Sum of the digits: Difference between revisions
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Latest revision as of 08:29, 3 February 2022
(SOD).
1.
A basis of allocating total costs or income across successive time periods, so as to 'front-end load' them.
In other words, a systematically greater proportion of the total cost or income is allocated to the earlier periods.
Example
A fixed asset has a cost of $12m,
an expected disposal value of $2m,
and an expected useful life of 4 years.
The total expected accounting cost for the 4 year period:
= $12m - $2m
= $10m.
The 'sum of the digits' of the expected holding Years 1 to 4 inclusive
= 1 + 2 + 3 + 4
= 10.
The allocation proportions (for the total depreciation charges of $10m) are calculated as follows:
Year 1:
= $10m x 4 / 10
= $4m.
Year 2:
= $10m x 3 / 10
= $3m.
Year 3:
= $10m x 2 / 10
= $2m.
Year 4:
= $10m x 1 / 10
= $1m.
The net book value of the fixed asset - applying the depreciation charges calculated above - would be (at the end of each year):
Year 1:
= 12 - 4
= $8m.
Year 2:
= 8 - 3
= $5m.
Year 3:
= 5 - 2
= $3m.
Year 4:
= 3 - 1
= $2m.
2.
Sum of the digits methods are sometimes used to allocate total finance charges - for example under IFRS 16 - as a simpler alternative to the Implied rate of interest (or Actuarial) method.
