Download Depreciation Consulting Best Practices

Consider this observation from Satya Nadella, Microsoft's CEO, who said, "Every piece of technology in our economy, our society, is going through a rapid change. And it's the cumulative effect of that that is changing the texture of business." An essential but often neglected aspect of this change is understanding accounting practices including Depreciation.

Depreciation, at its most fundamental level, refers to the decrease in value of assets over time due to wear and tear, obsolescence, or age. However, for an organization's CFO, it is not so simple—it's more than an accounting entry, it is a strategic business factor.

Depreciation touches areas as diverse as tax planning, budgeting, capital planning, and, hence, it is vital for business leaders to fully understand it. According to Deloitte's CFO Insights series, failure to manage asset depreciation correctly can have a direct impact on a company's bottom line, leading to a potential loss of millions of dollars annually.

Economic Impact of Depreciation

The latest report from the Bureau of Economic Analysis (BEA), part of the U.S. Department of Commerce, highlighted that the capital consumption adjustment had risen to 2.1% of GDP, most of which can be attributed to Depreciation. This underlines the sheer economic size and importance of managing it correctly.

Impact on Tax Planning

From a tax planning point of view, corporations can leverage various depreciation methods such as straight-line or decreasing balance to minimize taxable profits and hence reduce their tax liability—another reason why overseeing depreciation correctly is so crucial. Failing to do so might mean leaving valuable tax offsets on the table, which could undermine the corporate goal of optimizing shareholder value.

Best Practices for Depreciation Management

Here are some best practices according to the prestigious McKinsey Group:

• Accurate Inventory: Keep an accurate inventory of all assets. It will help in estimating costs and planning budgets.
• Frequent Reconciliation: Carry out frequent reconciliation of physical assets with the accounting records.
• Appropriate Depreciation Method: Select the most appropriate depreciation method that best reflects how the asset's future economic benefits will be consumed by the entity.
• Keep an Eye on the Changing Landscape: Laws, regulations and tax rules can change. Keep up-to-date with changes and make adjustments as necessary.

Role of Technology in Depreciation Management

The synergy between technology and business strategy is a critical factor in managing depreciation. The insights gleaned from the proper use of technology can enable critical strategic decisions. Advanced software solutions and automated asset management systems can collect, organize, and analyze data on the lifespan, maintenance costs, and depreciation rates of every company asset.

Goldman Sachs's 2020 report on The Future of Finance underscores that companies who harness the power of technology in finance are better placed to streamline processes, including depreciation calculation, to become more cost-efficient in the long run.

Think Strategically About Depreciation

Embracing depreciation calculation as a strategic tool rather than an unavoidable accounting fact allows for better capital planning, strategic decision-making and complements overall Strategic Management. Synchronizing these elements is crucial for C-level executives to maintain corporate health and achieve Sustainable Growth.

As we navigate the rapid change in today's business environment, a comprehensive understanding of depreciation and its strategic application can prove to be a competitive advantage, leading to better financial health and stronger market position in the long run.