5. Periodic appraisal value.
On the form shown below, provision is made for adjustment of the original estimate of depreciation. Where there is a realizable scrap value, additional columns to show scrap value and total depreciation to be written off should be provided. The form shown would have to be adapted to the method of depreciation decided upon as applicable to a particular asset. Thus, if working hours or service output are the basis, provision should be made to show the basis of calculation of each period’s depreciation burden. The following form is well adapted to make record of the asset under the straight line method of depreciation.
From “Principles of Depreciation” by Earl A. Saliers.
Plant Ledger (showing adjustment of value)
Periodic Revision of Rates
In Chapter VIII where the problems in connection with depreciation rates were discussed, a periodic testing of the effects of the particular rate employed was laid down as an essential for the application of any rate. The determination of the rate in the first place is a problem requiring expert knowledge and the most careful consideration of many factors. Hardly less important, however, for the successful operation of any depreciation scheme is the attention given to the manner of its operation and a modification and readjustment of rates to bring the theoretical expectation of the wasting of the asset into accord with its actual wasting to date.
At the beginning, when the asset is first installed the depreciation rate must be based, so far as this particular asset is concerned, entirely on contingencies. None of its life has been lived; none of its actions and behavior have yet become a matter of record. What it is apt to do can be forecast only by a study of its ancestors—heredity as modified by a reasonable expectation of change due to different environment. However, at the end of five years, say, there is available a record of service and behavior in the light of which not only can the accuracy of the forecast be judged, but also a more reliable forecast for the remainder of its service life can be made.
Frequency of Revision of Rates
Because of the conditions stated above, a periodic testing of rates should be made. How frequently this should be done depends largely on local conditions. Certainly sufficient time should be allowed to pass to secure a really worthwhile test. What constitutes a sufficient time depends largely on the expected length of life. Long-lived assets obviously need not be tested so frequently as short-lived assets; and the periods should be shortened when the asset has been serving under supernormal conditions; the intensity of its life would be a controlling factor. It is usually stated that this testing of rates and conditions should be made at least every five years in the form of an appraisal. In the physical appraisal care should be used not to allow present market prices to enter into it, else the element of fluctuation may easily be brought in to nullify or exaggerate the real results of depreciation.