Depreciation

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 Determination of the amount
of depreciation

¡ the input price (the acquisition

price, the production costs, the
reproduction price)
¡ the life of a fixed asset

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 Accounting and tax depreciation
¡ A business prepares a depreciation plan
for each item of the depreciable fixed
assets containing the amount of
depreciation for particular items of assets
in particular years during the whole life.
¡ Two types of depreciation:
- accounting depreciation
- tax depreciation

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 Accounting depreciation
¡ Depreciation should reflect an average or
expected view of the decline in value of
an asset.
¡ According to the Act no. 431/2002 Coll.
of Accounting, depreciation is a part of
valuation of assets and represents
permanent reduction of the value of an
asset.
¡ The accounting unit must depreciate
tangible assets except for the stock and
intangible assets except for accounts
receivable.

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 Accounting depreciation
¡ A business unit determines a depreciation plan.
¡ The assets can be depreciated up to their book value.
¡ Tangible assets except for the stock are depreciated in
accordance with their wearing out corresponding with
normal conditions of their use.
¡ Intangible assets can be depreciated according to their
real useful life that can be even longer than five years
(goodwill, establishing expenses, costs of development
– up to 5 years!)
¡ The amount of accounting depreciation – determined
by a business itself, it is monthly carried to account
(tax depreciation – only once a year)
¡ The accounting depreciation must not be suspended.

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 Accounting depreciation
¡ Methods:
¡ STRAIGHT-LINE DEPRECIATION METHOD (LINEAR METHOD)
– allocates an equal amount to each year of the asset´s
expected life
¡ ACCELERATED DEPRECIATION METHODS (DEGRESSIVE
METHODS) – accelerate the assignment of an asset´s cost to
depreciation by allocating a larger amount to the early years
of its life
¡ PROGRESSIVE DEPRECIATION METHODS – the amounts of
depreciation are lower in early years of the asset´s life, then
the amount is increasing toward the end of the life. Rarely
used.
¡ OTHER METHODS may be used by a business, each should
lead to the reflection of real wearing out of assets.
¡ The amount of accounting depreciation exceeding the tax
depreciation cannot be included to the tax expenses for the
purpose of calculating the tax base !!!

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 Tax return depreciation
¡ Used when preparing a firm´s tax
return – specified by the income tax
act – significant for determining the
tax base
¡ the Act no. 595/2003 Coll. of
income taxes: „Depreciation is the
gradual inclusion of depreciation of
tangible and intangible assets to tax
expenses.“

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 Tax return depreciation
¡ Fixed (long-term) tangible asset – an
asset the input price of which is over
30 000 Sk, the operational-technical life
expectancy of which exceeds one year.
¡ Fixed (long-term) intangible asset –
an asset the input price of which is over
50 000 Sk, the operational-technical life
expectancy of which exceeds one year.

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 Tax return depreciation

¡ Technical upgrade of tangible and

intangible assets – expenses
incurred in respect of completed
extensions, additions, adaptations
of buildings or structures,
reconstruction and modernization
exceeding 30 000 Sk in the
aggregate for the tax period.

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 Depreciation of fixed tangible assets

The period of depreciation shall be:

Depreciation category Period of depreciation

1 4 years
2 6 years
3 12 years
4 20 years

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 Depreciation of fixed tangible assets
¡ The taxable party shall determine the method of
depreciation for each newly acquired tangible
asset which cannot be changed for the entire
period of depreciation.
¡ Tangible assets whall be depreciated up to the
input value or up to the input value increased by
a technical upgrade or up to the net book value
increased by a technical upgrade (in case of the
accelerated depreciation method).
¡ Yearly depreciation shall be rounded up to whole
Slovak Crowns.

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 Depreciation of fixed tangible assets

¡ STRAIGHT-LINE DEPRECIATION METHOD

Depreciation category Period of depreciation
1 ¼
2 1/6
3 1/12
4 1/20

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 Depreciation of fixed tangible assets

¡ ACCELERATED DEPRECIATION METHOD

Coefficient for accelerated depreciation

Depreciation category in the 1st year in subsequent years for increased

of depreciation of depreciation book value
1 4 5 4
2 6 7 6
3 12 13 12
4 20 21 20

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 Depreciation of fixed tangible assets

¡ The depreciation charges will be

calculated as follows:
(a) in the 1st year as the input price divided
by the applicable coefficient prescribed
for the 1st year,
(b) in subsequent years as two times the
net book value divided by the applicable
coefficient prescribed for the subsequent
years minus the number of years for
which the asset has already been
depreciated.

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 Depreciation of fixed tangible assets

2 (Vc − Op )
O =
k −r

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 Depreciation of fixed tangible assets

O ... yearly depreciation

Vc ... input price
Op ... accumulated depreciation
k ... coefficient of accelerated
depreciation prescribed for the
subsequent years
r ... number of years for which the
asset has already been depreciated

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 Depreciation of fixed tangible assets

¡ Accelerated method in case of technical

upgrade:
(a) in the year, in which the n.b.v. is
increased: two times n.b.v. divided by
the applicable coefficient prescribed for
the increased n.b.v.,
(b) in subsequent years: two times n.b.v.
divided by the coefficient prescribed for
the subsequent years minus the number
of years for which the increased n.b.v.
has already been depreciated with
reference to the increased n.b.v.

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 Depreciation of fixed intangible assets

¡ in accordance with the accounting

regulations (the Act on accounting)
up to the amount of the input price,
¡ they are not included to any
depreciation category,
¡ the method of depreciation is
chosen by a business.

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 Tax depreciation - general
¡ Tax depreciation may be suspended.
¡ It is a yearly category.
¡ It is a voluntary expense.
¡ Choosing the appropriate method of tax
depreciation with possibility to suspend
depreciation – a way of correcting the
amount of profit.
¡ In practice, businesses often do not use
the accounting depreciation, they identify
it with the tax depreciation.

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 The effect of capacity extension

¡ Also called the Lohmann-Ruchti

effect.
¡ Means:
- the production capacity can be
increased without additional capital
input;
- the development of the production
capacity is irregular.

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