Reducing-balance depreciation
Reducing-balance depreciation applies a fixed percentage rate to an asset's declining carrying value each year, producing larger depreciation charges early in the asset's life and progressively smaller ones later; also called the.
FrameworkDepreciation
What it is
See it move
A van bought for €24,000 is depreciated at 25% reducing balance. Year one's charge is €6,000, leaving a carrying value of €18,000. Year two's charge, 25% of that lower base, is €4,500, leaving €13,500. Year three's charge is €3,375, leaving €10,125. The rate stays fixed, but each charge falls because the base it applies to keeps shrinking.
The formula
Variables
- carrying value at the start of the year (cost minus accumulated depreciation at that point) (€)
- reducing-balance depreciation rate (fixed percentage set by policy or tax rules) (decimal)
The carrying value never mathematically reaches zero under this method alone; a switch to straight-line in the final years is common when the straight-line charge exceeds the reducing-balance charge.
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
Under HGB the reducing-balance, or declining-balance, method is heavily shaped by tax policy. German tax law has periodically permitted a declining-balance allowance for movable fixed assets, usually as a fixed multiple of the straight-line rate subject to a statutory cap, and has switched it on and off as an economic stimulus over the years. Because the commercial and tax accounts are linked, companies have often adopted the same declining-balance pattern in their statutory financial statements to keep the two sets of books aligned, so the accounting charge follows what the tax rules allow rather than a separate study of how the asset is used.
IFRS
IAS 16 permits a diminishing-balance method, but only as one of several patterns and only where it genuinely matches how quickly the asset delivers its benefit to the business over time — for instance an asset that is most productive when new. The choice of method must follow the expected pattern of consumption, not a tax-driven percentage, and it is reviewed each year and changed if that pattern shifts. A declining-balance charge that exists mainly to match a tax allowance would not, on its own, satisfy the IFRS test.
Edlintics’ own explanatory summary — not official IFRS Foundation or national standard-setter guidance.