Emergency facilities -- Depreciation, amortization, and income taxes;

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Issued by the Committee on Accounting Procedure, American Institute of Accountants, 270 Madison Avenue. New York 16, N. Y.
Copyright 1952 by American Institute of Accountants
Accounting Research
BULLETINS
November, 1952
Emergency Facilities — Depreciation, Amortization, and Income Taxes
No. 42
CERTIFICATES OF NECESSITY
1. Section 124A of the Internal Revenue Code, which was added by the Revenue Act of 1950, provides for the issuance of certificates of necessity under which all or part of the cost of so-called emergency facilities may be amortized over a period of 60 months for income tax purposes. In many cases, the amounts involved are material, and companies are faced with the problem of deciding whether to adopt the 60-month period over which the portions of the cost of the facili-ties covered by certificates of necessity may be amortized for income tax purposes as the period over which they are to be depreciated in the accounts.
2. Thinking on this question apparently has become confused because many so-called percentage certificates have been issued cov-ering less than the entire cost of the facility. This fact, together with the fact that the probable economic usefulness of the facility after the close of the five-year amortization period is considered by the certifying authority in determining the percentage covered by these certificates, has led many to believe that the percentage used repre-sents the Government's conclusion as to the proportion of the cost of the facility that is not expected to have usefulness at the end of five years.
3. In some cases, it is apparent that the probable lack of economic usefulness of the facility after the close of the amortization period must constitute the principal if not the sole basis for determining the percentage to be included in the certificate. However, it must be recognized that the certifying authority has acted under orders to give consideration also to a variety of other factors to the end that the amount certified may be the minimum amount necessary to secure expansion of industrial capacity in the interest of national defense during the emergency period. Among the factors required to be con-sidered in the issuance of these certificates, in addition to loss of useful value, are (a) character of business, (b) extent of risk assumed (includ-ing the amount and source of capital employed, and the potentiality of recovering capital or retiring debt through tax savings or pricing),
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