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Difference Between WDV and SLM

WDV vs SLM

Companies have a very difficult task when it comes to the acquisition of an asset, be it a tangible and intangible one. It is not the acquisition itself that is difficult, which is often simply the change of hands between the money involved and the asset itself, but the accounting for and determination of its value over time. In these cases, a calculation to determine the Written-Down Value (WDV) through methods such as the Straight-Line Method of Depreciation (SLM) or other such methods can be very important in ensuring accuracy for different reasons, such as tax reports and filing of loans.

The Written-Down Value, (WDV), is the current value or worth of an asset (often a fixed asset) after depreciation and/or amortization has been accounted for and is recorded on a company or individual’s balance sheet. Other terms that are often used in reference to this are “book value” or the longer “net book value.” The Written-Down Value is often adjusted to reflect the original cost of the item against the fair market value as the current economic market or environment dictates. To put it simply, it is the value of an asset or assets “as of this point in time.” The WDV of an asset is influenced by depreciation and amortization (if applicable, as in the case of an intangible asset such as patents or trademarks). A common practice of getting the WDV of an asset or assets is to calculate it on an annual basis. This begins with determining the original or primary value of the asset at the time it was acquired. From this original value, the process of determining the WDV progresses to determine the depreciation each year that it initially possessed until it reaches the present time (also commonly referred to as the “diminishing balance method”). This depreciation is based on the current and prevailing tax structure. Realistically, an asset would reflect depreciation in line with how the asset has been used during that period of time.

Companies often conduct a periodic determination of the Written-Down Value, particularly when the nature of the business involves fixed assets. For instance, a car company would have a production line that involves automated and heavy machinery. These would have had an initial value based on when they were purchased from the company that provided them. However, because of usage in the course of operations, this value would progressively decline. Another factor that can affect this calculation is technological progress as machinery that is ten years old would certainly be far less in value than similar machinery that has developed and is sold at the current time. Determining the Written-Down Value would be important, then, in having an accurate assessment of what value the company’s assets have. This information would have a significant effect come tax time. Another potential effect is for the purpose of applying for loans as the Written-Down Value would influence a bank’s decision based on how much the company’s assets are worth.

In relation to this, the Straight-Line Method of Depreciation is the simplest and most often used way of calculating for the salvage value of an asset. Unlike the diminishing/depreciating balance method where the annual depreciation is based on the depreciation rate multiplied by the asset’s Written-Down Value at the start of the year, the Straight-Line Method of Depreciation (SLM) calculates the annual depreciation by subtracting the residual or “salvage” value (i.e., the value the asset will theoretically have when its usefulness has peaked) from the original cost or value and dividing the result by the number of years the asset will be or has been used. This is a far simpler method but might not accurately depict the asset’s Written-Down Value because it assumes a constant level of depreciation.

Accounting is a very complicated but necessary process for companies. Determining the Written-Down Value through methods such as the Straight-Line Method of Depreciation or other methods of calculation are essential in the effective management of company assets.

Summary:

1.Written-Down Value (WDV), also called the book or net book value, is the present value of a fixed or intangible asset after depreciation/amortization is determined.
2.The Straight-Line Method of Depreciation (SLM) is one of the methods of calculating depreciation and is the simplest and most often used.
3.The WDV is best determined through the diminishing or depreciating balance method as it is more realistic and accurate compared to the SLM which assumes a constant depreciation value per year.


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1 Comment

  1. I want to learn about depreciation method and example?

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