Depreciation on appreciation;

              Accounting Research
BULLETINS
Depreciation on Appreciation
Issued by the Committee on Accounting Procedure, American Institute of Accountants, 270 Madison Avenue, New York 16, N. Y. Copyright 1940 by American Institute of Accountants
SCOPE OF THIS STATEMENT
1. The committee has given extended consideration to the question of the proper accounting for depreciation on appreciation. The re-search staff has studied the available literature, and has caused several special memoranda to be prepared. The committee has dis-cussed the subject at three of its meetings, and by correspondence.
As a result the committee now makes a definite recommendation with respect to the charge to be made against income in such cases, but has as yet developed no definite recommendations on other aspects of the problem. It has therefore been considered useful for the committee to issue this statement of its conclusion as to the proper charge against income, and to add thereto a discussion of other relevant questions. The latter discussion will, it is hoped, be helpful in furthering the formulation of conclusions on these other ques-tions.
2. Accounting for fixed assets should normally be based on cost, and any attempt to make property accounts in general reflect current values is both impracticable and inexpedient. Appreciation normally should not be reflected on the books of account of corporations. The problem which the committee here considers is the treatment of charges against income where appreciation has in fact been entered on the books.
3. The word "depreciation" is here used in its ordinary accounting sense and not as the converse of "appreciation".
This discussion does not deal with cases in which the value of property may exceed the amount at which it is carried on the books because of increment due to lapse of time—such as the growth of timber, or to such causes as solidification or adaptation—as of the roadbed of a railroad or a dam, or by reason of excessive allowance for depreciation in the past. On these cases no opinion is here ex-pressed or implied. This bulletin is concerned primarily with apprecia-tion due to (1) increases in the relevant price levels, or (2) demonstra-tion that the property has greater usefulness than is reflected in the
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April 1940
No. 5