6. Probable change in ownership and consequent change in policy.
7. Probable change in the requirements of the market, necessitating an adaptation of the equipment to uses for which it was not originally intended.
At the time of installation the rate of depreciation must be based only on the normal factors—things which can with reasonable certainty be counted on. At intermediate periods in the life of the asset, a physical inspection should be made to compare the actual depreciation of the property with the estimated. If, then, it is found that any contingent factors have become real or reached the point of reasonable expectancy, these provide the basis for an adjustment of the rate for the remaining life-term of the asset.
Basis of Normal Rate
With regard to the normal rate, the following items demand first consideration:
- “1. Exterior or movable apparatus
- (a) Abuse
- (b) Neglect
- (c) Temperatures
- (d) Oxidation
- (e) Irregular shocks in use, such as starting
- or braking, also road or rail defects
- 2. Installed operating and generating machinery
- (a) Reversals, increased by rapidity and aggravated by shock
- (b) Irregular loads or service, aggravated by speedand sudden character
- (c) Excessive usage, resulting in increase of temperature of parts
- 3. Fixed equipment including boilers and piping
- (a) Excessive and irregular strains
- (b) Interior causes of decay
- (c) Chemical action
—all these being of greater or less effect, according to the time of daily usage and lack of periods of rest.”[29]
Policies as to Repairs
Without doubt the most important single factor in the determination of the depreciation rate is the normal policy as to repairs and maintenance. Physical deterioration is constantly at work. If this is counteracted by a liberal maintenance policy, not only is more efficient service secured but a longer service life is thereby insured. As soon as repairs are needed, although the efficiency of the asset may not be immediately impaired, the rate of deterioration is much accelerated unless the condition is corrected. Deterioration takes place day by day, but repairs obviously cannot be made at such short intervals—both because of the difficulty of detection and also because such a policy would not be economically practical. Every concern must consider its own peculiar problems and determine from these what shall constitute its normal repairs policy, and so far as possible this should be adhered to. The charges for repairs are bound to be of a more or less irregular character. Their handling is discussed on page 147.
Regardless of what the established policy as to repairs may be, conditions are sure to arise which make strict adherence to it impossible. There may occasionally be lack of funds at the time repairs are customarily attended to; it may be impossible to get the expert labor needed or the parts to replace worn-out units; or, and of oftenest occurrence, the need of repairs may coincide with a period of intense activity when the plant is being worked to its limit and in consequence there is no opportunity for making repairs. It is clear that rates based on one shift and the normal use of equipment during eight hours would be inadequate for three shifts and twenty-four hours of use; for in addition to a threefold intensity of operation this makes impossible adherence to the normal repairs policy based on an eight-hour schedule.