Sum of the digits: Difference between revisions
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Year 1: | Year 1: | ||
= 4 / 10 | = $10m x 4 / 10 | ||
= $4m. | = $4m. | ||
| Line 42: | Line 42: | ||
Year 2: | Year 2: | ||
= 3 / 10 | = $10m x 3 / 10 | ||
= $3m. | = $3m. | ||
| Line 49: | Line 49: | ||
Year 3: | Year 3: | ||
= 2 / | = $10m x 2 / 10 | ||
= $2m. | = $2m. | ||
| Line 56: | Line 56: | ||
Year 4: | Year 4: | ||
= 1 / 10 | = $10m x 1 / 10 | ||
= $1m. | = $1m. | ||
Revision as of 19:37, 15 January 2016
(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 IAS 17 - as a simpler alternative to the Implied rate of interest (or Actuarial) method.
