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An index of growth due to depreciation

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  • RICHARD P. BRIEF
  • HECTOR R. ANTON

Abstract

. While factors such as inflation, technological change and growth often have been discussed in connection with the adequacy of provisions for depreciation under a historical cost model, there is another dimension to the capital maintenance problem and it concerns the multiplier effect of depreciation. When an amount equal to depreciation is reinvested, a firm's productive capacity tends to increase. Reinvestment of depreciation also increases a firm's financial capital if book depreciation is more accelerated than economic depreciation. Based on a model developed by Ijiri (1967), this paper derives an index of this growth due to depreciation. The index estimates a bias in conventional depreciation methods that has been overlooked in the literature on the subject. This bias has implications for inflation accounting because if conventional depreciation methods have a built†in growth bias, adjustments for inflation may be a type of double counting. A second implication mentioned concerns the bias in accounting rates of return. Résumé. Bien que des facteurs tels l'inflation, les changements technologiques et la croissance ont souvent été examinés à propos de la pertinence des provisions pour dépréciation dans le cadre du modèle au coût historique, un autre aspect du problème de préservation du capital subsiste et il concerne l'effet multiplicateur de l'amortissement. Lorsqu'un montant égal à l'amortissement est réinvesti, la capacité d'exploitation de la firme a tendance à s'accroître. Le réinvestissement de l'amortissement fait aussi augmenter le capital de la firme si l'amortissement comptable est plus accéléré que la dépréciation économique. En se basant sur un modèle élaboré par Ijiri (1967), cet article dérive un indice de cette croissance attribuable à l'amortissement. L'indice estime un biais des méthodes traditionnelles, qui a été négligé dans les recherches consacrées au sujet. Ce biais a des implications en comptabilité des effets de l'inflation, car si les méthodes d'amortissement traditionnelles comportent implicitement ce biais de croissance, les redressements relatifs à l'inflation peuvent être assimilés à un double comptage. Une deuxième conséquence est signalée, soit le biais relatif aux taux de rendement comptable.

Suggested Citation

  • Richard P. Brief & Hector R. Anton, 1987. "An index of growth due to depreciation," Contemporary Accounting Research, John Wiley & Sons, vol. 3(2), pages 394-407, March.
    • Handle: RePEc:wly:coacre:v:3:y:1987:i:2:p:394-407
    DOI: 10.1111/j.1911-3846.1987.tb00646.x
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    References listed on IDEAS

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    1. Yuji Ijiri, 1967. "On the Convergence of Periodic Reinvestments by an Amount Equal to Depreciation," Management Science, INFORMS, vol. 13(5), pages 321-335, January.
    2. Dorfman, Robert, 1981. "The Meaning of Internal Rates of Return," Journal of Finance, American Finance Association, vol. 36(5), pages 1011-1021, December.
    3. Beaver, Wh & Dukes, Re, 1974. "Delta-Depreciation Methods - Some Analytical Results," Journal of Accounting Research, Wiley Blackwell, vol. 12(2), pages 205-215.
    4. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
    5. Barlev, B & Levy, H, 1979. "Variability Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 17(2), pages 305-315.
    6. Skinner, Rc, 1982. "Fixed Asset Lives And Replacement Cost Accounting," Journal of Accounting Research, Wiley Blackwell, vol. 20(1), pages 210-226.
    7. Kay, John A, 1976. "Accountants, Too, Could Be Happy in a Golden Age: The Accountant's Rate of Profit and the Internal Rate of Return," Oxford Economic Papers, Oxford University Press, vol. 28(3), pages 447-460, November.
    8. George O. May, 1954. "Concepts of Business Income and Their Implementation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 68(1), pages 1-18.
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    1. Berg, M. & De Waegenaere, A.M.B. & Wielhouwer, J.L., 1996. "Optimal Tax Reduction by Depreciation : A Stochastic Model," Discussion Paper 1996-102, Tilburg University, Center for Economic Research.
    2. Berg, M. & De Waegenaere, A.M.B. & Wielhouwer, J.L., 1996. "Optimal Tax Reduction by Depreciation : A Stochastic Model," Other publications TiSEM e0cfb53a-86e6-4bd8-992d-e, Tilburg University, School of Economics and Management.

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