Diminishing Value Depreciation, also known as Declining Balance Depreciation, is a method used to allocate the cost of a tangible asset over its useful life. With this method, depreciation is calculated by applying a constant rate to the asset's reducing book value each year, resulting in higher expenses in the earlier years and decreasing expenses in later years. This method reflects the anticipated faster reduction in the utility of the asset as it ages.

For example, a company purchases machinery for $10,000 with an annual depreciation rate of 20%. In the first year, the depreciation would be $2,000 (20% of $10,000), leaving a book value of $8,000. In the second year, depreciation would be $1,600 (20% of $8,000), reflecting the diminishing value.

Diminishing Value Depreciation is particularly useful for assets that lose value quickly after purchase, such as technology or vehicles. Many tax systems favor this method because it better matches costs and revenues by accounting for higher expenses when the asset is newer and more productive. This method aligns well with companies aiming to reflect a fair value approach towards asset valuation.