Yep, I agree with Rob...it's 25% reducing balance

Pauline

I just want to stick my tuppence worth in here. As depreciation is a bookkeeping exercise, so does not affect tax calculations, you can (and if you want to be pedantically accurate) report the true value of assets.

That is, if you buy a company car new in year 1 at 10,000, you would typically apply 25% straight line at the end of the year (2,500). However, if that vehicle was used a lot and ran up, say 50,000 miles, then from a bookkeeping point of view it may only be worth 5,000. Therefore it would be far more accurate to depreciate 5,000. This would be in the true principle of reporting a fair and accurate picture of the business.

What I am really saying here is that whilst it is (usually) OK to just use some formula (eg 25% straight line), you are not really being accurate. I wonder how many agree with me?

Hi Quentin,

whilst I agree that depreciation is not a tax concept I think that you are mixing up the point of depreciation.

Per FRS15 where the entity is deemed to be a going concern then accounts should be prepared on an historical cost basis.

Therefore, an asset should be depreciated over it useful economic life rather than carried at current value.

The depreciation relates not to the value of the asset but the value to the business of that asset and the depreciation method used should as fairly as possible reflect that usage in the annual accounts.

As Rob and Pauline state the method used here is 25% reducing balance.

SSAP19 gives an alternate approach for investment properties but we are not talking about those here.

There are exceptions and it is acceptable to revalue assets and take this to a reserve where necessary.

I could go into more detail on the above if necessary but the basis is that it is a basic requirement that an asset is depreciated in order to show it's value to the business. This follows the general principle (per FRS18) that costs should be allocated to the period to which they relate.

The only time that it is necessary to show actual asset values in the accounts is where the accounts are prepared on the basis that the entity is not a going concern and then assets will be valued at their open market value.

OK, that's my two penneth and my flags firmly in the depreciation rather than revaluation is necessary in order to adhere to the Financial reporting standards.

Sure that this one will spark an interesting debate especially when Bill homes in on it.(well done Quentin).

All the best,

Shaun.

Hi Bill,

how did I know that this would be your sort of question!

Not much time to check in on the site at the moment so slacking a bit in my duties of giving a warm and fuzzy welcome to newbies.

However, I have noticed that the ICB (in particular James) seems to be taking that role on of late.

Your right as always, I always think in company terms rather than individuals so have more of a purist view of depreciation.

Appreciate fully what your saying about sole traders and tax however, as bookkeepers I think that the readership on here needs to be aware of what depreciation really is as I know that many of the accountancy texts really don't pick up on it. They seem to go to great lengths to explain how one would calculate it rather than what it really is and it's links to the fundamental accounting principles (Per FRS18).

For others reading this (Not you Bill), depreciation is a measure of the useage of the asset, apart from where there is an issue over going concern it is not necessarily meant to reflect the current market value of the asset. In this way costs are allocated to the period to which they relate.

I suppose that it confuses matters that depreciation seems to follow the principle of tieing itself to the current value of the asset.

Good examples of why various methods might be adopted would be for a quarry with the same extraction every year over five years then obviously 20% straight line would be adopted (No, no, I'm not going to confuse matters here with provisions and contingent liabilities for site rectification as that's a whole different thread (And standard, look at FRS12 for that one)).

For a van where the bulk of the price drops as soon as it's driven off the forecourt and then slows then 25% reducing balance to an estimated residual value would not be an unreasonable assumption.

In the latter example, how could one argue that the value of the van to the business in year one was less than that in year 4!

My take on this is that using reducing balance gives a fairer approximation the rate of consumption of the value of the asset so reflecting the true cost for the period. The real estimate here that would cause a difference of opinions would be the estimated residual value of the asset as in reality it is no more than guess work.

Ok, I feel like someone with a stick prodding a hornets nest here as I'm sure that this will not tie in with many peoples current perceptions of what depreciation actually is.

Also of course, a debate will now probably kick off and I'm unlikely to be sitting in on most of it :(

Hope that you have a good weekend Bill (whats left of it). I probably won't catch up on the thread until tomorrow evening. Looking forwards to reading others points of view on depreciation.

Have fun,

Shaun.