Straight Line Method (SLM) and Written Down Value (WDV) methods are the most used methods for calculating depreciation. Although Companies Act doesn’t require any specific method to be chosen, the income tax limits the choice for selecting options. SLM is allowed by the Companies Act, but the Income-tax Act requires calculation of depreciation by WDV Method only. However, certain exceptions are there where even income-tax act allows calculation of depreciation by SLM. But, that’s part of another discussion.
Schedule II of the Companies Act, 2013 contains the useful guide for calculation of depreciation. Although it doesn’t contain the rates to be used, it provides the useful life to be used for different classes of assets. And based on those periods, rates for WDV can be easily calculated.
The formula used to calculate WDV rates is –
Rate of Depreciation (R) = 1 – [s/c]^{1/n}
Where,
s = scrap value at the end of period ‘n’;
c = Written down value at present; and
n = useful life of the assets (Schedule II of Companies Act provides this useful life period for different classes of assets)
Illustration 1 – Suppose a Plant is purchased for ₹ 10 lakhs and its estimated useful life is 10 years. The scrap value at the end of the useful life is estimated to be ₹ 2.5 lakhs. Calculate the WDV Rates.
Here, we can use the above formula and accordingly,
WDV Rate = 1 – [2.5/10]^{1/10}
i.e. 1 – 0.25^{0.1} = 12.95% (approx.)
Now, you can use this WDV rate to calculate depreciation. Depreciation for the year is the rate in percentage multiplied by the WDV at the beginning of the year. For example, for Year I – Depreciation = 10,00,000 x 12.95% i.e. 1,29,500. New WDV for subsequent year will be previous WDV minus Depreciation already charged. i.e. WDV for year II will be 10,00,000 – 1,29,500 i.e., 8,70,500.
Accordingly, WDV and Depreciation for all years is as below:
Year | WDV at beginning ( ₹ in lakhs) | Depreciation ( ₹ in lakhs) | WDV at end ( ₹ in lakhs) |
0 | 10 | – | 10 |
1 | 10 | 1.295 | 8.705 |
2 | 8.705 | 1.127 | 7.578 |
3 | 7.578 | 0.981 | 6.597 |
4 | 6.597 | 0.854 | 5.743 |
5 | 5.743 | 0.744 | 4.999 |
6 | 4.999 | 0.647 | 4.352 |
7 | 4.352 | 0.564 | 3.788 |
8 | 3.788 | 0.491 | 3.297 |
9 | 3.297 | 0.427 | 2.870 |
10 | 2.870 | 0.370 | 2.500 |
This method can be used for calculating WDV Rates for any class of assets whose useful life, initial WDV and scrap value at the end of the period is known.
This is the easiest way. However, not everyone is acquainted with the mathematics involved. So for those who feel difficulty in calculating values like 0.25^{0.10}, we have a short trick.
Using simple calculator, you can type 0.25 and press ‘√’ i.e., square root buttons for 13 times. Then after subtract ‘1’ from the value and multiply it by the value in power i.e., 0.10. After that add ‘1’ to the resulting value and press ‘x’ ‘=’ buttons in same order for 13 times. You will get your required value. You can use 12 times or 13 times or any number of times for square rooting and multiplying. However, using value less than 13 times will be less approximate to the result.
If you find, calculating Depreciation rates for either SLM or WDV time-consuming, you can always use our free Depreciation Calculator at this link.
Hope this Article helps you in calculating WDV Rates and depreciation using WDV Methods. For any queries, don’t forget to ask by commenting on comments section.
very good explanation thank you
I like this article very much for a simple reason that it highlights one of the very fundamental differences such as SLM is allowed by Companies Act, while WDV Method is allowed by IT Act barring exceptions. Thank you very much for your good effort. I couldn’t find such simplicity in other website like Taxguru.
Can the author of the article further elaborate some steps on how and why both methods are essential in building the Financial Models for Project Appraisal?
Sir, your article need to reflect how to arrive at a scrap value as per guidelines provided in Act relevant thereof. one cannot estimate in his own way. it seems that 5% of original asset cost is what the scrap value to be as per new Act. Scrap value plays important role in determining the IRR. If promoters of a company choose high recovery cost at the end of economic life, IRR will be inflated. Kindly address this issue. Also tell us if promoters use used plants partially, how to determine scrap value at the end of economic life. scrap value should also include the cost of dismantling the plant and cost of disposal . Kindly give your insights on the above
Scrap value of 5% is an indicative part and not a compulsion. One can choose other than 5% as scrap value. It should however be justified.
Even for partial use of plants, scrap value will remain same.
Cost of dismantling the plant is not the scrap value, instead it is included in the cost of plant. It is more clear from IAS 16. One problem may be to estimate it in advance, for which which you can use discounting factor.