Valuation of Buildings
In the valuation of buildings a much more difficult problem is encountered after the structure is completed and repairs and alterations are made. It is the old problem of the proper differentiation between capital and revenue charges, and is particularly difficult of solution in some instances. Nothing more can be said here than was stated in [Chapter V] where the fundamental rules to be observed in distinguishing between repairs, renewals, and betterments were laid down. Changes in interior arrangement to accommodate new fixtures and equipment, or a different distribution and arrangement of existing equipment with a view to better operating conditions require particularly careful handling. Such expenses were mentioned in connection with the treatment of machinery on page 290, and the reader is referred to it. Whatever decision is reached on any doubtful item of this or a similar kind, the supporting vouchers, bills, and papers constituting the full evidence should be carefully preserved and made available for review in case of any future questioning of the charges.
Betterments on Leased Buildings
In the case of betterments made on leased buildings, provision must be made to write off their entire cost by the time of the expiration of the lease, as they almost invariably revert with the building to the owner. Sometimes the betterment, if material and so agreed as between lessee and owner, may be taken over at a depreciated value upon expiration of the lease. Here depreciation of the betterment must be provided for. Whether all or only part of the cost of the betterment is to be charged off periodically, record of this is best accomplished as an addition to the periodic rent charge.
Application of Depreciation
As stated above, the basis for valuation of buildings is at full cost less depreciation. It is the method of appraisal, although the inventory may provide a good check in the case of concerns owning many structures. A subsidiary record of buildings showing separate costs and location, or at least a map showing location, may then prove very essential, particularly in the case of fire losses. In the application of depreciation to buildings many things must be carefully considered. Not only must the depreciation of use, i.e., wear and tear and lapse of time, be considered but also obsolescence and inadequacy as factors in shortening the service life of the structure.
Buildings used for some purposes deteriorate more rapidly than when put to other uses. Vibrations, whether caused by own use or due to exterior causes, increase the rapidity of deterioration. Susceptibility to fire, explosion, and the like, due to the nature of their use, should be taken into account. It is stated that power plants operating under normal conditions provide for an entire replacement of plant every five years. Power houses depreciate more rapidly than store houses. A building put to various uses will be subject in its different parts to varying rates of depreciation. Although a composite rate applicable to the whole structure will give a satisfactory valuation, if accurate departmental costs are required it would be desirable to apply the different rates to the building values distributed over the various departments. In practice this is seldom done.
According to different authorities, rates of depreciation ranging from 1% to 5% constitute a fair average. The nature of the structure, whether occupied by owner or tenant, its location, kind of composition, etc., are additional factors for consideration. While some authoritative rates are available, no standard rates, unless compulsory, should be used without a careful study of local conditions. Structures which are temporary should, of course, be charged for their net cost, i.e., full cost less salvage value, against the product or the job which makes use of them. Other cheap structures such as mine buildings, shaft houses, temporary housings for lumber mills, and the like, should be written down very rapidly. Having practically no realizable salvage value and their life being brief, they should be charged off the books at least during the period of their use.
Buildings owned as a freehold for life, or, stated otherwise, a life interest in buildings, are not subject to depreciation, the remainderman taking the building in its condition as released by the party owning the life interest.
Accounting for Land