Finance Leasing Manual - FLM12.24

No secondary period: assets with residual values: depreciation charge

SSAP 12 (Accounting for depreciation), paragraph 1. explains that `This statement deals with the depreciation of fixed assets....including the depreciation of amounts capitalised in respect of finance leases`. Paragraph 4 provides that the assessment of depreciation involves considering three factors including both the asset's useful life and the estimated residual value. Para 15 states that the `Provision for depreciation ... should be made by allocating the cost (or revalued amount) less estimated residual value of the assets as fairly as possible to the periods expected to benefit from their use.

For example, suppose a ship depreciates evenly over 25 years; that is, 4% is written off each year. If the ship cost £1 million, £40,000 would be written off each year. Assuming the depreciation charge accurately reflects the market value, 40% or £400,000 will have been written off for accounting purposes over the ten year primary period. It is this depreciation charge that we take for the purposes of SP3/91 - not the £1m cost of the asset. If there were secondary periods for the entire life of the ship the result, these figures would be the same for the first ten years. That is, £40,000 a year would be depreciated so that £400,000 would be depreciated - and allowed for tax - by the end of year 10.

Of course, in practice, the depreciation charge may vary from year to year. The value of ships can be particularly volatile. So the figures would not necessarily work out neatly; but the principle is clear.