What formula is used to determine the allowable cost for a short lease with respect to the wasting nature of the asset?

The formula that determines the allowable cost for a short lease concerning the wasting nature of an asset takes into account how much of the asset's useful life is left at the time of disposal compared to its remaining life when it was acquired. Using the correct formulation involves calculating the percentage of the asset’s life remaining at the point of disposal, ensuring that the allowance reflects the actual utility derived from the asset during its use.

Choosing the ratio of the percentage for life left at disposal to the percentage for life left at acquisition accurately accounts for this wasting nature. When this calculation is made, it directly ties the cost of the asset to how much of its remaining useful life the lessee is effectively able to benefit from at the time of disposal, ensuring that tax allowances are reflective of actual economic use.

This approach is crucial for short leases, as it ensures alignment between the diminishing value of the asset and the corresponding tax deductions that reflect that valuation, maintaining fairness and accuracy in tax reporting.