Interest gap and Reducing balance: Difference between pages

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A mismatch in the timing at which interest rate assets and liabilities are repriced.
1.


A positive gap (assets repricing more quickly than liabilities) means an exposure to falling interest rates and vice versa.
A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.




Banks and other financial institutions commonly have a 'structural' interest gap, resulting from the nature of their business and the structure of their balance sheets.
'''Example'''


A fixed asset has a cost of $12m,


This structural interest gap is usually negative.
to be depreciated on a reducing balance basis at a rate of 40% per year.


The negative interest gap results from shorter-term liabilities funding longer term assets.
 
The depreciation charge for Year 1 would be:
 
= $12m x 40%
 
= $4.8m.
 
 
The net book value at the end of Year 1 (and the start of Year 2):
 
= 12 - 4.8
 
= $9.2m.
 
 
The depreciation charge for Year 2:
 
= $9.2m x 40%
 
= $3.68m.
 
 
The net book value at the end of Year 2 (and the start of Year 3):
 
= 9.2 - 3.68
 
= $5.52m.
 
 
And so on.
 
Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).
 
 
2.
 
''UK tax.''
 
UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.




== See also ==
== See also ==
* [[Assets]]
* [[Depreciation]]
* [[Gap report]]
* [[Straight line]]
* [[Liabilities]]
* [[Sum of the digits]]
* [[Maturity ladder]]
* [[Writing down allowance]]
* [[Exposure]]
 
[[Category:Accounting,_tax_and_regulation]]

Revision as of 12:35, 18 March 2015

1.

A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


Example

A fixed asset has a cost of $12m,

to be depreciated on a reducing balance basis at a rate of 40% per year.


The depreciation charge for Year 1 would be:

= $12m x 40%

= $4.8m.


The net book value at the end of Year 1 (and the start of Year 2):

= 12 - 4.8

= $9.2m.


The depreciation charge for Year 2:

= $9.2m x 40%

= $3.68m.


The net book value at the end of Year 2 (and the start of Year 3):

= 9.2 - 3.68

= $5.52m.


And so on.

Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).


2.

UK tax.

UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.


See also