Written-Down Value Details

Every asset a company holds, whether tangible, such as a machine, or intangible, such as a patent, loses value over time. The written-down value of an asset is simply its current value. In taking the current value of its assets into account, a business has a clearer idea of its profit or loss.

When a business enters a tax return, it will receive a tax deduction on the depreciation of its assets, even though it did not purchase the asset in that tax year. For example, if a business bought a new cargo van in 2020 and paid $40,000 for it, it can write down 30% of the cost annually. This annual write-down of $12,000 shows more income on the company's profit and loss statement and increases the assets on its balance sheet.

Example of Written-Down Value

Mega has bought a new computer for $6,000. Her company could claim the cost as a one-off expense, but its accountant prefers to use asset depreciation and recover the cost, through written-down value, over the useful life of the computer. This will allow Mega, the accountant argues, to save money on tax by setting the depreciation expense against taxable income. The office manager believes that it would be better to declare the expense of the computer and offset its cost against tax in the current tax year; she argues that money loses value over time because of inflation. Both the accountant and office manager have logical reasons for their respective choices.

Examples of Written-Down Value Depreciation Rates

The Tax Code establishes differing depreciation rates depending on the type of asset. For example:

  • A building for commercial use - 10%
  • Furniture and Fittings - 10%
  • Computers and software - 40% (This reflects the fact that technological changes soon render information technology obsolete)
  • Plant and machinery - 15%
  • Vehicle for commercial use - 30%
  • Intangible assets - 25%

These depreciation rates cover only the business uses of an asset which the company owns. When a member of the business uses an asset for private purposes—a vehicle, for instance—the Tax Code only allows for depreciation on the proportion of its use for business purposes. A business will generally use depreciation for its tangible assets and amortization for its intangible assets in calculating written-down value.

Depreciation vs. Amortization

Depreciation and amortization both describe the same process of extending the cost of an asset over the asset's useful life. The difference lies in the type of asset. Depreciation is used on tangible assets, such as machinery, and can be accelerated, meaning the company depreciates a larger percentage of the asset's value during the asset's early years of useful life. Amortization applies the same process to intangible assets, such as a patent, but generally applies the same sum to each period of the asset's useful life. This is known as a 'straight-line basis.'

Another difference lies in the fact that, even though a company will write down a tangible asset through its useful life, this depreciation does not imply that the asset has no value at the end of the period. A fully depreciated tangible asset may still have resale value. Generally, the amortization of intangible assets, such as copyright, implies that the end of useful life means that the asset has no value whatsoever.