18.5.2. Written Down Value (WDV) Method

Depreciation is charged at a fixed percentage on the book value of the asset.

The Written Down Value (WDV) Method is a way of accounting for the depreciation of an asset. Unlike some other methods where a fixed amount is deducted every year, the WDV Method calculates depreciation as a percentage of the book value of the asset at the beginning of each year. This means that as the asset's value decreases over time, the depreciation amount for each following year will also decrease.

Imagine you buy a new smartphone for $800. In the first year, you might depreciate it by 20$160. However, in the second year, the book value of your phone is now $640 (the original value minus the depreciation). If you continue with the same percentage, your depreciation for the second year would be 20$640, which is $128. This pattern continues, showing how the depreciation cost changes as the asset ages.

Formula: Depreciation = Book value at beginning of year × Rate of Depreciation

To calculate the depreciation using the WDV Method, you simply take the book value of the asset at the start of the financial year and multiply it by the predetermined rate of depreciation. This formula helps in determining how much value is lost each year due to the usage of the asset. The rate of depreciation can vary based on the asset type and its expected life.

Consider a company that has a delivery truck with a book value of $50,000 at the start of the year and a depreciation rate of 15$50,000, which is $7,500. This means at the end of the year, the truck's book value would decrease to$42,500 after accounting for depreciation.

Results in higher depreciation in initial years.

One notable consequence of the WDV Method is that it results in higher depreciation expenses in the early years of an asset's life compared to the later years. Because you're always applying the depreciation rate to the current book value, which is larger in the initial years, the amount for depreciation will be higher initially. As the asset ages and its book value decreases, the monthly or yearly depreciation amount conversely diminishes.

Think of a car that loses a significant part of its value in the first couple of years. For instance, a new car worth $30,000 may depreciate rapidly to$20,000 in the first year. If you apply the WDV method, you might see that it depreciates more significantly in those first couple of years. Initially, you may account for $5,000 of depreciation in the first year and$4,000 in the second, showing how depreciation is more pronounced when the car is new and still holding more of its total value.

Suitable for assets whose efficiency decreases over time.

The WDV Method is particularly well-suited for assets that are expected to lose their efficiency as they age. For instance, technology or machinery may operate at peak efficiency when new, but as they wear down, their performance may degrade, making this method ideal as it matches the loss of utility with the depreciation expense.

Consider a computer used for graphic design. When new, it performs tasks quickly and efficiently. However, over time, as software demands increase and hardware capabilities lag, the computer becomes less efficient. The WDV Method allows a business to reflect the decreasing utility and efficiency of the computer over time through its declining book value and subsequently adjusted depreciation expense.

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