DEPRECIATION

Evening Post, Volume CXXVI, Issue 78, 29 September 1938, Page 20

DEPRECIATION

FORESIGHT PREVENTS RUIN

New Zealand is one of many countries in which various companies have been ruined because they carried on without making proper provision for depreciation of assets. Helpful advice on that matter is given by Mr. C. P. Barrowcliff in "The Incorporated Accountants' Journal" (London). "The correct position would seem to be to write an asset off in its lifetime," he states, "or' if there is a possibility of earlier replacement then'it should be written off during such shorter period. So far as this applies to such things as motors, fixtures, and fittings, little difficulty presents itself. It does appear, however, that, it is not so clear-that the greatest care is needed in considering the expenditure upon assess for projects which may be subject to change or alteration in method. In the case of manufacturing concerns, who is to say how long a particular process may last before being replaced by an altogether new process? Anyfirm in such a case should be in a position %o scrap its existing plant, machinery, and equipment, and replace it witn new plant, machinery, and equipment. To do so means writing off the old expenditure so that the bal-ance-sheet is not encumbered with worthless assets. Therefore - the provision for depreciation should in all such cases be. speeded, up with the idea of writing expenditure down to a

figure which can easily be written off at short notice.

"One of the lessons of the post-war period was this very important question of providing depreciation during successful years for the risk of obsolescence. In so many instances the /risk was either overlooked or minimised, with disastrous consequences. Losses arising from modernisation of plant and equipment, as it was called, had to be provided by writing down capital, whereas due regard to the necessity of providing for obsolescence at the time of profit-making would have avoided in many cases .this .unfortunate and undesirable proceeding. . "It must be kept always in mirwl that v profits do not really exist until provision has been made for all expenses incurred' in endeavouring to , make such profits. Wear or tear of asset* clearly is an expense to be provided for, and so is the probable loss ori an asset through its ceasing to be economically profitable or +hrough its being considered desirable to replace it before* the end of its life."