“Any theory for ascertaining existing depreciation in the plant of a public utility which confines such depreciation solely to the actual, visible, physical, demonstrable deterioration which can be seen by the human eye and measured by the human hand, must of necessity ignore that other species of deterioration which the experience of the past has demonstrated beyond peradventure exists in the property of every telephone company, although it cannot always be seen by the human eye or measured by the human hand. We refer to that tendency upon the part of all such property to become inadequate or obsolete with the lapse of time.”
“Accounting” and “Fair” Depreciation
Another distinction is sometimes made between “accounting” depreciation, previously mentioned, and “fair” depreciation or depreciation of valuation. Accounting depreciation signifies the depreciation, determined by whatever method, which has been taken into the accounts, i.e., the depreciation as shown on the books. This is approximately the same as theoretical depreciation defined above. Its point of view is that of financing the loss of value caused by depreciation so as to cover the entire loss by the time the asset is retired from active service rather than that of establishing a true actual value of the asset at intermediate periods. On the other hand, fair depreciation or depreciation of valuation is the “sum that should be deducted from original cost to date (or from estimated cost of reproduction new)[17] as a step in finding that which the courts have called ‘fair value.’” Here the point of view is essentially that of showing the true value of the asset at a given date. Determination of this is fundamentally an engineering problem in the solution of which cognizance must be taken of:
1. Accounting depreciation.
2. The managerial policy as to repairs, maintenance, and renewals.
3. The past performance and expected future performance of the asset.
4. All other factors locally present which may affect the determination of the present, existing values in the asset.
Under certain conditions fair depreciation corresponds roughly with actual or absolute depreciation as defined above.
Complete and Incomplete Depreciation
Depreciation is sometimes classed as “complete” and “incomplete.” Complete depreciation refers to those assets or properties which have been discarded because no longer capable of economical service. When their cycle comes to an end, depreciation is complete. Incomplete depreciation refers to the amount of the decrement in value of assets which are still in service. The accounting for complete depreciation requires little consideration except so far as rates of depreciation are concerned. This class of depreciation represents the accomplished fact and therefore furnishes data and statistics by which the expected depreciation of similar new assets can be calculated. The accountant, therefore, is concerned with it purely as an experimental means of forecasting the future.