Asset Depreciation in SAP S/4HANA

Except for select asset types like land and goodwill, nearly all assets undergo depreciation over their specified useful lifespan.

For assets falling outside these exceptions, a monthly depreciation process is conducted. During this process, depreciation postings are made to lower the asset's book value and record the associated depreciation expense.

In this blog post, we describe the business process step by step for asset deprecation in SAP S/4HANA Finance.

Business Process Overview

The business process for asset depreciation in SAP is as follows (depicted in the figure below):

1. Define the depreciation areas. Depreciation areas can be defined using Transaction AS02 and are used to group assets together for depreciation purposes. For example, you may have a depreciation area for plant and equipment, another depreciation area for vehicles, and a third depreciation area for buildings.
2. Assign assets to depreciation areas. Assets can be assigned to depreciation areas in the asset master data. To do this, go to Transaction AS01 and open the asset master record for the asset you want to assign. In the Depreciation Area tab, select the appropriate depreciation area.
3. Define the depreciation keys. Depreciation keys define the depreciation method, calculation period, and other parameters. For example, you may have a depreciation key for straight-line depreciation, another depreciation key for declining-balance depreciation, and a third depreciation key for accelerated depreciation.
4. Assign depreciation keys to depreciation areas. Depreciation keys can be assigned to depreciation areas in the asset master data. To do this, go to Transaction AS01 and open the asset master record for the asset you want to assign. In the Depreciation Key tab, select the appropriate depreciation key.
5. Run the depreciation calculation. The depreciation calculation can be run periodically using Transaction AFAR. This transaction will calculate the depreciation for all assets in the system based on the depreciation keys that have been assigned to them.
6. Post the depreciation. The depreciation can be posted periodically using Transaction AFBP. This transaction will post the calculated depreciation to the general ledger accounts. 

Note: The asset retirement transaction will automatically generate a journal entry to reverse the asset acquisition and depreciation entries. If the asset is being sold to a customer, the asset retirement transaction will also generate a revenue entry. If the asset is being scrapped, the asset retirement transaction will also generate an expense entry for the scrap value of the asset.

The figures computed for unplanned and special depreciation are not automatically recorded during the routine depreciation process. To account for these amounts, it's necessary to manually post adjustment entries in the financial records to ensure accurate representation of the asset’s book value.

Ordinary Depreciation Accounts

The depreciation run carries out this operation by crediting the accumulated depreciation account (Acc.dep. Accnt.for Ordinary Depreciation, 7) to represent the reduction in asset value and debiting the depreciation expense account (Expense Account for Ord. Dep. below Zero, 8). This process is known as standard depreciation, often referred to as ordinary depreciation within SAP S/4HANA.

Usually, once the net book value of an asset reaches zero, depreciation for local reporting purposes ceases. However, there may be situations where, for business or statutory considerations, you need to continue depreciating the asset even if the net book value falls below zero. To address this, SAP S/4HANA employs the Expense Account for Ord. Dep below Zero account 9) for posting any ordinary depreciation after the net book value of an asset has reached zero.

If, for any reason, the depreciation that has been posted to an asset needs to be reversed, the reversal of ordinary depreciation is recorded in the Revenue from Writeup on Ord.deprec general ledger account 10). Such a write-up in depreciation can occur for various reasons, such as previous depreciation being excessively high, the posting of a credit memo reducing the capitalized cost of an asset, or other pertinent circumstances. The mentioned accounts are shown in this figure.

Unplanned Depreciation Accounts

In situations where an asset experiences unforeseen wear and tear, such as damage caused by a natural disaster, you have the option to record unplanned depreciation to decrease the net book value (NBV) of the asset. SAP S/4HANA offers a set of specific general ledger accounts to facilitate the posting of unplanned depreciation. The use of these accounts closely mirrors the approach we've discussed for their counterparts in ordinary depreciation:

• Accumulated depreciation (Accumulated Dep. Account Unpl.deprec., 11): This account is employed to accumulate the depreciation related to the unplanned wear and tear.
• Depreciation expense (Expense Account for Unplanned Deprec., 12): This serves as the account for recognizing the depreciation expense incurred due to the unplanned wear and tear.
• Depreciation if the net book value is below zero (P&LAct.Unpl.Dep.Below 0, 13): When the net book value falls below zero during the depreciation process, this account is used to record any depreciation in that scenario.
• Revenue from depreciation write-up (Revenue from Write-up on Unplnd. Deprec., 14): This account comes into play when you need to write up depreciation for specific reasons, whether it's to rectify previously overstated depreciation or address adjustments, for instance.

The mentioned accounts are shown below.

Special Depreciation Accounts

Occasionally, statutory regulations may permit the application of special depreciation, often in the form of tax incentives or other government-backed growth promotion initiatives. A notable example in the United States involves economic stimulus acts over the past decade that granted businesses the ability to claim extra depreciation for assets acquired during specific calendar periods.

While this involves configuring new depreciation keys to calculate special depreciation, it's important to highlight that, in terms of general ledger account determination, the postings for special depreciation can be tracked in distinct general ledger accounts as opposed to the ones used for ordinary depreciation. SAP S/4HANA employs the following general ledger accounts for posting special depreciation, and their usage aligns with the methodology described for corresponding accounts in ordinary depreciation or unplanned depreciation:

• Accumulated depreciation (Accumulated Dep. Account Special Dep., 15): This account is designated for accumulating the special depreciation posted.
• Depreciation expense (Expense Account for Special Depreciation, 16): This serves as the account for recording the depreciation expenses associated with special depreciation.
• Depreciation if the net book value is below zero (Expense Account for Spec.Dep.Below Zero, 17): In situations where the net book value drops below zero due to special depreciation, this account is utilized for posting such depreciation.
• Revenue from depreciation write-up (Revenue from Write-up on Special Deprec., 18): If there's a need to adjust depreciation upward, this account comes into play, addressing various scenarios like correcting previously overestimated depreciation or handling specific adjustments.

The mentioned accounts are shown in the next figure.

Note: Prior to considering the utilization of distinct general ledger accounts for various forms of depreciation, it's crucial to assess your specific business requirements. From a technical standpoint, it is entirely feasible to allocate different general ledger accounts for ordinary depreciation, unplanned depreciation, and special depreciation. Nonetheless, it's important to recognize that asset accounting offers multiple views and reporting features that allow you to differentiate between ordinary, unplanned, and special depreciation. This means that you might not necessarily need a separate set of general ledger accounts within your primary chart of accounts to distinguish these different depreciation types. The availability of these views and reports can often obviate the need for an intricate general ledger account structure.

The figures computed for unplanned and special depreciation are not automatically recorded during the routine depreciation process. To account for these amounts, it's necessary to conduct a periodic asset posting run specifically for this purpose.

Editor’s note: This post has been adapted from a section of the book Account Determination in SAP S/4HANA: Business Processes and Configuration by Abdullah Galal and Jonas Tritschler.