bean counting...

[ecoathlete]

Hi all,

A question re cost accounting:

I'm a little unclear on the relationship between book or market depreciation, and maintenance overhaul reserve.

Let's say I buy an R44. Being prudent, I want to apportion the 100, 2000, and 2200 overhaul costs across the actual operating time. I would also want to depreciate the value of the aircraft over, say, 5-years. But with the maintenance reserve, if I spend that at the appropriate time, then effectively (not really but for the sake of the argument) I have a 'new', or zero time aircraft. So it seems to me that if I apportion both depreciation AND maintenance overhaul costs, it unnecessarily adds a significant cost per hour, or double-dipping.

Anyone provide some advice as to how they do it?

Many thanks.

[HillerBee]

After overhaul you're aircraft is not completely new. You have to depreciate if you want realistic figures. On the other hand the prices on new aircraft go up all the time and after 3 years the worth might be the same as you paid.

We don't depreciate in calculating the hourly cost. However I count 10% of the invested money on a yearly basis as interest (so being cost really). If we'd invested that money differently we would make about that as well.

So investing $400,000.00 means I have to add $40,000 to the yearly cost.

[Whirlygig]

If you depreciate an asset over 5 years, it means that in five years time you reckon it has zero value. Since that is clearly not true, 5 years is not a good depreciation rate to use.

Depreciation represents the diminution in value of an asset over its useful economic life. It is based on the capital cost of the asset. Maintenance reserves represent the cost of keeping the asset.

So, how long do you plan to keep the aircraft and, with its appropriate maintenance schedule (which you accrue for and put in a reserve), what will be its value in ten years time when you plan to sell it or scrap it. Then, you take that value, say £50,000 from the origianl purchase cost (to you),say $120,000, leaving £70,000. You depreciate the helicopter over 10 years at £7,000 per annum.

I have absolutely NO experience at owning or operating a R22 and these are general accounting pineapples. If there are any particular quirks that you wish to factor in, let me know!

Cheers

Whirls

[Arm out the window]

diminution - must be a word written by lawyers and accountants meaning reduction? Gotta love contract wording. :)

[Whirlygig]

Odd that :p I have given the Accounting Standards definition :ok: It just trips off the tongue.

Cheers

Whirls ACA

Now, if anyone wants the accounting standards definition of a finance lease, I am more than happy to quote it!

[headsethair]

Here in the good old Mother country we have to agree depreciation of business assets with Her Majesty's Revenue & Customs. One way of depreciating an R44 is one-thirteenth of its cost per annum for 12 years. Or you can choose to depreciate at a set figure per hour - which I believe for a standard R44 is around £60 or Aus$ 145
The basis of all this, of course, is the 2200 lifetime or 12 years, whichever comes first.
These costs are in addition to your FOC & DOC.
Not certain what you mean by "2000" hr rebuild. For DOC you should allow for at least a 50hr and 100hr - and some places like to change the oil every 25hrs. (Some R44s also use a litre of oil evey 3hrs) With a 2 yr warranty, new machines are initially cheaper to run - but do make some sort of allowance for "exceptionals" once the 2 years are up.

[Whirlygig]

Here in the good old Mother country we have to agree depreciation of business assets with Her Majesty's Revenue & Customs
What absolute codswallop!

A business can depreciate its assets at whatever rate it chooses but only to the extent that the business's auditor (if it is required to have one) is satisfied that the depreciation rates used are reasonable.

The taxman (my very good friends at HM Revenue & Customs) will "disallow" depreciation for tax purposes (whether it be income tax for self-employed/partnerships or corporation tax for limited and public companies). Instead he or she gives the business "capital allowances" on its assets. The rules regarding these allowances are set in legislation and are not subject to "agreement". There may be circumstances where the Taxes Acts are ambiguous and in those circumstances, quite often a different Inspector will have a different interpretation of the legislation. In rare circumstances, a case could be heard before the Commissioners in order to decide the correct taxation treatment.

The reason for this is that one business (making equal gross profit) could decide to depreciate its helicopter over 20 years (thus making a bigger profit since the depreciation charge is a smaller amount) whilst the other could decide to depreciate over five years making less profit.

This net profit after depreciation is oonly a paper figure and so the company with the five year depreciation rate would pay less tax on a lower profit. So, HMRC "add back" the depreciation charge to the net profit and, after the capital allowances (which are fixed for all businesses), tax is paid on that figure.

The main capital allowance given is 25% on reducing balance, i.e. buy a helicopter for £100,000, after one year its tax book value is £75,000, after two tears £56,250, after three £42,188 etc etc. This allowance is given on all general assets (except expensive company cars, land and buildings etc).

Cheers

Whirls

[headsethair]

absolute codswallop!........There may be circumstances where the Taxes Acts are ambiguous and in those circumstances, quite often a different Inspector will have a different interpretation of the legislation.

So, in other words, an agreement is made.....which is what I said. However, none of this exchange is much use to someone in Australia. But it gives "Whirls" a chance to puff-up the chest and speak out.

