Free amortization

Free amortization consists of the power that the tax agency of each country grants to a company to decide the rate of depreciation of its fixed or real estate assets, regardless of the amortization coefficients that it issues annually.

Otherwise, it is an option that allows the company to amortize its assets in a more realistic way, depending on the use they give it. Thus, from an accounting point of view, a computer cannot be amortized in the same way as a machine, since its depreciation is different. There are goods that lose value faster than others.

Free amortization. Accounting and taxation

Companies are obliged to amortize their fixed assets , for example their building or their vehicles. From an accounting point of view, this should be consistent with the loss of value due to its use. However, the Treasury of most countries issues tables of linear amortizationcoefficients every year . The free depreciation option allows them to account for depreciation based on usage and not on these tax indications.

Thus, the company can choose the amortization method that best suits reality and offer a faithful image of its economic-financial structure. On the other hand, you can also carry out tax planning appropriate to your interests (as we will see in the example), within the current law. In addition, it allows you to know the true value of the good at a given time as the difference between its acquisition price and depreciation.

Examples of amortization differences

Imagine that we have a machine that makes a certain product, for example, headphones. In turn, we know what its average annual production is, for example, 100,000 units and the supplier informs us that it usually has the capacity (use) to manufacture 1,000,000 pieces. On the other hand, the Treasury believes that in this case 20% per year should be amortized. Its acquisition price is € 100,000. Let’s see how it would be calculated:

We can see that the formula for accounting and tax calculation is simple, but in the first one the amount to be amortized annually is half. When making the table we see that there are a series of differences between both methods every year. The first five, accountingly amortize less than fiscally, that is, we account for € 10,000 but the Tax Agency allows us to deduct € 20,000.

As this item is an expense for us, we will deduct € 20,000 because that way, those years we will pay less taxes. However, in the next five years the opposite situation occurs and we will pay more taxes. At the end of the true shelf life , ten years, some differences will be compensated with the others. We are really only postponing the payment of taxes, something that can benefit us in certain circumstances.

 

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