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Depreciation & Inflation Item General introduction

Description In the Simfi simulation, there are several long term assets, subjected to depreciation, which are: 1. Headquarter for 50,000 fixed, depreciation rate 4% 2. Equipment for 25,000 fixed, depreciation rate 4% 3. IT Investments-variable depending on participants’ decisions, depreciation rate 20% The amounts for headquarter and equipment are hard-coded in the simulation and cannot be set by the trainer. The same goes for the depreciation rates.

Role in Simfi Where?

Depreciation

The depreciation expenses are booked under administrative expenses, in the profit and loss statement. Deprecation and inflation affect the value of long term assets and equity Administrative expenses: Financial statement > Profit and loss > Operating expenses Inflation adjustments: Financial statement > Profit and loss > Non-operating expenses Net property and equipment: Financial statement > Balance sheet > Long term assets Depreciation rates are set on an annual basis. The depreciation expenses are charged on a quarterly basis. The value of the asset at the end of the quarter is calculated in the following way:

The 0.25 power expresses that this is a quarterly rate. The actual depreciation can be calculated by subtracting the current quarter from the previous quarter:

Investment

Value at beginning of quarter

Depreciation

Q0

50,000.00

0

Q1

49,492.32

507.68

Q2

48,989.79

502.53

Q3

48,492.37

497.42

Q4

48,000.00

492.37

Depreciation Rate 4%

For the participants it is possible to make investments in IT. These investments will lead to a competitive advantage in the acquisition of new business. The investments should be taken into account for depreciation. It is assumed that the investments take place at the beginning of the quarter, in which the investment decision is made and the depreciation is calculated for the complete quarter. The asset value is increased with the value of the investment. New Investment Q0

-

Value at beginning of quarter 25,000.00

Depreciation

Depreciation Rate

Q1

5,000.00

28,372.25

1,627.75

Q2

-

26,832.82

1,539.43

Q3

-

25,376.91

1,455.91

0

20%


Q4

-

24,000.00

1,376.91 6,000.00

Inflation

Inflation is included in the simulation and affects the value of long term assets. The inflation rate is set by the trainer. Inflation has the following effects in the simulation: 1. The value of long term assets increases with the inflation rate 2. The value of equity increases with the inflation rate. The inflation rate leads to an increase in the value of long term assets as follows:

If we ignore the depreciation, inflation has the following effect on the value of long term assets:

Value start quarter Q0

-

Value end quarter ignoring depreciation

Depreciation Rate

Depreciation

25,000.00

0

Q1

25,000.00

25,124.07

-

Q2

25,124.07

25,248.76

-

Q3

25,248.76

25,374.07

-

Q4

25,374.07

25,500.00

-

20%

Inflation Rate 2%

Negative inflation rates, or deflation, cannot occur in the simulation. If the asset value increases, equity will increase with a similarly. This gain is booked not only in the balance sheet, but also in the profit and loss statement under inflation adjustment, as negative costs, or income. Without long term assets, equity also increases due to inflation. This is a different kind of inflation correction which should not be confused with the inflation correction, due to the increase in value of long term assets. If the equity value increases (not due to inflation of long term assets), this increment should not only show up in the balance sheet, but also in the profit and loss statement. The increase in monetary value is booked in the balance sheet under reserves / retained earnings /accumulated losses. In order to neutralize this inflation gain, an additional cost of the same monetary value is incurred in the profit and loss statement, under Inflation adjustment. This will reduce the profit and the effect on the balance sheet is neutralized. Note that all long term assets are consolidated under the balance sheet item ‘net property and equipment’.


12 Inflation & Depreciation