WDV, or written-down value, is what your accountant records as the value of your business assets. Also known as book value or carrying value, it's the worth of your assets after you adjust for accumulated depreciation and other factors. The WDV method is an accounting formula that doesn't affect the price for which you can sell your assets.
The WDV formula is simple. Take the purchase price of an asset and add the cost of any improvements or upgrades you made to it. Subtract all depreciation you've applied to the asset and any impairments to its worth. The result is the written-down value.
Under the generally accepted accounting principles, or GAAP, you have to record depreciation expense over the useful life of the asset. If your construction company buys a $30,000 bulldozer with a useful life of 10 years and no residual value, you'd depreciate it $3,000 a year using the straight-line method. This isn't so much about the equipment aging as how to account for the original purchase expense.
The WDV formula is a simple matter of math. Start with the $30,000 purchase price on the equipment. The first year you write the value down by $3,000 to $27,000, the second year you write it down to $24,000 and then $21,000 and so on until the value is zero. That's the WDV method.
GAAP's depreciation rules are different from the rules for deducting depreciation expense on your taxes. They're also unrelated to the market value of your asset. If the written-down value of that construction equipment is $12,000, that prevents you from selling it for more if someone's interested.
If you pay for any improvements to your equipment, the WDV formula has to factor that in. Paying for repairs doesn't affect written-down value, but spending to enhance assets does.
Suppose you buy a $3,000 computer with a useful life of three years. In the first year, you spend $200 to fix a glitch and $600 to add memory capacity. Under the WDV method, the book value is $3,000 plus $600 less $1,000, giving you a $2,600 book value. The repair bill doesn't factor in.
Impairment is another factor with which you may have to deal when using the WDV method. Impairment is what happens if the market value of your asset drops below the book value. GAAP rules say you adjust book value by writing it down to the market price.
For example, suppose you've had your $30,000 bulldozer for six years, so the accumulated depreciation is $18,000. The book value is therefore $12,000. Your driver runs the bulldozer over some masonry, damaging the undercarriage, and you don't think it's worth repairing.
The market value of a similarly damaged dozer is $10,000, so you factor that difference into the WDV formula. The formula says $30,000 minus $18,000 minus $2,000 gives you a book value of $10,000. Your ledgers report a total of $3,000 depreciation for the year, $18,000 accumulated depreciation and $2,000 of impairment loss.
Accounting rules say you have to check for impairment and recognize it in your bookkeeping. The rules aren't as clear about when you need to check or how often to measure it.
Impairment doesn't have to result from damage to an asset. Written-down value method examples of impairment would include:
- The technology is old and obsolete. A new generation of cellphones can impair the value of your older model, for instance.
- Increased competition by sellers has driven down the market value of the asset.
- The laws change. For example, if there's a new safety standard for construction equipment, your older equipment will drop in value even if you're grandfathered in to keep using it.