[OPE] replacement cost and historical cost (again)

Chai-on,

As you can read in this brief commentary on the 1956 Companies Act of India
for example, retrospective revaluation of depreciation is possible from the
time an asset is bought, and extending into the future, using a different
depreciation method:

"When a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset
coming into use. The deficiency or surplus arising from the retrospective
recomputation of depreciation in accordance with the new method would be
adjusted in the accounts in the year in which the method of depreciation is
changed. In case the change in the method results in deficiency in
depreciation in respect of past years, the deficiency should be charged to
the profit and loss account. In case the change in the method results in
surplus, it is recommended that the surplus be initially transferred to the
'Appropriations' part of the profit and loss account and thence to General
Reserve through the same part of the profit and loss account. Such a change
should be treated as a change in accounting policy and its effects should be
quantified and disclosed."
http://www.taxguru.in/audit/guidance-note-on-accounting-for-depreciation-in-companies-issued-by-icai.html

Philip Dunn hits the nail on the head - "Assets can turn out not to be worth
what it was thought they were worth", namely they could be worth more, or
worth less, which could be inferred either from the average market price at
which those fixed assets are current traded, or from the income currently
earnt from a fixed asset, or from projected future earnings.

In practice, the value of many fixed assets these days is determined almost
completely according to the income that can be extracted from them. But this
also means that depreciation in price terms will vary from depreciation in
value terms, and that ex ante revisions can in principle be derived from
projected future earnings.

When Marx discusses depreciation in Cap. Vol. 2, he notes that fixed assets
can become obsolescent (devalued) before they are physically used up, but
this is precisely what can prompt ex post or exa ante revisions of the
depreciation schedules. But resource scarcity (or excess demand) can also
drive up the value of fixed assets, consequently enlarging the possible
write-off.

Jurriaan

mere words could not explain
precious love
you held my life within your hands
created everything I am
Taught me how to live again
Only you
Came when I needed a friend
Believed in me through thick and thin
This song is for you
Filled with gratitude and love
God bless you
You make me feel brand new
I sing this song for you
You make me feel brand new

- Stylistics, "You make me feel brand new"

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Received on Tue Sep 8 03:31:16 2009