SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION

Contents
1.0 WHAT IT IS:............................................................................................... Error! Bookmark not defined. 1.0 PURPOSE: ................................................................................................................................................ 1 1.0 HOW IT IS APPLIED .................................................................................................................................. 1 1.1 Calculating Sum of Years Digits Depreciation ..................................................................................... 2 1.0 EXAMPLES: .............................................................................................................................................. 3 1.1 Example 1. ........................................................................................................................................... 3 1.1 Example 2 ............................................................................................................................................ 3

SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION

1.0 INTRODUCTION

1.1 DEFINITION
According to Thomas R. Noland The sum-of-years digits depreciation method is an accelerated depreciation and amortization technique, accelerated in the sense that it records large amounts of depreciation in the early years of an assets life whereas amortizing in the sense that it writes off the cost of an asset. Philo Gabriel has also defined it as an accounting technique used to calculate depreciation. This depreciation is accelerated to reflect that items lose value more rapidly early in their history than later. Still other sources have defined the Sum of the Years' Digits Method as an accelerated method of depreciation which is based on the assumption that the loss in the value of the fixed asset will be greater during the earlier years and will go on decreasing gradually with the decrease in the life of such an asset. From the definitions given above, it is clear that it is one of depreciation techniques used that assumes more loss of value in the early years of an assets life.

PURPOSE:
In general, the main purpose of depreciation is to identify or determine the economic life of an asset. The information helps the individual to plan on how best to make full use of the asset in order to maximize the benefits resulting from its usage. In particular, the purpose of the sum of integers depreciation method is to allocate depreciation of an asset during its economic life on a whole years basis. This means that the actual depreciation of each year is found for all the years of an assets economic life.

3.0 APPLICATION OF THE SUM OF INTEGERS DEPRECIATION METHOD

The sum of integers depreciation method sees its most frequent use in the banking and regulated industries. A regulated Industry is an industry that is regulated by government to a significant extent. Utility industries are excellent examples; their pricing, profits, and, sometimes, production methods are regulated by both federal and state governments (Barrons Business Dictionary). As an accelerated depreciation method, the SYD approach is most appropriate for those situations in which the asset is judged to render greater utility during its earlier life and less in its later life. It is applied in a number of instances some of which include: cost allocation; Specifying useful lives for different categories of assets.

SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION In order to calculate the depreciation for an item or property using the sum of year digits method, you will need to plug into the formula at least the best estimate for each of the following: Original cost; this is the amount assigned to a particular asset; usually the ordinary and
necessary amount expended to get an asset in place and in condition for its intended use.

Economic life or use value; this is the useful life of an asset to an enterprise, usually relating to the anticipated period of productive use of the item. This is the number of anticipated years that an asset will be used. Salvage or resale value; this is also called residual value, it is the amount expected to
be realized at the end of an asset's service life. For example, you may anticipate using a vehicle for three years and then sell it. Depreciable cost; this is the cost minus the salvage value. It is simply the amount of cost that will be allocated to the service life.

1.0

Calculating Sum of Years Digits Depreciation

First, subtract the value you expect the item to have at the end of its period of anticipated use from its original cost. Thus, salvage value is subtracted from the original cost. The difference is the items total depreciable cost. Next, take the sum of the digits up to and including the number of years of anticipated use of the item. For one year, this would be one. For two years, this would be 1 + 2, or 3. For three years, this would be 1 + 2 + 3, or 6. For four years, this would be 1 + 2 + 3 + 4, or 10, and so on. A simple way to calculate this is n(n + 1)/2 for n years. For example, for eight years, this would be 8(8 + 1)/2, or (8 * 9)/2, or 72/2, or 36. Multiply the total depreciable cost by a fraction consisting of the above sum of digits as the denominator, and the number of years of anticipated use as the numerator. This is the depreciation for the first year. Multiply the total depreciable cost by that same fraction except with a numerator of one less. This is the depreciation for the second year. To calculate each subsequent year's depreciation, continue this same procedure, deducting one from the numerator for each year. The numerator should equal one the final year of anticipated use.

