Straight-line depreciation: a simple method for complex SaaS assets

Straight-line depreciation is a well-known method for calculating depreciation expenses. It’s based on the assumption that assets will lose the same amount of value each year they are in use. Because of that, it spreads an asset’s cost evenly across its lifespan, charging a uniform depreciation amount during each accounting period throughout its service life.

Though it works better with some assets than others, straight-line depreciation is a popular choice for finance leaders due to its simplicity and broad applicability. How does it work? Keep reading for a closer look at this depreciation method and why it can make accounting easier for SaaS businesses.

How can you calculate straight-line depreciation?

Straight-line depreciation is calculated using the following formula:

Annual depreciation expense = (cost - estimated salvage value) / estimated useful lifespan

In this formula, an asset’s “cost” refers to both the initial construction/purchase price plus any related capital expenditures. Meanwhile, your asset’s estimated salvage value is the proceeds you can reasonably expect from scrapping or disposing of it after its useful life. Finally, the estimated useful asset lifespan is the period in which an asset is expected to remain functional once you use it for the first time.

The pros and cons of straight-line depreciation

Straight-line depreciation offers a number of benefits:

• Wide applicability. Straight-line depreciation works with all sorts of assets. This is especially true in situations where asset obsolescence is determined solely by the passage of time.
• Ease of calculation. You’ll only need to know three variables to determine an asset’s depreciation rate when using straight-line depreciation.
• Simple amortization schedules. Amortization schedules based on straight-line depreciation are extremely simple, which can cut down on record-keeping work for your finance team.

However, straight-line depreciation is far from a one-size-fits-all solution. You’ll also have to account for potential issues like:

• Nonlinear depreciation. For some assets, finance leaders need to account for input, output or usage while calculating depreciation expenses. Of course, none of these factors come into play with straight-line depreciation.
• Varying estimates. In the straight-line depreciation formula, the values you use for useful life/salvage value will be estimates. Because of that, it may be hard to ensure that these variables are reliable.
• Accelerated obsolescence. Certain assets become obsolete at a faster rate early in their lifespans. Notably, this is the case for assets like vehicles and computers.

Where can you apply this process?

While straight-line depreciation isn’t always an ideal choice, there are several classes of assets where it commonly applies.

Equipment

Do you have equipment that simply loses value as it ages (instead of losing value due to usage or other factors)? If so, straight-line depreciation can be an excellent fit. 

Software

While depreciation is commonly associated with physical assets, internally developed or purchased software is typically amortized over its useful life. However, in some SaaS contexts, certain software may be treated as a depreciable asset depending on how it's categorized.

Intangible assets

The concept of depreciation doesn’t usually apply to intangible assets. However, you can still use a version of the straight-line depreciation process in these situations. 

For intangible assets such as financial licenses or intellectual property, the concept used is amortization, not depreciation. Straight-line amortization applies the same principles of spreading cost evenly, but the accounting classification remains distinct.

What other depreciation methods should you keep in mind?

As you can see, straight-line depreciation is just one way to spread asset costs out over time – and it rarely covers all your bases. Other notable depreciation methods include:

Units-of-production method

This depreciation method focuses on an asset’s activity, defining its useful life in terms of its anticipated output. With this method, you’ll determine depreciation charges by considering the number of units produced in a given period as a percentage of all units that will be produced over an asset’s useful lifespan. Then, you’ll multiply that by the asset’s depreciable base.

Declining-balance method

Under this depreciation method, finance leaders apply a consistent depreciation rate to an asset’s declining net balance. That creates relatively high depreciation charges in the earliest stages of an asset’s lifespan and lower charges as it approaches the end of its useful life. (A variation of this method, known as “double-declining balance”, multiplies the depreciation rate by two, resulting in an even faster depreciation process.)

Sum-of-the-years’-digits (SYD) method

This accelerated depreciation method uses a decreasing fraction of the depreciable base, providing lower depreciation charges as an asset ages. That fraction’s numerator equates to the number of years remaining in an asset’s useful life, and you can find the denominator by adding the years’ digits.

For instance, if an asset has a three-year service life, the denominator used in this depreciation method would be 3+2+1=6.

MACRS

When it comes to U.S. taxes, the IRS has stated that taxpayers need to use the Modified Accelerated Cost Recovery System (MACRS) when calculating asset depreciation. Unlike many other depreciation methods, ​​MACRS ignores salvage value in tax depreciation calculations, treating the full asset cost as recoverable. However, this doesn’t imply the asset has no residual value—just that it’s not included in the depreciation formula for tax purposes.

Finding and tracking depreciation in your ERP system

Though straight-line depreciation isn’t hard to calculate, relying on manual calculations for depreciation can still lead to problems. 

For example, let’s say your SaaS company’s finance team uses traditional spreadsheets of depreciation tables to track your business’s depreciable assets. In that case, the people on this team could easily make errors while entering data. Even if they don’t, it’s still inefficient and takes time away from more high-value activities.

If your company uses NetSuite as its ERP system, your finance team’s members shouldn’t have to calculate straight-line depreciation on their own. With NetSuite’s accounting features, you can automate depreciation work – eliminating human error and freeing up your staff members’ schedules in the process. 

Meanwhile, adopting the NetSuite Fixed Assets Management add-on can help you ensure your asset inventory and depreciation are aligned, your depreciation rules are being applied consistently and your records are accurate.

Unlock NetSuite’s full potential with ERP-embedded finance

Straight-line depreciation is just one of the calculations NetSuite can track for finance teams,  and by leveraging automation, it can help you keep all your financial data clean and accurate. And if you adopting an ERP-embedded finance strategy with native SuiteApps, you can eliminate spreadsheets, multiple logins, errors and extended month-end closes completely.

Zone & Co is the only developer offering multiple workflows with native SuiteApps for finance teams that are fully embedded in NetSuite. To learn more about how Zone’s SuiteApps can revolutionize your financial systems, book a demo today.  

“I would recommend ZoneReconcile to any NetSuite user. I can’t see how you can run NetSuite effectively without it, and I certainly cannot see any situation where we do not use the tool.” – Kate Callender, CFO at BLUNT Umbrellas