This past August, the Financial Accounting Standards Board (FASB) asked for input regarding four possible agenda items: Intangible Assets, Pensions, Liabilities and Equity, and Performance Reporting. Paul B. W. Miller and Paul R. Bahnson from Accounting Today favored pursuing radical reform for all four and suggested a more aggressive fifth reform.
It’s well past time to rectify the perennial misbelief that systematic depreciation produces useful information and eliminate its persistent significant contamination of financial statements.
As for us, we spell depreciation “duh-preciation” because it’s an obsolete, naive, ignorant, crude, ultra-simplistic, lazy and otherwise unsophisticated response to urgent demands for useful information about productive assets.
So, what’s the problem? Annual duh-preciation is based on the false premise that value is always lost and never gained, and it is not observed but calculated by combining a single dubious fact with these three unverifiable predictions:
- Capitalized cost is a fallacious measure of original value because it’s based on the buyer’s sacrifice, instead of the obtained economic utility. (Even if cost somehow could equal value, it would quickly lose that equality.)
- Service life cannot be validated until the asset is taken out of service.
- Salvage value cannot be validated until the asset is sold.
- The allocation pattern is a speculative conjecture that cannot possibly coincide with actual future value changes.
The conclusion is indisputable: The consequence of combining this premise with these false and literally unknowable factors makes duh-preciation a complete fabrication that has no correlation with any real results of real events. If that conclusion is valid, then accountants are both irrational and irresponsible to report these expedient imaginary numbers as if they are facts.
Without doubt, systematic duh-preciation leaves abundant havoc in its wake in the form of contrived numbers that masquerade as useful information. This practice pollutes every reported measure it touches, especially assets, cost of goods sold, operating costs, and, of course, earnings. It also ruins return ratios by putting spurious numbers in both the numerator and denominator.
In light of all the duh-preciation debris strewn throughout the statements, is it any wonder that stock prices and earnings numbers aren’t strongly correlated?
Whenever we bring up these shortcomings, accountants rationalize the status quo with the same 180-year-old excuse that there are no available methods for estimating tangible assets’ market values. This shortsighted excuse is embarrassing! After all, if estimation techniques are readily applied for impairments and combinations, then why not use them everywhere?
After 180 years, it’s long past time to get real about valuation instead of acting like bogus duh-preciation and impairment numbers are relevant and reliable when they’re neither.
Questions? Comments? Let us know in the comments section below.
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