
After an amortized adjustment, the depreciation amount is adjusted by a Rate Adjustment Factor which allocates amortized change over the remaining life.
Formula for the Rate Adjustment Factor is:
(New Recoverable Cost - Recalculated Depreciation Reserve)/New Recoverable Cost