Tax book in FA is set up to track assets and depreciation as per you Tax laws.Basically there are two depreciation - depreciation for you accounting and financial reporting - This is based on the Corporate Book you set up and depreciation as per you tax laws - which is based on your tax book.

Setup Configuration

The following setup processes are required for a Tax Book

1. Define a Tax Book which is attached to a corporate book
2. Define asset categories for those will be maintained in Tax Book
3. Copy asset from Corporate Book to Tax Book for the first time. CIP Assets are not copied
4. Copy asset from Corporate Book to Tax Book periodically

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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
Depreciation/Year :20
At the end of 3 yrs :60

Expense Adjustment

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.

Amortized Adjustment

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

When you are changing financial information of any asset once its aquired in system then you will have two options under financial side.

1. Effect of adjustment should have retrospective effect, ie, asset will be treated with new financial information as though it would have been, when asset is added or
2. Effect of adjustment should have prospective effect,ie, the effect of adjustment will affect only future depreciation amounts.

If you choose option 1,it is called EXPENSED ADJUSTMENTS. For expensed adjustments, Oracle Assets recalculates depreciation using the new information and expenses the entire adjustment amount in the current period. Any excess or deficit of depreciation on account of change in financial information will be charged in the current period.

If you choose option 2,it is called AMORTIZED ADJUSTMENTS. For amortized adjustments, Oracle FA spreads the adjustment amount over the remaining life or remaining capacity of the asset. For flat-rate methods, Oracle Assets starts depreciating the asset using the new information. You can set up your amortized adjustments to have a retroactive start date by changing the default amortization start date (usually the system date) to a date in a previous period. Any adjustment amount missed since the amortization start date is taken in the current period. If you amortize an adjustment for an asset, you cannot expense any future adjustments for that asset in that book.

Amortize check box is available in scrren which you need to open via this navigation (N) Asset workbench>Books

Finally am able to put the detailed accounting entries for the Asset Cycle. As highlighted in one of the post Oracle Assets creates journal entries for the following general ledger accounts:

1. Asset Cost
2. Asset Clearing
3. Depreciation Expense
4. Accumulated Depreciation
5. Revaluation Reserve
6. Revaluation Amortization
7. CIP Cost
8. CIP Clearing
9. Proceeds of Sale Gain, Loss, and Clearing
10. Cost of Removal Gain, Loss, and Clearing
11. Net Book Value Retired Gain and Loss
12. Intercompany Payables
13. Intercompany Receivables
14. Deferred Accumulated Depreciation
15. Deferred Depreciation Expense
16. Depreciation Adjustment

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Reader asked:

I am technical person and will you able tell where does depreciation really reflects in financial statement context.. we know it is a non cash item but , up to that extent profit gets reduced, so where does it really reflect in Balance sheet?

As mention is last post, various impact in financial impact would be:

• P&L = Depreciation expense
• Balance sheet = Accumulated depreciation
• Cash Flow Statement = Adjusted in Operating Cash Flow as a non cash expense

Here is explanation in layman language :

1. It's first recorded on Balance Sheet as a fixed asset when cash paid or liability incurred for payment.
2. Then your cost center is responsible for a recurring charge (depreciation), similar to a lease payment for the use of the fixed asset (office furniture, leasehold costs, PC equipments, phone system, etc.) over time until fully paid (depreciated).
3. Balance Sheet also keeps track of charges called accumulated depreciation until the recorded charges reduce the fixed asset to a zero book value. That's when it's fully recouped from cost centers.
4. Your P&L account is charged with the recurring charges (depreciation) for book purposes (intercompany allocation) which in essence requires no cash transfer because it's already paid/charged on fixed asset account.
5. Your cost center is to reimburse for the use of the fixed assets over the estimated life or statutory tax period, and as a result reduces your cost center's net profit.
6. Cash flow wise doesn't change because your cost center is one of many inside the same company's cash account. It's simply paying one hand to the other, so your cost center's profit gets debited on paper for depreciation, and it's a non-cash transfer - simply a journal entry the accountants keep track monthly, quarterly, semi-annually or annually.

