In the criteria for the development of a market economy, one of the burning tasks of society is support, technical re-equipment and future development of the base of production processes, an important element of which are the means of labor.
In value terms, the latter work as fixed assets belonging to different business entities. The fixed capital during industrial use is subject to depreciation (physical and moral), the source of which is depreciation. The calculated depreciation amounts are created to allocate funds for the implementation of new technologies that reflect the merits of modern scientific and technological development.
The implementation of scientific achievements in almost everything depends on the directions and methods of depreciation policy, which directly affects the formation of financial criteria for the reproduction of labor resources. On the contrary, the mismatch between the depreciation policy and the actions in the economy leads to imbalances in the turnover of fixed assets, a slowdown in the introduction of new equipment and the withdrawal of obsolete equipment. Depreciation policy plays an extremely important role in the economy of each state.
Depreciation concept
Consider the concept of depreciation in the depreciation policy of the company. The term refers to two different but related concepts. First of all, depreciation is a process of depreciation of fixed assets, caused by their physical consumption as a result of operation, as well as as a result of technological progress associated with the possibility of obtaining more efficient and cheaper devices on the market that allow to obtain better product quality.
Depreciation can be considered not only as a decrease in the value of assets, but also as a way of distributing the value of fixed assets during their application. This moment affects the company's net income. Typically, costs are allocated as depreciation expense in accordance with the periods in which these assets will be used. This is important for the company in terms of financial reporting and tax issues. The methods for calculating depreciation expenses may vary depending on the nature of the assets and the type of business carried out by the company.
Regulating its activities, any organization is obliged to apply a certain accounting policy, the depreciation premium at which can be calculated by established methods. The principal part of this policy is its depreciation component, since it specifically affects the monetary background of the company more intensely.
Essence of the idea
Any organization carries out its activities, managing both tangible and intangible assets. During use, fixed assets are subject to wear and tear, failure, obsolescence, etc. They depreciate, losing value. It is necessary to determine how to optimally manage these amounts using a similar company policy. Depreciation is the basis for investment and a source of allocation of financial resources for the development of the company.
Depreciation policy implies how specifically it is possible to organize the transfer of OS value at cost in order to return this amount as soon as possible, using it for modernization. This phenomenon is determined by the speed of this transfer and fundraising for the exchange of already impaired fixed assets.
Reasons for depreciation policy
When developing the principles of such a policy, the following reasons should be taken into account:
- quantitative properties of the assets of the organization;
- what exactly are the assets and how they affect each other;
- methods for assessing the value of funds created for depreciation;
- how long the asset is depreciated in the organization;
- what methods of accounting for depreciation are selected (from those permitted by law);
- investment potential and organization plans;
- level of government inflation.
Formation Basics
The following methods of depreciation policy of companies can be distinguished:
1. Policy and selection of sources of allocation of financial resources.
The category under study should be based on the relationship with the financial strategy and capital accumulation in relation to the choice of the source of financing. All sources of investment are divided into internal and external. They completely depend on the scope of the organization, its financial situation, financing opportunities from its own resources, constant income and the level of depreciation.
Nowadays, enterprises almost always use their own and borrowed resources as sources of financing.
The combination of depreciation policies and strategies for creating money capital is the choice of sources. In this case, the introduction of borrowed funds is the least profitable. It is ideal to use your capital, not counting depreciation and amortization. The advantages of depreciation as a source of investment financing are the following reasons:
- degree of accessibility for the organization;
- cost level (depreciation is an investment resource that has no value and is “free” for companies).
2. Policy and investment planning.
In the course of the formation of the depreciation policy, the main condition should be consideration of the actions that are associated with the planning and management of depreciation, their transformation into a source of investment. The consequence of this is the growth of cash flows of the company.
This approach implies that the formation of depreciation policy will be carried out in closer connection with the element of monetary policy, and specifically with investments. Compilation of cash flows of the investment project is carried out taking into account different sources of financing, depreciation methods, as well as determining the terms for fixed assets.
These relations are aimed at creating investment projects for intended future investments.
This approach requires solving the following problems for the company:
- designation of the current project cycle, which will completely coincide with the period of use of the product;
- selection of investment sources;
- determination of methods for calculating depreciation.
More important, based on the beliefs of increasing the level of investment potential of the company, is the choice of a short term use of fixed assets and the predominant implementation of accelerated depreciation methods.
3. Politics and the formation, distribution of income.
The formation of the depreciation policy of the enterprise should occur in close connection with the strategy for generating income and their distribution. It is the result of determining the profitability of a company.
