Ace the 2025 ACCA F7 Challenge – Financial Reporting Fun and Games!

The reducing balance method applies a consistent percentage to the remaining book value of an asset annually, which is a characteristic that distinguishes it from other depreciation methods. Under this approach, the depreciation expense is calculated as a fixed percentage of the asset's carrying amount at the beginning of each period. As the book value of the asset decreases over time, the depreciation expense also decreases because the base amount for calculating the depreciation becomes smaller.

This method is particularly useful for assets that lose value more quickly in their earlier years, as it aligns the expense recognition with the asset's usage and performance over its useful life. Consequently, the reducing balance method often reflects a more accurate representation of an asset's consumption and economic reality compared to methods that allocate the same amount of expense each period or base depreciation on units produced.

In contrast, the straight-line method allocates an equal amount of depreciation expense across the useful life of the asset, the double-declining balance method is simply an accelerated form of the reducing balance method where the percentage applied is doubled, and the units of production method bases depreciation on actual usage, which can vary from period to period. Therefore, the reducing balance method's unique approach to applying a consistent percentage to remaining book value makes it the correct answer.