DEPRECIATION

Evening Post, Volume CXXIV, Issue 87, 9 October 1937, Page 15

DEPRECIATION

A BUSINESS HERESY

■ As an aftermath of the depression e there has developed a school of thought n which, unfortunately, has been eme braced by some who are regarded as business men, to the effect that proper _ provision for depreciation and obsolescence is an anti-social practice," com- / ments the New Zealand "Accountants' , Journal" editorially. "It is contended '■ in certain quarters that companies have been kept alive, and are function- "> ing beyond their period of usefulness ■. simply because in bygone years those ■, responsible for the management and i control have set aside from trading profits sums which should have been distributed to shareholders. The idea is that when machinery and plant wear out the stockholders should be approached for further capital with which to purchase the new equipment. "Very little thought is needed to show the fallacy of the arguments in favour of a policy of letting the morrow take care of itself. Apart from the fact that if money is not set aside for the depreciation of machinery which must inevitably wear out or become obsolete, the capital assets become dissipated, and that if all earnings are distributed the return represents capital as well as income, there are other factors to be considered. Generally speaking, shareholders in a concern are not static. Abnormal divi- i dends from any company would causa j the shares not only to rise artificially in value, but to change hands. The time would come, when innocent parties would be left to 'carry the baby,' and it is not difficult to visualise just how they would react if in the light of falling returns they were asked to provide new capital for the replacement of machinery which in the case of any concern prudently managed would be paid for out of depreciation funds. "Directors who pursue a policy of distributing all earnings of the question of providing for the replacement o£ wasting assets will no doubt be popular for a time, but the very shareholders who participated in the fruits of such a foolish policy will be the first to condemn the board if further capital funds are required to replenish worn-out plant. Even under existing conditions directors are too prone to set aside insufficient sums and this has been noticeable in recent years where, in order to maintain even moderate dividends, boards have been inclined t allow plants to run down. We venture to say that with dozens of our industrial plants in this Dominion today there is a crying need for the provision of up-to-date equipment. "Touching on this question o£ depreciation. it was refreshing to read of a discussion which recently took place at a meeting of the Wellington Harbour Board. In order to offset increased charges for labour and materials it was suggested that instead of passing on the extra expenditure by way of additional port and wharfage levies the board should for a time reduce the depreciation payments. Fortunately the majority of members, strongly reinforced by the views of one of their colleagues, the Hon. Walter Nash, refused to adopt a policy of 'burying their heads in the sand' and preferred to risk an outcry from users of the facilities. We are confident that those who stand for orthodox accountancy - principles and prudent finance can rely on public opinion to support them . in their preference for a sound sinking fund and depreciation plan." .