Different organizations employ different methods in their depreciation process, depending on their needs. Among them, there is the Written Down Value Method that is commonly used. This method involves identifying the rate that is fixed for an asset and then halving the value each year. The depreciation amount is deducted from the written-down value, which is the cost of the asset less the amount of depreciation, and written off as a loss on the debit side of the profit and loss account. The reduction of the asset’s value varies every year because the decrease is based on the book value and not the initial value. 

 Why Do Businesses opt for the Written-Down Value Method When Depreciating Assets? 

Assets can lose value over time due to wear and tear, as outlined in Section 32 of the Income Tax Act of 1961. This section addresses depreciation, and the Written Down Value (WDV) method is used to calculate it for tax purposes. The Act permits depreciation calculation for both tangible assets like buildings, factory plants, and machinery, as well as intangible assets such as trademarks, patents, and franchises. 

So, how does calculating Written Down Value depreciation help? If you utilize an asset for more than 180 days within a year, you’re eligible for a 50% depreciation allowance, regardless of whether the asset was used in the previous year. Additionally, if you’ve leased the asset to a lessee, you can still claim deductions under the Income Tax Act. This flexibility in depreciation rules benefits taxpayers and encourages efficient asset utilization. 

WDV depreciation is preferred for tax purposes, which is a key benefit for the companies getting involved in this method. It is essential to establishing the exact profit and loss margins. When WDV depreciation is not considered, profitable organizations may tend to overestimate their actual profits and therefore face financial losses due to wrong valuations. Thus, the incorporation of WDV depreciation calculations provides far more accurate financial evaluations, which benefits the companies. 

Formula for Calculating Depreciation 

 The formula for calculating the Written-Down Value is quite simple.                     

  

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 Where:  

  • Cost of Asset: This refers to the initial purchase price of the asset, covering any extra expenses such as shipping and installation to put it into operation.
  • Accumulated Depreciation: Depreciation signifies the decline in an asset’s value over time due to factors like wear and tear or obsolescence. It’s computed yearly using different methods (e.g., straight-line, or declining balance) and cumulated over time. 

 

Advantages of the Written Down Value (WDV) Method 

Great for Rapid Depreciation: Perfect for industries with fast-evolving tech or high obsolescence, like computers or vehicles. 

Flexible Accounting: Adapts to varying depreciation expenses over the asset’s life, ideal for assets with uneven value decrease or higher early returns. 

Accurate Valuation: Reflects the natural decline in value realistically, accounting for wear, tear, and tech obsolescence. 

Market Value Reflection: Aligns asset values with market conditions, essential for decision-making and analysis. 

Tax Benefits: Offers significant tax advantages by allowing higher early-year depreciation, reducing taxable income and liabilities. 

 Disadvantages of Written Down Value (WDV) Method 

Inconsistent Reporting: Depreciation expenses fluctuate, making it hard to compare financial performance across periods. 

Subjective Estimates: Useful life and residual value estimations are subjective and can skew calculations. 

Complex Application: More complex than simpler methods like Straight-Line, requiring detailed analysis of asset cost, residual value, and useful life. 

Distorted for Long-Life Assets: Long-life assets might show lower initial depreciation, misrepresenting their true value drop. 

Need for Reassessment: Regular checks are necessary to account for changes in technology, market conditions, and unexpected factors. 

 

Questions to Understand your ability 

Ques1: What’s the key feature of the Written Down Value (WDV) method? 

  1. Depreciation based on the asset’s original cost
  2. Fixed rate depreciation on the asset’s decreasing value
  3. Constant depreciation throughout the asset’s life
  4.  Depreciation only in the final year
 

 Ques2: Why do businesses go for the WDV method for fast-depreciating assets? 

  1. Simplifies reporting
  2. Shows value increase over time
  3. Accurately depicts quick value drop in early years
  4.  Ignores residual value
 

 Ques3: What’s the tax advantage of the WDV method? 

  1. Uniform depreciation expenses
  2. Larger deductions in later years
  3. Higher depreciation early on, reducing taxable income
  4.  Deductions only at the asset’s end of life
 

 Ques4: What’s a downside of the WDV method? 

  1. Consistent reporting
  2. Easier than Straight-Line
  3. Fluctuating depreciation expenses
  4. No need for reassessment
 

 Ques5: How do you calculate depreciation with the WDV method? 

  1. Subtract residual value from initial cost, divide by useful life
  2. Apply fixed rate to original cost each year
  3. Subtract accumulated depreciation from cost each year, apply fixed rate
  4.  Depreciate the entire cost in the first year
 
Summary 

WDV, showing the actual cost of an asset over its useful life, is a standard method of calculating depreciation for fiscal and taxation requirements. It reduces the asset value annually through a reduction from the WDV, not the cost of the asset acquired. This method is especially suitable for industries where assets deteriorate rapidly or the assets’ valuation is inaccurate under historical cost because it provides the exact point-in-time valuation closest to market value. Also, it is a tax- break that features higher depreciation in the earlier years. But it does not provide all of the comfort; thus, it’s not all plain sailing. WDV can get the financial reports wrong with implausible depreciation, involves guesswork on asset lifespan and its residual value, is complicated compared to SL, and distorts the values of long-life assets. It also requires periodic revisions in order to keep the issue of depreciation on track. 

 

 

FAQ’s

WDV method hits depreciation at a fixed rate on the asset’s decreasing value each year, not just its original cost. 

It nails the quick drop in value during early years, matching the asset’s wear and tear perfectly. 

WDV lets them snag bigger depreciation deductions early on, cutting down taxable income and saving on taxes. 

Depreciation = (Cost of Asset – Accumulated Depreciation) * Depreciation Rate. 

Flexibility, precise asset valuation, realistic market value reflection, and sweet tax benefits. 

Inconsistent financial reporting, subjective guesses, complexity, potential distortion for long-life assets, and constant reassessment needed. 

It causes fluctuating expenses, making period-to-period comparisons a pain. 

Tech changes, market swings, and other factors can tweak the asset’s life and value, so regular updates keep depreciation accurate.