In another word an accrual based accounting system, depreciation expense matches the cost of the asset with the revenues generated by it over it's useful life to get a better picture of true profit (or loss) in a specific period. If you were to expense the asset at the time of purchase (cash based) you would have artificially low profit in the period the asset was purchased and artificially high. On the Balance Sheet, Accumulated depreciation reduces the value of the asset to reflect the expensed portion moreover the the cash flow statement will give you the picture of cash movement in a specific period.

Hope this helps to understand. Wait for next post for accounting details for asset life cycle :)

Fixed asset accounting is a most important part of a any company's financial accounting and reporting system because fixed, or long-term, assets generally represent substantial investments. A company's top management usually asks department heads and finance managers to establish fixed asset accounting procedures that conform to accounting principles, industry standards and governmental directives.

Fixed Asset accounting involves the following main aspects:

1. Acquisition of a Fixed Asset: You need to consider the capitalization of incidental costs, treatment of assets acquired in foreign exchange, treatment for leased assets, etc.
2. Depreciation: There may be separate rates of depreciation for Company Law and Income Tax purposes etc etc
3. Retirement of Assets: You need to consider the treatment of profit/ loss on sale of asset, writing back the accumulated depreciation pertaining to the asset sold, etc.
4. Other than these you have other aspects too:
   1. Tracking
   2. The Inventory Process
   3. Financial Reporting : Two accounts is mostly important in BS and P & L context, which is as discussed below.

Depreciation accounts

• Balance sheet accounts: the net value of the asset (carrying amount or book value of the asset) is preserved through two accounts:
  • Gross (acquisition) cost
  • Accumulated depreciation
• Income statement account
  • Depreciation expense of the current year
• Balances and details of these accounts are used in supplementary disclosures in the notes to the accounts.

Next post you will see the greatest and latest accounting details for Oracle EBS 11i/R12 for different.

So far Oracle FA is have all the good things except the lack on reporting.Oracle FA is now offer lot of public API's that can be used to interfacing with third party or Oracle application other modules. Here are some of transaction's API's:

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Last article you have seen some insight functionlity for Fixed asset Reclass functionality and Business need.

Majority of time whenever there is merger/acquisitions or Instance consolidation exercise reclassification plays an important role specially when you as project team not allow any new category . Mapping all assets and aligning with Parent's company existing Category is major challenge depending volume of assets. The more challenge come to IT when you did not find right fitment for Mass reclassification native screen to cater the requirement quickly thus Reclass via API's Programmatically is good options indeed.

API availability for Reclass

You can use Reclass API that uses the FA_RECLASS_PUB.DO_RECLASS procedure

You can achieve

• This API can also be used to automatically reclassify assets in all the tax books that are associated with the corporate book where the reclassification originated.
• You can automatically reclassify assets to all of the reporting books when MRC is enabled and without generating any rounding issues.

Let take a quick look the API details and Usage part.

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Though Reclassification of Financial assets is just a function in Oracle asset, but have larger impact in reporting side for disclosure requirement.

Reclassification and mass reclassification

Reclassification of an asset is simply changing the category of an asset.

Mass Reclassification is a feature that allows you to reclassify a group of assets from one asset category to another based on flexible selection criteria. Your flexiable flexible selection criteria may be either inherit the depreciation rules of the new category or retain depreciation rules of the old asset category. Also you have an option for an option to choose to amortize or expense any depreciation adjustment resulting from the reclassification. sounds Good:)

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Couple of questions from reader in FA, here is consolidated one:

In order to give you small background,take a note there are three type of books in Oracle Fixed asset. Corp book, tax book and budget book.

The most commonly used books are Corp and tax books. The basic rule of thumb is that an asset is created in Corp book and then migrated to tax book(s). Each corp book can have multiple tax books associated with them. For example a corp book can have seperate tax book for state, Federal, and other tax reporting needs. You can select the option in Corporate and tax books to report FA activity to GL.

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