Allocation versus Valuation
Many find it tempting to consider the book value of a fixed asset as a proxy for market value, but we know too well this is financially myopic. Depreciation is a matter of cost allocation, not asset valuation.
Wouldn’t it be swell if we could mark fixed assets to market values and then depreciate them based on economic schedules? Practical? No. But it is an appealing idea.
Wouldn’t it also be swell if accumulated depreciation were considered and treated as a piggy bank into which a portion of current revenues and earnings are deposited to buy and build replacement assets to sustain the earnings base of the institution? …another reasonably cool idea that is too frequently disregarded by not-for-profit institutions who feel exempt from prudent financial practice.
I think the time has come to reconsider the concept of depreciation and put it in its rightful place with regard to managing for the economic sustainability of the firm.
For the sake of transparency and fair disclosure, let’s get it right for all institutional types.
Posted on Thu, April 8, 2010
by Timothy E. Moffit