[Greg]

The scenario:
A company uses tax depreciation (provided by an accounting firm) as its book depreciation. However, it uses Section 179 (below the limit) so it depreciates each asset in entirety when placed into use and does not amortize it over its useful life. Therefore, the company has fixed assets that still have a remaining useful life on its books but are fully depreciated thanks to using tax depreciation as its book depreciation.

Net Income (and other earnings ratios) were understated in prior years but are technically overstated in the current year.

I can’t find guidance stating tax depreciation can’t be used to calculate book depreciation but I’d think it’s crazy if Section 179 can count towards book as well (doesn’t seem like US GAAP to me). Any thoughts/advice on this scenario?

[kdawg22]

If the company is private, it should be okay. I have a few private clients that we issue reports for that use tax depreciation for book. When the report is issued you just have to add the below paragraph to the report.
“Accounting principles generally accepted in the United States of America require that fixed assets be depreciated over their estimated useful lives. The Company has computed depreciation on several fixed assets in accordance with the Modified Accelerated Cost Recovery System required for federal income tax purposes, which does not allocate depreciation to expense over the estimated useful lives of the assets. Management has not determined the effect of this departure on the financial statements.”

If you are issuing a report that has disclosures make sure you update how depreciation is calculated in the Fixed Assets Accounting Policies note as well

[Greg]

Thank you so much for your insight. It is a private company, however, the industry this company is in requires the data to be posted publicly. I've calculated the departure and it represents nearly 10% of net income for the current year.

[Author]

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