The "indexed replacement value" component makes it possible to calculate replacement values for assets, and to use replacement values as the basis for calculating depreciation. You determine the replacement values using index series.

The replacement value can be used in certain situations as the basis for depreciation for one of the following reasons:

• In certain countries, where the rate of inflation is very high, depreciation based on replacement value is allowed.
• It makes sense for reasons of pricing policy to take price changes of investment goods into account for cost accounting purposes. For example, a company concerned with inflation accounting can use this method to take actual reduction in the value of assets into account in its pricing policy.
• For companies interested in the preservation of real asset values, they can use depreciation from replacement value as the basis of their reserves policy.

Therefore, the cost-accounting depreciation area is set up in the standard system so that you can manage replacement values there. Current depreciation based on the replacement value is then periodically transferred to cost accounting when you carry out the depreciation posting run.

However, it is also possible to define replacement values in depreciation areas that automatically post to the general ledger. In this way, the depreciation posting program automatically posts depreciation values, as well as changes to the asset balance due to revaluation (both upward and downward), to Financial Accounting.

The system determines the replacement value of an asset using the index series that you define (Periodic Processing) and specify in the individual master records.

The calculation of the current replacement value can take place in two ways. It can be determined from

• The replacement value of the previous year
• The APC in an historical acquisition year (historical calculation)

If you set the indicator in the depreciation area definition, the system will also calculate any revaluation (upward or downward) of accumulated depreciation from previous years (backlog depreciation). Set this indicator if you want the system to index (revalue) not only the acquisition value, but also the value adjustments (accumulated depreciation) from the past, when it calculates the replacement value.

The graphic shows the calculation formulas that the system uses for the calculation of replacement value and backlog.

Depending on what year the index figures start, the index series can be divided into two types:

• Age-dependent index figures are based on the n-th year that an asset belongs to the company. Age-dependent figures represent a yearly rate of change from the point in time when the asset was acquired. The year 1 has the index figure 100.
• Year-dependent index figures are based on a specific fiscal year, and represent a rate of change from that base fiscal year. This base year has the index figure 100.

You can use one index to reflect both inflation and technical progress, or you can set up two separate index series for these situations. For example, you can specify a year(inflation)- dependent and an age(progress)-dependent index for determining replacement value (in the detail screen of the depreciation area). When determining the replacement value, the system adds the index figures of the two index series.

Since the system manages revaluation separately from the original acquisition value, you can see these values separately in reporting. Note that the system only automatically revaluates the asset values that existed at the start of the fiscal year. The system does not take transactions in the current fiscal year into account. In addition, the revaluation amounts that the system calculates on the basis of the current index figures are always related to the entire fiscal year (just like planned depreciation).

When defining an index series, first select an appropriate index class. The following specifications are made in the index class:

• Whether the index series is year-dependent or age-dependent
• Whether the replacement value should be calculated historically.

SAP supplies the corresponding index classes. When creating an index series, enter index figures according to age or year. Also enter the percentage rate for the increase of asset values to be used for simulation of future fiscal years. Note that the simulation percentage rate defines an increase. Entering a simulation percentage rate of "110" means, for example, an annual increase of 10%.

If you want to use replacement values as the basis for calculation within a depreciation area, be aware of the following:

• When defining the depreciation area in question, allow for revaluation

• of acquisition and production costs
• of accumulated depreciation from the past (backlog depreciation)

• Specify (if necessary) that the following should be posted periodically to general ledger accounts

• Depreciation (depreciation posting program)
• Changes to the asset balance due to revaluation (depreciation posting program) and
• Changes to the asset balance due to transactions (asset value posting program)

• Enter a depreciation key for this depreciation area with an internal calculation key that uses the replacement value as the base value.
• Enter the key of an index series for the depreciation area in the asset master record or in the asset class (you can specify a second index series in the detail screen of the particular depreciation area).
• Maintain your index series by periodically entering current index figures.