This is hardly a method of calculating the depreciation charge, but rather of recognizing the fact of depreciation by charging all renewals and replacements to revenue. It is argued that in a large, widely extended plant after depreciation has reached the point where renewals are necessary, the charging of all renewals and replacements as expenses will take care of all accruing depreciation and secure a fairly uniform charge to product from period to period. Under this plan depreciation as such does not appear on the books but is taken care of under other titles.
(c) The Fifty Per Cent Method
This is somewhat similar to the replacement method in that it is applicable only after depreciation has reached the renewals stage. It is claimed for it that, in a property or class of asset consisting of many similar parts, as railroad ties, for example, after the stage of normal repairs has been reached so that the parts are in all degrees of repair from 0% to 100%, the normal maintenance and renewals policy will maintain the property or asset always in about 50% condition. Therefore the total depreciation for the asset or class is the other 50%, which never reaches a larger amount because of a constant renewal of parts. This 50% depreciation may or may not be carried on the books but it exists nevertheless. For the conditions under which it is applicable as above, the law of averages doubtless applies and makes the estimate a fairly good one.
(d) Appraisal Method
Here a physical appraisal of the asset or property is taken at the close of every fiscal period. The difference in value between the two appraisals for successive fiscal periods represents the depreciation for the period and would be brought on the books as such.
(e) Insurance Method
This is applicable only to large properties with assets widely distributed. Its operation “involves the actuarial principles of ordinary insurance. This means that the fund accumulated by depreciation charges should not be reserved as an accumulation until it can be spent for the purpose of replacing the identical property upon which the fund accumulated when such property is abandoned; and furthermore, that this fund should be expended, in whole or in part, during the year in which it is created, in the replacement of equipment.”
(f) Gross Earnings Method
Here the depreciation estimate is based on the gross earnings for the period. This does not necessarily mean that the depreciation estimate will be large when profits are large, and small or nothing when profits are small, although it may be made to apply in that way in individual cases. The policy of making ample reserves for depreciation in good years and scant reserves in poor years is not to be wholly condemned. Depreciation, however, has no relation to, or dependence upon, profits. Rather, profits depend on depreciation in the sense that they cannot exist until after charges for depreciation have been taken care of. Depreciation considered as a fixed per cent of gross earnings is almost the same in effect as the service output method, and has much to commend it.
Condition Per Cent