Write-off of depreciation, included in the cost of production, directly affects the profitability of the company. As a result, accelerated depreciation methods are more profitable from an investment point of view, they allow you to write off a huge amount of assets in the initial period of their use, at the same time increase industrial costs and, thus, have a negative impact on profitability. A fall in the absolute characteristics of income can lead to lower company profits.
The implementation of the elements of the depreciation policy is carried out on the basis of a preparatory study of the financial situation and in determining more optimal ratios of income and profitability of the company.
Main methods
At the present stage of company activity, cost is not an important factor that determines the price of products. It is much more dependent on market conditions, which cannot be changed by company policy. It turns out that depreciation is the only cost element that can be managed. As follows, the choice of a profitable depreciation method can significantly increase the company's profitability.
Linear way
This is the simplest and most commonly used depreciation method, which consists of a uniformly distributed asset value at a time that assumes that the asset is being used uniformly throughout its life. The calculation formula is as follows:
And r = (W p - W r ) / O u,
where A r is the annual depreciation rate;
W p is the initial value;
W r - residual value (price of the object at the time of its resale);
About U - life.
Decreasing method
In the framework of this method, it is assumed that the usefulness of an asset decreases over time, which means that depreciation in the first years is much higher than in subsequent years. In this connection, most of the depreciation is included in the first years of use of the asset. This approach is beneficial for the enterprise. When calculating the amount, the depreciation coefficient does not change, but the basis on which we rely is calculated on the basis of net cost, that is, after deducting existing write-offs.
The formula in the calculation of the depreciation policy of the organization is as follows:
A = ON * B,
where A is the annual depreciation expense;
HA - depreciation rate;
B - book value since the beginning of the year.
The simplest form is the doubling of the depreciation rate calculated by the linear method. The process continues until the residual value is reached.
Calculation by units (in physical terms)
It is assumed that the consumption of the object is the same for each unit of work (for example, a work of art, kilogram, hour, etc.), therefore, the amount of depreciation depends on the amount of work performed in a given period of time.
Calculation formula:
Ar = (W p - W r ) x (P r / P z ),
where A r is the annual depreciation rate;
W p is the initial value;
W r - residual value;
P p - real products;
P z - estimated profit.
Progressive method
According to this method, the depreciation amount increases with the end of the service life. This is due to the assumption that the greater the age of the OS object, the more funds must be allocated for its repair. Therefore, the cost of its operation increases. This method is beneficial for companies that suffer losses in the first few years.
Efficiency mark
The depreciation policy is considered effective if it helps to make up for the “saving” of income (that is, the function of preserving a significant part of it for the internal tasks of the company) and the existing funds of the organization, which can be paid as dividends. As a result, the interests of both the staff and the owners of the company are ensured: the former can hope for higher salaries, the number of jobs, the improvement of the technological process, and so on.
The productivity of the depreciation policy is determined by the monetary condition of the company. It is necessary to take into account such characteristics as:
- OS depreciation rate;
- capital intensity (when the price of fixed assets corresponds to one ruble of revenue from sales of products);
- profitability (how much income falls on the ruble of fixed assets).
The correct depreciation policy of the enterprise increases the investment attractiveness of the organization and its financial potential, which directly affects the growth of the company's income.
Public Sector and Depreciation
Allocate the following basic principles of development of the state depreciation policy:
- revaluation of the operating system must occur promptly and correctly;
- depreciation rates should be differentiated depending on the multifunctional purpose of the asset;
- accounting for the moral and physical deterioration of OS facilities;
- depreciation rates should be sufficient and promote extensive reproduction;
- depreciation charges for companies of all forms of ownership and OPF management should be used only on the basis of their multifunctional purpose;
- accelerated depreciation can be applied in all companies;
- policies are required to facilitate the renewal of fixed assets and accelerate the pace of scientific and technical progress;
- broader rights should be granted to commercial organizations in the area of their depreciation policy.
All these principles underlie the formation of the studied concept. Subject to the correct amortization policy of the state, companies can form a sufficient level of investment capital for expanded reproduction of fixed assets.
Conclusion
Depreciation policy is an inseparable part of the strategy of creating own cash resources, which consists in managing the write-off of deductions from the cost of fixed assets and intangible assets that are used to reinvest them.
When choosing depreciation methods, they proceed from the legislative framework in this area. The company decides to use the linear method or accelerated depreciation of fixed assets depending on the established accounting rules.