Depreciation of fixed assets

Износ основных средств

Fixed assets are stated to be those assets of material value that are of long-life, are held to be used in business, and are not primarily for resale or for conversion into cash.

Usually, with the exception of land, fixed assets have a limited number of years of useful life. Motor vans, machines, buildings and fixtures, for instance, do not last for ever. Even land itself may have all or part of its usefulness exhausted after a few years. Some types of land used for quarries, mines, or land of another sort of wasting nature (истощение земли) would be examples. When a fixed asset is bought, then later put out of use by the firm, that part of the cost that is not recovered on disposal (не возмещается при ликвидации) is called depreciation.

It is obvious that the only time that depreciation can be calculated accurately is when the fixed asset is disposed of, and the difference between the cost to its owner and the amount received on disposal is then ascertained (определена). If a motor van was bought for $1,000 and sold five years later for $20, then the amount of depreciation is $1,000 - $20 = $980.

Depreciation is thus the part of the cost of the fixed asset consumed during its period of use by the firm. Therefore, it has been a cost for services consumed in the same way as costs for such items as wages, rent, lighting etc. Depreciation is, therefore, an expense and will need charging to the profit and loss account before ascertaining net profit or loss. Provision for depreciation suffered will therefore have to be made in the books in order that the net profits may be profits remaining after charging all the expenses of the period.

Depreciation is ‘the measure of the wearing out, consumption or other loss of value of fixed asset whether arising from use, effluxion of time (истечение срока) or obsolescence through technology and market changes.’ This definition refers to loss of value rather than cost (потеря стоимости, а не расходов). This has been done deliberately so that it also covers depreciation in any form of inflation accounting system (системы бухгалтерского учета, которые применяются в условиях инфляции).

Causes of depreciation (причины износа)

These may be divided into the main classes of physical deterioration (физическое старение), economic factors, the time factor, and depletion (истощение ресурсов).

Physical deterioration is caused mainly from wear and tear when the asset is in use, but also from erosion, rust, rot, and decay from being exposed to wind, rain, sun and other elements of nature.

Economic factors may be said to be those that cause the asset to be put out of use even though it is in good physical condition. These are largely obsolescence and inadequacy.

Obsolescence means the process of becoming obsolete or out of date. An example of this were the steam locomotives, some of them in good physical condition, which were rendered obsolete by the introduction of diesel and electric locomotives. The steam locomotives were put out of use by British Rail when they still had many more miles of potential use, because the newer locomotives were more efficient and economical to run.

Inadequacy refers to the termination of the use of an asset because of the growth and changes in the size of the firm. For instance, a small ferry boat that is operated by a firm at a seaside resort is entirely inadequate when the resort becomes more popular. It is found that it would be more efficient and economical to operate a larger ferry boat, and so the smaller boat is put out of use by the firm.

Both obsolescence and inadequacy do not necessarily mean that the asset is scrapped. It is merely put out of use by the firm. Another firm will often buy it. For example, many of the aeroplanes put out of use by large airlines are bought by smaller firms.

The time factor is obviously associated with all the causes mentioned already. However, there are fixed assets to which the time factor is connected in another way. There are assets with a fixed period of legal life such as leases, patents and copyrights. For instance a lease can be entered into for any period, while a patent’s legal life is sixteen years, but there are certain grounds on which this can be extended. Provision for the consumption (резерв на потребление) of these assets is called amortization rather than depreciation.

Other assets are of wasting character (носят «расходный» характер), perhaps due to extraction of raw materials from them. These materials are then either used by the firm to make something else, or are sold in their raw state to other firms. Natural resources such as mines, quarries and oil wells come under this heading. To provide for (возмещение) the consumption of an asset of a wasting character is called provision for depletion (резерв на истощение недр).

From the book by Frank Wood “Business Accounting”. Longman Group UK Limited, London, 1999.