Written down value method to calculate asset depreciation

To calculate the depreciation of an asset, experts turn to two methods of valuation – the Straight Line Method (SLM) and the  Written Down Value (WDV) method. Of these, the written down value method of depreciation is used for income tax purposes. The WDV of an asset can be seen on the company’s balance sheet.

What is the written down value method?

WDV or written down value method of depreciation of an asset is arrived at after accounting for an asset’s depreciation or amortisation. In short, WDV is the current value of the asset.

Why is written down value method of depreciation calculated?

Due to wear and tear of an asset, there might be a loss in the value of the asset over time. Section 32 of the Income Tax Act of 1961, deals with such depreciation in the value of an asset. WDV method of depreciation is calculated for tax purposes and the Act allows calculation for both, tangible (such as building, factory plant, machinery) and intangible assets (trademarks, patents, franchise).

So how does calculating WDV depreciation help? Know that if an asset is used for over 180 days, a 50% depreciation is allowed for the year. It is not required that the asset has to be mandatorily used in the previous year. If the asset was leased to the lessee, the assessee can claim deduction under the I-T Act.

Calculating the WDV depreciation helps, because it provides you some tax benefit. Companies are also required to calculate written down value depreciation, to ascertain profits and losses. In the absence of such written down value depreciation calculations, companies may not have any indicator of real profit and may suffer due to wrong valuations.

See also: What is a real estate appraisal and how does it work?

Rate of depreciation of common assets

Building for residential use: 5%

Building for non-residential use: 10%

Furniture and fittings: 10%

Computers including software: 40%

Plant and machinery: 15%

Motor vehicles for personal use: 15%

Motor vehicles for commercial use: 30%

All intangible assets: 25%.

WDV: Other terms used in place of written down value method

The written down value method is also known as the reducing-value method or the reducing balance or the reducing installment method or the diminishing balance method. Written down value method is also called book value or net book value.

Also read all about indexation benefits

WDV method of depreciation formula

The WDV method of depreciation is considered the most logical method. An asset is considered to provide more value in the initial years than the later years.

Rate of Depreciation (R) = 1 – [s/c]1/n

Where, ‘s’ stands for the scrap value at the end of the period, that is ‘n’.

‘c’ stands for the WDV at present.

‘n’ is the useful life of the asset.

Note: The useful life of an asset, for different asset classes is provided in the Schedule II of Companies Act. Useful life of buildings (other than factory buildings) with RCC frame structure is 60 years and that of buildings (other than factory buildings) other than RCC frame structure is 30 years.

In the WDV method, depreciation is charged on the book value of such an asset and every year, the book value decreases. Let us see working of written down value method through an example:

Suppose the cost of the asset is Rs 1,00,000.

Depreciation for the first year – 10%

So, depreciation is Rs 10,000 for the first year.

Depreciation for the second year = Rs 10,000 (10% of Rs 90,000) = Rs 9,000

Depreciation for the third year = 10% of Rs 81,000 [i.e., 90,000 – 9,000] = Rs 8,100

See also: How to calculate land value?

Written down value method: Merits

The WDV method helps in understanding the depreciated asset value that can be then used to determine the price of the asset.

Higher depreciation during the beginning years directly results in reduced taxes.

Written down value method: Demerits

Although the WDV method is the most practical and preferred method to calculate depreciation, WDV method has its own limitations. For example, year after year the original cost of the asset escapes attention in a written down value method of depreciation. Secondly, the asset can never be brought down to zero.

Moreover, any interest on the capital which is invested in the asset is also not taken into account. The written down value method also requires extensive book-keeping and yet, arriving at the correct value may be a difficult task. However, if you have to calculate the WDV depreciation of a plant, machinery or even a vehicle, the written down value method is the best.

FAQs

Anuradha Ramamirtham

With 16+ years of experience in various sectors, of which more than ten years in real estate, Anuradha Ramamirtham excels in tracking property trends and simplifying housing-related topics such as Rera, housing lottery, etc. Her diverse background includes roles at Times Property, Tech Target India, Indiantelevision.com and ITNation. Anuradha holds a PG Diploma degree in Journalism from KC College and has done BSc (IT) from SIES. In her leisure time, she enjoys singing and travelling.
Email: [email protected]

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