02/04/2016
I sat in a committee meeting recently as we labored over depreciation.
I had a hard time because I rarely consider it. The number is just a
calculation I must do based on estimated useful lives of questionable
accuracy.
In general use depreciation means the amount of value lost
over some period. For instance, driving your brand-new car off
the dealer’s lot and watching its resale value drop radically
as the tires thump over the curb cutout is depreciation. So is
that ding from the parking lot.
Contrast that with your company’s tax return. The tax return
says that the truck your company bought last year for $50,000
has depreciated by $26,000, and your company’s financial
statements may say something entirely different. Depreciation is
the systematic (and arbitrary) allocation of the costs of
long-lived assets over their useful life. There are no studies
done to determine that you used 52% of it.
In fact we just looked in some IRS tables and did some
arithmetic. Congress, which likes tables, set them up in
1986. The results are fixed and determinable, another thing
that Congress likes.
And while Congress is happy to tell you how to run your business, they
don’t concern themselves with how profitable it is or whether it will
still be around when the truck must be replaced.
* "No Margin, No Mission*"[1]
It is the margin you get while performing your mission that
will fund the truck replacement. Either saving for it now or
borrowing for it later must come from the funds your firm
generates. The measure necessary for you to think sensibly
about the future is replacement cost, something that is
neither fixed nor necessarily determinable.
Productive capacity comprises all of the things that make it
possible to make the product or offer the services that
fulfill the mission. It is made up of things like trucks,
computers and desks. Your mission must generate the funds to
pay for these things.
[1] Sister Irene Kraus, First President of the Daughters of Charity
National Health System,