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.
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.