How would you decide between straight-line and written down value depreciation for a new asset? What role does Schedule II play?

What the interviewer wants to hear

• Method should reflect the pattern in which benefits are used up
• Straight-line for even use, WDV for assets that lose value faster early
• Schedule II of the Companies Act gives indicative useful lives
• Different useful life needs technical justification and disclosure
• Book depreciation is separate from income tax depreciation

Model answer

The method should match the way the asset’s benefits are used up. If a building or office furniture gives roughly the same benefit every year, straight-line is the natural choice. If an asset like a vehicle or computer is most productive and loses value fastest in its early years, the written down value method reflects that better. For Indian companies, Schedule II of the Companies Act gives indicative useful lives for each class of asset. A company can use a different life or residual value, but it must have a technical justification and disclose it. I also remind people that book depreciation and income tax depreciation are separate: tax uses the block of assets and prescribed rates, so the difference often creates deferred tax. Finally, useful life and method are reviewed periodically, and any change is applied prospectively as a change in estimate.

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