Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

The Standardization of Depreciation Rates The determination of the rate of depreciation of a given asset is essentially an engineering problem. But as the accounting for depreciation is dependent on the rate, and the records of the accounting department must furnish much of the information for estimating the rate, the whole problem of fixing depreciation rates will be considered under the one head. Much study and effort to reduce all the conditions under which assets depreciate to a common basis and so to a definitely stated rate for each set of conditions, have, so far, come to naught and all qualified experts say without reserve that the rate of depreciation is an individual problem. It is to be hoped that a further gathering of statistics as to expectations of life of different assets under varying conditions will ultimately furnish tabulations, corresponding to insurance tables, according to which under known and expected conditions a fairly accurate rate of depreciation for a particular asset may be made. Unlike insurance rates, however, the depreciation rate once established will not necessarily remain constant, but must be subject to a periodic revision in the light of new data and conditions. Effect of Local Conditions Many factors enter into the rate of depreciation. They may be classed roughly as “stable or normal” factors and “contingent” factors. It should be constantly borne in mind that in the present state of the actuarial development of the subject, general rates, i.e., rates which will apply without readjustment, cannot be determined. For the determination of individual rates local conditions are always the controlling factor. An illustration in point is given by Henry Floy,[28] showing the varying rates used by thirty-one different concerns for the depreciation of their rolling stock equipment. The methods vary in almost every case, comprising annual charges of an arbitrary amount, per cent of the original cost, cents per car mile, arbitrary deductions from income irregularly applied, per cent of gross earnings, per cent of present estimated values. Reduced to a common basis, the per cent methods show a range of expected life varying between ten and one hundred years. While it is improbable that had the determination of the depreciation rate for the different concerns been in the hands of the same expert, there would have resulted these bewildering variations in method, still it does bring out in strong relief the fact, well recognized by experts but so often lost sight of by those unacquainted with the technical phases of the problem, that local conditions are a _controlling factor_; and that until local conditions can be somewhat standardized there is no hope of establishing rates of depreciation which will be of general application. [28] In “Value for Rate-Making,” pp. 255-256. Factors in Determining Depreciation Rate In the determination of rates the factors to be taken into account are: