Current cost depreciation methods and the valuation of farm tractors and headers

Abstract

More accurate valuation of fixed assets in the Balance Sheet and calculation of depreciation in current cost terms are aims of inflation accounting. This report demonstrates which of the commonly used traditional depreciation methods might best be adapted to measurement of fixed asset values and current cost depreciation under the guidelines established in the Richardson Report. Also, depreciation allowances and book values are compared for the proposed current cost methods and the present historical cost system. The comparison of methods (and rates) of depreciation was made using a cross-section of tractors and headers for which data was collected in a recent survey of New Zealand wheat growers. The best method and optimum rate of depreciation was defined on the basis of minimum sums of squares of errors (SSE) between assessed values and calculated book values. This approach attempts to reconcile the accounting and economic viewpoints with regard to measurement of depreciation. The use of standard depreciation formulae and indexed historical cost means that the results may be useful for accounting purposes. However, since depreciation is calculated by valuing assets first and then computing the depreciation, the approach conforms to economic theory.