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- Title
SELECTING THE PROPER DEPRECIATION METHOD.
- Authors
Reynolds, Isaac N.
- Abstract
In conclusion, I should like to summarize in outline form a suggested approach to tile selection of an appropriate formalized depreciation method. For the asset, or preferably for the group of homogeneous assets in question, we must first determine: (1) the amount of services in terms of volume and earnings that may lie expected of the asset over the years, (2) the amount and timing of the operating costs that may be incurred over the life of the asset, (3) the impairment of service quality and adequacy, as evidenced by the decline in physical efficiency, of the asset, (4) the amount of competition which may be expected from improved substitutes, and (5) the implicit rate of return which the type of asset earns. From this information we must project a pattern of net service values for the asset or group of assets. Then we should match this curve with the appropriate curve implied by the correct formalized method. For example, if we have a projected net service value curve, which is a horizontal straight line, then the sinking-fund method is the appropriate one. If we have a net service value curve which declines by the rate of return multiplied times the equal periodic depreciation charge, then the straight-line method is the correct one. If we have a net service value curve which declines by a fixed percentage of the diminishing balance of the remaining sum of the net service values, then the diminishing balance method is appropriate and the proper fixed rate is that rate by which the net service values decrease. If some other method is a correct one, then the choice would be made in the manner just outlined. Even if the formalized depreciation methods do not fit precisely the actual life history of particular assets, results in the aggregate for all plant assets should be reasonable provided that the broad pattern applicable to major asset groups are wisely chosen.
- Subjects
DEPRECIATION; ASSETS (Accounting); COMPETITION; OPERATING costs; RATE of return; CURVES
- Publication
Accounting Review, 1961, Vol 36, Issue 2, p239
- ISSN
0001-4826
- Publication type
Article