WHY WDV IS BETTER THAN SLM

Understanding WDV and SLM

In the realm of depreciation methods, two prominent players stand out: WDV (Written Down Value) and SLM (Straight-Line Method). While both aim to allocate the cost of an asset over its useful life, they diverge in their approach, leading to distinct implications for businesses. Delving into the intricacies of each method, we'll unravel why WDV often emerges as the superior choice.

WDV: Capturing the Time Value of Money

WDV, also known as the Reducing Balance Method, acknowledges the time value of money. It assumes that an asset's value depreciates at a faster rate in the early years of its life, reflecting its higher productivity and efficiency during that period. This accelerated depreciation in the initial years provides several advantages:

• Tax Savings: Assigning a higher depreciation expense in the early years reduces taxable income, leading to immediate tax savings for businesses.


• Improved Cash Flow: WDV’s front-loaded depreciation schedule results in lower depreciation expenses in the later years, thereby enhancing cash flow.


• Accurate Asset Valuation: WDV better reflects an asset’s diminishing value over time, providing a more realistic representation of its worth.

SLM: A Consistent and Straightforward Approach

In contrast, SLM spreads the depreciation expense evenly over an asset's useful life. This method is simpler to apply, making it a popular choice for businesses seeking a straightforward depreciation approach. However, its uniform depreciation schedule fails to account for the time value of money and can lead to several drawbacks:

• Lower Initial Tax Savings: SLM’s uniform depreciation results in lower tax savings in the early years compared to WDV.


• Reduced Cash Flow: The consistent depreciation expense under SLM can strain cash flow in the later years of an asset’s life.


• Overstated Asset Value: SLM’s uniform depreciation schedule may result in an overstated asset value in the later years, potentially affecting financial statements.

Comparing WDV and SLM: A Numbers Game

To illustrate the contrasting effects of WDV and SLM, consider the following example:

• An asset costing $100,000 with a useful life of 5 years and no salvage value.

Annual Depreciation Expense:

• WDV:




• Year 1: $40,000 (40% of $100,000)


• Year 2: $24,000 (40% of $60,000)


• Year 3: $14,400 (40% of $36,000)


• Year 4: $8,640 (40% of $21,600)


• Year 5: $5,184 (40% of $12,960)


• SLM:




• Year 1: $20,000 ($100,000 / 5)


• Year 2: $20,000 ($100,000 / 5)


• Year 3: $20,000 ($100,000 / 5)


• Year 4: $20,000 ($100,000 / 5)


• Year 5: $20,000 ($100,000 / 5)

Cumulative Depreciation:

• WDV: $92,224


• SLM: $100,000

Tax Savings Over 5 Years:

• WDV: $36,889


• SLM: $30,000

When to Choose WDV Over SLM

Given the advantages of WDV, it is often the preferred depreciation method in the following scenarios:

• High-Value Assets with Rapid Technological Obsolescence: For assets that depreciate quickly due to technological advancements, WDV’s accelerated depreciation allows businesses to recover their investment faster.


• Businesses Seeking Immediate Tax Savings: WDV’s front-loaded depreciation schedule provides immediate tax savings, which can be beneficial for businesses with high taxable incomes.


• Early Asset Disposal: If a business plans to dispose of an asset before the end of its useful life, WDV’s accelerated depreciation ensures a more significant portion of the asset’s cost is depreciated, reducing the potential loss on disposal.

Conclusion: WDV’s Edge

While both WDV and SLM serve as viable depreciation methods, WDV often emerges as the superior choice due to its recognition of the time value of money, provision of immediate tax savings, improved cash flow, and accurate asset valuation. Its accelerated depreciation schedule is particularly advantageous for high-value assets, businesses seeking immediate tax savings, and situations involving early asset disposal. Understanding the nuances of each method enables businesses to make informed decisions, optimize their depreciation strategy, and maximize their financial benefits.

Frequently Asked Questions (FAQs)

1. What is the primary difference between WDV and SLM?



Answer: WDV employs an accelerated depreciation schedule, assigning a higher depreciation expense in the early years, while SLM spreads the depreciation expense evenly over the asset’s useful life.

2. Which depreciation method is more beneficial for businesses?



Answer: WDV is generally more advantageous as it provides immediate tax savings, improved cash flow, and a more accurate representation of an asset’s value.

3. When should a business choose WDV over SLM?



Answer: WDV is preferable for high-value assets with rapid technological obsolescence, businesses seeking immediate tax savings, and situations involving early asset disposal.

4. Can WDV result in a higher depreciation expense compared to SLM?



Answer: Yes, WDV’s accelerated depreciation schedule leads to a higher depreciation expense in the early years, resulting in a more significant tax deduction.

5. What are the limitations of WDV?



Answer: WDV may not be suitable for assets with a long useful life or for businesses that prefer a consistent depreciation expense over time.