Accounting Research BULLETINS
Issued by the Committee on Accounting Procedure, American Institute of Accountants, 270 Madison Avenue, New York 16, N.Y.
Copyright 1954 by American Institute of Accountants
1. The declining-balance method of estimating periodic depreciation has a long history of use in England and in other countries including, to a limited extent, the United States. Interest in this method has been in-creased by its specific recognition for income-tax purposes in the Internal Revenue Code of 1954.
2. The declining-balance method is one of those which meets the requirements of being "systematic and rational."1 In those cases where the expected productivity or revenue-earning power of the asset is relatively greater during the earlier years of its life, or where maintenance charges tend to increase during the later years, the declining-balance method may well provide the most satisfactory allocation of cost. The conclusions of this bulletin also apply to other methods, including the "sum-of-the-years-digits" method, which produce substantially similar results.
3. When a change to the declining-balance method is made for general accounting purposes, and depreciation is a significant factor in the deter-mination of net income, the change in method, including the effect thereof, should be disclosed in the year in which the change is made.
4. There may be situations in which the declining-balance method is adopted for tax purposes but other appropriate methods are followed for financial accounting purposes. In such cases it may be that accounting recognition should be given to deferred income taxes. However, the committee is of the opinion that, in the ordinary situation, deferred income taxes need not be recognized in the accounts unless it is reasonably cer-tain that the reduction in taxes during the earlier years of use of the declining-balance method for tax purposes is merely a deferment of income taxes until a relatively few years later, and then only if the amounts are clearly material.
The statement entitled "Declining-balance Depreciation" was adopted by the assenting votes of nineteen members of the committee, of whom one, Mr. Stans, assented with qualification. Mr. Burns dissented.
1Accounting Terminology Bulletin No. 1, paragraph 56.