In connection with both the estimate for depreciation and for depletion, the elements of unusual risks, due to fires, floods, and the like, should be taken into account. Their effect might be to cut down the supply of available product and so increase the periodic depletion charge. Another factor, of great importance at times, is the available supply of any auxiliary product needed for the treatment of the main product. Thus, large ore bodies may remain unmined and unprofitable because of the failure of a ready supply of auxiliary material needed in the reduction, smelting, or refining of the ore. This applies particularly to iron ores.
Water Rights
Sometimes valuable water rights are acquired along with mining property, and it may be profitable to utilize them for the manufacture and sale of power long after the depletion of the mine. In that case their capital value should be separated from that of the mining venture, and retained as an investment; or a new company may be formed to carry on the power project after ceasing mining operations.
Leaseholds
On the boundary line between a depreciating asset and one subject to depletion stands a leasehold, i.e., the right of occupancy of premises for a stated term. Thus, a building may be rented for a term of years; or a piece of land may be leased for a long enough period to justify the erection of a building thereon, the building going to the owner of the land as a gift or at an appraised value, or the land may revert in its original condition to the owner upon expiration of the period of the lease, according to the contract. The payment for the lease may be an annual sum similar to a rental charge, or a bonus and an annual sum. In the latter case, the bonus should be treated as a deferred charge and spread as additional rent over the period of the lease.
Leases may run for any period up to 99 years, 63 and 84 years being favorite terms in New York. An original lessee may sell his lease outright for a set sum sufficient to cover the remaining period of the lease, or on an annual rental basis. The set sum is calculated as the present worth of an annuity of the amount of a fair annual rental.
Where property values have greatly appreciated, a leasehold on favorable terms may have a high market value which may not appear on the books or balance sheet. If the terms of the lease call only for a periodic payment like rent, the value of the lease will not usually appear on the books. If the lease is purchased outright for a lump sum or a bonus is paid, some value for it will appear on the books. Where the balance sheet is to be used as the basis for credit, the present appraised value of the leasehold should appear, either in a footnote or preferably incorporated into the balance sheet with an offsetting reserve.
If the leasehold is carried at any value on the books, this must, of course, be depreciated or amortized by the end of the leased period. As stated above, the periodic charge for this is to the rent account and the credit to the leasehold account, writing it down directly instead of by means of a reserve. The straight line method of amortization is the easiest of application, but authorities seem to favor, on theoretical grounds, the annuity method which brings in the element of interest. If the agreement provides for the reversion of the building to the owner of the leased land, then also the full cost of the building must be depreciated over the life of the lease. Any excess of this depreciation over normal depreciation is in the nature of a rental charge but not usually of sufficient importance to require segregation. If the premises must be returned in original condition to the owner, the net costs of demolishing any structures erected thereon must be treated as expenses of the lease and provided for accordingly.
CHAPTER XVIII
INTANGIBLE ASSETS—PATENTS,
FRANCHISES, GOOD-WILL
General Considerations