The Written Down Value (WDV) Method, also known as the Diminishing Balance or Reducing Balance Method, calculates depreciation on the remaining book value or non-depreciated balance of an asset. A fixed rate of depreciation is applied to the reducing book value. Therefore, depreciation is higher in the earlier years and gradually decreases in later years.
Advantages of Written Down Value Method
Higher Depreciation in Earlier Years
The main advantage of the Written Down Value Method is that it charges higher depreciation during the earlier years of an asset’s useful life. As the asset’s book value decreases, the depreciation amount also decreases in later years.
This pattern is suitable for assets that lose a larger portion of their value during the initial years of use. The Double-Declining-Balance Method, which is an accelerated form of the reducing balance method, specifically provides an accelerated rate of depreciation in the earlier years.
Better Matching of Cost with Benefits from Asset Use
The Written Down Value Method may provide a better matching of asset cost with the economic benefits obtained from the use of the asset.
Certain assets may provide greater benefits or lose more value during the earlier years of their useful lives. In such cases, charging higher depreciation in the initial years and lower depreciation in later years may more accurately represent the pattern of benefits obtained from the asset.
The method may therefore be a better representation of the depreciation pattern of certain assets, particularly vehicles.
Depreciation is Calculated on Reducing Book Value
Under the WDV Method, depreciation is calculated on the remaining book value of the asset rather than its original cost every year.
The closing book value of one accounting year becomes the opening written down value for the next year. The same depreciation rate is applied to this reduced amount.
Therefore, the method systematically reduces the carrying amount of the asset over its useful life.
Suitable for Assets with Accelerated Reduction in Value
The WDV Method is suitable for assets that experience a faster reduction in value during their earlier years.
The method recognises a greater depreciation expense when the asset is newer and gradually reduces the depreciation charge as the asset becomes older.
Thus, the method may better represent assets whose depreciation pattern is not uniform throughout their useful lives.
Book Value is Not Reduced Below Salvage Value
Under the Double-Declining-Balance Method, the salvage value is not considered while determining the annual depreciation amount. However, the book value of the asset is never allowed to fall below its salvage value.
Depreciation stops when the salvage value or the end of the asset’s useful life is reached. This ensures that the remaining book value does not fall below the expected residual amount.
Possibility of Conversion to Straight Line Method
The Double-Declining-Balance Method may not always fully depreciate an asset by the end of its useful life. To deal with this situation, declining balance depreciation and straight-line depreciation may be calculated each year and the greater depreciation amount may be applied.
This approach allows a change from the declining balance method to the Straight Line Method at an appropriate stage in the asset’s useful life.
Such conversion helps allocate the remaining depreciable amount over the remaining useful life of the asset.
Disadvantages of Written Down Value Method
Unequal Depreciation Expense
Under the WDV Method, the amount of depreciation is not equal every year. A higher amount is charged in the earlier years and a lower amount is charged in later years.
This makes the depreciation expense less uniform compared with the Straight Line Method, under which the same amount of depreciation is charged every year.
The changing depreciation amount may require a fresh calculation based on the opening written down value of each accounting period.
More Calculation is Required
The Written Down Value Method requires depreciation to be calculated on the reduced book value of the asset every year.
The closing book value of the previous year must first be determined and used as the opening written down value for the next year. The applicable depreciation rate is then applied to this amount.
Therefore, the calculation may be more involved than the Straight Line Method, where annual depreciation generally remains constant.
Asset May Not Be Fully Depreciated by the End of Useful Life
The Double-Declining-Balance Method does not always depreciate an asset fully to its residual value by the end of its useful life.
Because depreciation is calculated on a continuously reducing balance, the remaining book value may continue to decline without reaching the required residual value within the estimated period.
For this reason, some methods calculate straight-line depreciation and declining balance depreciation each year and apply the greater amount.
Need for Adjustment in the Final Period
The normal depreciation rate cannot always be applied in the final year because doing so may reduce the book value below the asset’s salvage value.
For example, if the remaining book value is $129.60 and the salvage value is $100, only $29.60 can be charged as depreciation. The full depreciation amount based on the normal rate cannot be charged.
Therefore, an adjustment may be required in the final depreciation period.
Salvage Value is Not Used in Annual Depreciation Calculation
Under the Double-Declining-Balance Method, the salvage value is not considered while determining the annual depreciation expense.
Although the book value cannot be reduced below the salvage value, the annual depreciation calculation is based on the remaining book value and the depreciation rate.
Therefore, the asset’s salvage value must be separately monitored to ensure that excessive depreciation is not charged.
May Require Change in Depreciation Method
Since declining balance depreciation may not always fully depreciate the asset by the end of its estimated useful life, the business may need to change from the Declining Balance Method to the Straight Line Method at a suitable stage.
This requires the calculation and comparison of depreciation amounts under both methods.
Exam Focus
The major advantage of the Written Down Value Method is that it charges higher depreciation in earlier years and lower depreciation in later years. It may provide a better matching of asset cost with benefits for assets that lose value more rapidly during the initial years, such as vehicles.
Under the WDV Method, a fixed depreciation rate is applied to the reducing book value of the asset. Therefore, the rate may remain constant but the amount of depreciation decreases every year.
The main disadvantages are unequal annual depreciation, additional yearly calculations, and the possibility that the asset may not be fully depreciated to its residual value by the end of its useful life.
The book value of an asset must not be reduced below its salvage value. In some cases, the depreciation method may be changed from the Declining Balance Method to the Straight Line Method during the asset’s useful life.