Most companies take depreciation on their IT Assets as a means of boosting cash flow. Almost all of our client companies have some scheme for IT Asset depreciation, although occasionally one will not.

Among those that do, there is sometimes a significant disconnect between their depreciation plans and the accuracy of their IT Asset inventory. How comfortable can you be depreciating millions of dollars of IT Assets if you’re not sure if they’re still in use or even if you still have them, and you aren’t sure what software is on them?

Disclaimer: This discussion of depreciation is meant for “IT people” NOT for tax experts - and so is a layman’s description. If you need actual tax advice – see your nearest CPA!!

So what is depreciation? Why do we care about it?

Depreciation is the expensing of the purchase price of an asset across its useful lifetime. It reduces tax consequences and therefore boosts retained cash.

For example: If two companies have identical revenue, expenses, cost-of-goods-sold, and the exact same IT computer assets, but if only one of the companies depreciates their IT computer assets, then a financial side-by-side might look like this:

 

  Company #1 Company #2
a. Revenue $1,000,000 $1,000,000
b. Expense    
c. Cost of Good Sold (COGS) $600.000 $600,000
d. Depreciation - $100,000
  _________________ _________________
Total Expense $600,000 $700,000
EBIT (a - b) $400,000 $300,000
e. Taxes [EBIT @ 35%] $140,000 $105,000
Cash = Revenue - COGS - taxes (a - c - e) $260,000 $295,000

 

Note that Company #1 pays a lot more in taxes because they failed to use the depreciation expense, and thus Company #1 has a lot less cash left over.

(There are preconditions for depreciation of IT Hardware Software, and a few variations on the duration period too, i.e., “straight-line vs “accelerated”. Also some separate rules for cloud-based assets. See your tax advisor.)

Anyway, it’s important for companies to have a good handle on their IT assets so they can accurately represent them in their depreciation plans, and can respond to IRS audits.

From time to time a client of ours, some of them very sizable, will inform us they currently manage their IT Asset inventory manually on spreadsheets.

Spreadsheets are VERY USEFUL tools to use for many things. Everybody uses spreadsheets for all sorts of things. But they aren’t an effective tool to use as a database for tracking a volatile IT Asset inventory, in a diverse, volatile, and far-flung IT environment, especially when the IT Asset inventory of hardware and software gets up into the millions of dollars of purchased goods. 

Companies desiring to accurately count their IT Assets for depreciation purposes must have a better near-real-time view of those IT Assets; a view that provides a high degree of confidence; a view such as might be provided by a professional ITAM inventory and ITAM process.

What’s your opinion on this? We’d love to hear from you!