I speak facts. Not codswallop. You may check these facts with any R44 operator. By all means depreciate your helicopter over 5 years - but the sensible approach is to follow either the 12-year or the per flying hour approach as agreed with HMRC.

[Whirlygig]

Having your case heard in front of the Commissioners is hardly "agreement"! I inferred from what you initially posted that you meant you were supposed to agree your depreciation rates in advance with the Revenue. You don't. Depreciation is not allowable for tax purposes. Whether this is relevant or not to someone in Australia, I apologise but you stated something about UK tax legislation that was incorrect.

If however, by agreement you mean that you submit your tax computation and the Inspector disagrees and you argue back quoting whatever section number of the relevant act etc etc, then that is not my definition of agreement!

Cheers

Whirls

[headsethair]

Happy Easter, Whirls. And you can "infer" from that whatever you like! :D

A business can depreciate its assets at whatever rate it chooses but only to the extent that the business's auditor (if it is required to have one) is satisfied that the depreciation rates used are reasonable.

So - that's not ultimately an agreement either ? I'm sure you're great with figures.....but I'm having trouble with your words.

[Whirlygig]

Whichever country you're in (and I know the rules are similar in Australia), the profit a business makes as per its accounts, is not the same as the profit on which the business is taxed. The auditor does not agree the tax - that is a separate role.

A business may well "agree" (not a word I would use) its depreciation with its auditor but that has nothing to do with the tax man.

Cheers

Whirls

[SASless]

it gives "Whirls" a chance to puff-up the chest and speak out.

And there I was...thinking my Whirls had some help from a Hollywood surgeon and all it was is auditor talk!

[Whirlygig]

At the risk of digging myself into a hole; Whirls is exactly as Mother Nature intended :O . The use of the definite article though is interesting :}

Cheers

Whirls

[Gas Producer]

Ecoathlete,

While I am no longer in Aus, I am originally from there. Prior to taking up flying, I spent just a few years in finance.

There are several elements in your question. I will do my best to make this quick and painless.

The Australian Tax Office and Australian Accounting Standards will require that you depreciate any asset employed in the generation of revenues. There is some scope for you to nominate the rate of depreciation, but it must be 'reasonable' and reflect the realistic change in economic value of the asset over time.

Repair costs and minor maintenance costs attributed to the asset are treated simply as expenses, and represent a deductible expense in the year in which they are incurred.

If you spend some money IMPROVING the asset then you are changing its capital value, as such book depreciation will need to be adjusted for the amount of value you are now adding to the asset. eg. an overhaul.

Putting aside some money for your future overhaul is an expense in the year in which it is incurred, but gives rise to a provision for future use. This, in accounting terms, simply recognises that although an overhaul is a 'point in time' event, it occurs as a result of the prior usage of the asset.

All I have discussed here is related to simple 'book' accounting. In the real world the market place tends to dictate the worth of a given asset - in any industry. It is appropriate to compare your book or 'written-down' value to market value from time to time to ensure they are not grossly mis-aligned. Simple entries to your books can be made for this adjustment.

There is another complexity. The main reason a business will WANT to depreciate an asset is because it will lower pre-tax profit in book terms without actually spending any money! The tax office has it's own set of allowable depreciation schedules, and these are asset and industry dependent. You can depreciate in any way you like for your pre-tax profit for your books, but the tax office will require you to utilise their schedules as they apply to your business to determine the tax payable for a given financial period in your tax return. This is now getting into tax effect accounting.

The depreciation is a cost. The maintenance overhaul amount is a cost, you're just recognising it as a cost now in small chunks rather than take one big hit to your pre-tax profit in some future year.

I'm quite sure this will have put other pruners to sleep by now. If you would like more maybe PMs may be appropriate. Oh, and secure the services of a good tax-specialist accountant. His, or her, fee will be more than recovered by the tax they will save you if you get all this done properly.

Regards,

GP

[Capn Notarious]

Whilst accountancy, cost, depreciation and service charges, are a necessary component of helicopter operations: will you be pulling pitch and flying this week?

[Whirlygig]

GP - liked your answer; as I thought, similar principles to the UK. I do also know that my good friends in the USA have some very strange accounting principles (viz Enron/WorldCom :ouch: ) involving current cost accounting and inflation accounting. I'm not even going to dare to comment!

I shall possibly be terrorising the Norfolk airspace yes!

Cheers

Whirls

[ecoathlete]

...a very helpful discussion, and much appreciated.

cheers

[Gas Producer]

Whirls,

Mmmm, current cost accounting and inflation accounting . . . yes, definitely not the right forum for that sort of thing. I think we've both given ecoathlete enough for him to now have a meaningful discussion with a tax pro who can help him specifically.

Capn Notarious,

I have been pulling pitch and flying for over 2,000 hours, certified on four different types and have a good bit of night flying under my belt.

While the flying seems most important to the majority of you frequenting this site, and there's absolutely nothing wrong with that, the only reason you get to do it is because the operation you work for is financially viable.

There are many hands in the office, in the hangar and elsewhere that enable a privileged few of us to do what we do.

If somebody doesn't manage the dollars nobody is going to do any flying.

GP