From the above statements we can have a formula as written below; (Cost estimated salvage) (n-p)/syd, where n = the assets total estimated life in years p = the number of prior periods the asset was used in years syd = the sum of years digits given by [n(n+1)] 2

SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION

1.0 EXAMPLES:

1.1 Example 1.
A loader (1 tonne) is purchased for US $ 40,000 with an estimated life of 4 years. It has no residue value. Calculate the annual depreciation using the sum of digits method. Solution Original cost = US $ 40,000 Useful life= 4 years Salvage value estimate = US $ 0.00 Depreciable cost = US $ 40,000 US $ 0.00 = US $ 40,000 Sum of years digit (syd)= 1 + 2 +3 +4 = 10 or alternatively we can use the formula (n(n+1))/2 where n is the number of years. (4(4+1))/2 = (4 X 5)/2 = 10. Year 1 2 3 4 (depreciable cost) X (n-p)/SYD ($40,000) X (4-0)/10 ($40,000) X (4-1)/10 ($40,000) X (4-2)/10 ($40,000) X (4-3)/10 Annual depreciation $ 16,000 $ 12,000 $ 8,000 $ 4,000

1.1 Example 2
A company has a grader which it has been using for 5 years. The economic life for this equipment has been calculated to be 8 years after it has an estimated resale value of $ 10 000. The capital cost of replacement by a similar grader amounts to $ 50,000. Calculate the annual depreciation using the sum of digits method. Solution Original cost = $ 50,000 Useful life = 8 years Salvage value estimate = $ 10,000 Depreciable cost = $ 50,000 - $ 10,000 = $ 40,000. SYD = [n(n+1)]/2 = (8(8+1))/2 = (8 X 9)/2 = 72/2 =36

SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION

Year 1 2 3 4 5 6 7 8 (depreciable cost) X (n-p)/SYD ($40,000) X (8-0)/36 ($40,000) X (8-1)/36 ($40,000) X (8-2)/36 ($40,000) X (8-3)/36 ($40,000) X (8-4)/36 ($40,000) X (8-5)/36 ($40,000) X (8-6)/36 ($40,000) X (8-7)/36 Annual depreciation $ 8,888.89 $ 7,777.78 $ 6,666.67 $ 5,555.56 $ 4,444.44 $ 3,333.33 $ 2,222.22 $ 1,111.11

PROS AND CONS OF THE SUM OF INTEGERS DEPRECIATION METHOD

PROS
Cost allocation; across useful lives. The system specifies useful lives for different categories of assets Sum-of-years digits is approximately as aggressive as double-declining balance and does not pose the problems declining balance methods have in allocating the depreciation base over the life of the asset.

CONS
The sum-of-years digits method has several drawbacks. It is not commonly used, therefore it lacks comparability with competitors and familiarity with financial statement users and preparers. It is awkward if the depreciation period does not align with the fiscal year (financial year). usually it will expense the asset cost faster on the financial statements than on the tax return Given that the declining balance method is more flexible and is more closely related to the tax code, companies have little reason to use sum of integers method.

CONCLUSION
The sum of integers depreciation method is rarely used in practice. It is predominantly used in the financial and regulated industries.

SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION

RECOMMENDATIONS
Like any other accelerated depreciation method, the sum of integers depreciation method is more realistic in the sense that it takes into account the fact that depreciation of an asset can never be constant throughout the assets economic life. On the contrary, The straight-line method leaves a company exposed to a much greater probability of an unexpected asset impairment loss. Especially with assets that may lose value quickly, it may be difficult to estimate fair values, or may suddenly become obsolete, the accelerated methods provide a better option.

SUM OF YEARS DIGITS DEPRECIATION OR SUM OF INTEGERS DEPRECIATION

REFERENCES
Albrecht, W. S., Stice, E., and Stice, J. (2008). Financial Accounting (10 ed.). Thomson: Southwestern Publishing. Archibald, T. (1972). Stock Market Reaction to the Depreciation Switch-Back. Accounting Review, 47(1), 22-3 Barefield, R and Comiskey, E. (1971). Depreciation Policy and the Behavior of Corporate Profits. Journal of Accounting Research, 9(2), 351-358. Bowen, R., DuCharme, L., and Shores, D (1995). Stakeholders' implicit claims and accounting method choice, Journal of Accounting and Economics, 20 (3), 255-295. Beaver, W., and Dukes, R. (1973). Interperiod Tax Allocation and -Depreciation Methods: Some Empirical Results. Accounting Review, 48(3), 549-559.