AMORTIZATION OF MACHINERY AND EQUIPMENT IN SOVIET INDUSTRY

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• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01141A002600020001-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 88
• Document Creation Date: December 23, 2016
• Document Release Date: May 30, 2013
• Sequence Number: 1
• Publication Date: December 1, 1962
• Content Type: REPORT

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N? 3
AMORTIZATION OF MACHINERY AND EQUIPMENT
IN SOVIET INDUSTRY
December 1962
NOT TO BE REPRODUCED IN WHOLE OR
IN PART WITHOUT THE PERMISSION OF
THE CENTRAL INTELLIGENCE AGENCY
CENTRAL INTELLIGENCE AGENCY
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NOTICE
This report has been loaned to the recipient
by the Central Intelligence Agency. When it
has served its purpose it should be destroyed
or returned to the:
CIA Librarian
Central Intelligence Agency
Washington 25, D. C.
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AMORTIZATION OF MACHINERY AND EQUIPMENT
IN SOVIET INDUSTRY
CIA/RR ER 62-40
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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STAT
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FOREWORD
The amortization practices that the USSR has adopted for state-
owned industry, particularly for the amortization of industrial
machinery and equipment, are examined in this report. Soviet prac-
tices are compared with those adopted primarily for income tax
purposes in the US. In addition, some of the implications for the
growth of Soviet industry also are considered.
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CONTENTS
Summary and Conclusions
I. Introduction
II. Comparison of Amortization Practices in the US and the
USSR
A. Treatment of Fixed Assets
Page
1
5
9
9
1.
Fixed Asset Accounts and Depreciation Reserve
Accounts
9
a.
General
9
b.
In US Industry
9
c.
In Soviet Industry
12
2.
Valuation
15
a.
General
15
b.
In US Industry
17
c.
In Soviet Industry
20
3.
Service Life
24
a.
General
24
b.
In US Industry
27
c.
In Soviet Industry
31
B.
Mechanics of Depreciation and Amortization
35
1.
Principal Methods of Depreciation
35
a.
Straight Line Method
36
b.
Liberalized Methods
38
(1) Declining Balance Method
39
(2) Sum of the Year Digits Method
4o
(3) Economic Effects
40
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2. Amortization Rate and Amortization Charge in
Soviet Industry
Page
a. Calculation of Basic Amortization Rates . . . 42
b. Use of Composite Rates
(1) Composite Rates for Industries
(2) Composite Rates for Enterprises
(3) Division of Over-All Composite Rates into
Subrates for Capital Investment and
Capital Repair
44
48
c. New Standard Rates 49
d. Amortization Charge 51
III. Importance of Amortization in the USSR
55
A. As a Source of Financing Capital Investment 55
B. As a Source of Financing Capital Repair 60
C. As an Element in the Cost of Production 63
Appendix A.
Appendix B.
Appendix C.
Appendix D.
Appendixes
Comparison of the Primary Classification of
Machinery and Equipment Commonly Found in the
Fixed Asset Accounts of US and Soviet Indus-
trial Firms 67
Methods of Valuing and Revaluing Soviet Indus-
trial Fixed Assets
Relative Value Weights of Primary Categories of
Industrial Equipment Used in Computing Com-
posite Amortization Rates for Soviet Industry .
Amortization Rates Established in the USSR in
1930
69
73
79
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Tables
Page
1. US: Comparison of Capital Recovery Under the Principal
Methods of Depreciation 37
2. USSR: Comparison of Composite Amortization Rates in
Industry, 1938, 1950, 1952, and 1956 46
3. USSR: Amortization Deductions as a Source of Financing
Centralized Capital Investment in the Economy and in
Industry, 1956-60 56
4. USSR: Amortization Deductions as a Source of Financing
Centralized Capital Repair in the Economy and in
Industry, 1959-60 62
5. USSR: Amortization Charges as a Percent of Total Out-
lays for Production in Selected Industries, Selected
Years, 1940-59 64
6. USSR: Relative Value Weights for Primary Categories
of Industrial Equipment in Various Industries, 1956 714-
7. USSR: Relative Value Weights for Primary Categories
of Industrial Equipment in Selected Industries,
Selected Years, 1951-60 76
8. USSR: Effect of the 1960 Revaluation on the Relative
Value Weights of Major Types of Productive Fixed Assets
in Industry 77
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AMORTIZATION OF MACHINERY AND EQUIPMENT IN SOVIET INDUSTRY*
Summary and Conclusions
In the postwar period the Soviet government, like other governments,
has reexamined its policy with respect to the amortization (or depreci-
ation) of fixed assets, especially industrial machinery and equipment.
The inadequacy of official prewar rates usually is ascribed to the
postwar acceleration of technological progress, a development that has
increased the incidence of obsolescence in industrial equipment. In
the USSR an additional factor behind current reform of the amortization
system is the recently announced decision to use industrial fixed as-
sets more intensively, a practice that normally tends to shorten the
useful lives of industrial equipment.
Following World War II, both the US and the USSR, unlike some other
industrial nations, continued to adhere to the orthodox ("original [his-
torical] cost - useful life") concept of depreciation accounting as the
basis of depreciation policy. Now, however, the USSR is preparing to
adopt a form of "price-level" depreciation accounting. Beginning in
1963, Soviet fixed assets are to be amortized on the basis of their cur-
rent replacement cost instead of their historical cost. At the same
time, a revised schedule of standard amortization rates containing newly
computed allowances for obsolescence and physical wear is to be intro-
duced.
Although it is premature to pass judgment on the new Soviet amorti-
zation rates at this time, there is evidence that the rates will be
higher than previously, particularly in the case of machinery and equip-
ment. The average rate for the category production machinery and equip-
ment, which accounts for approximately one-fourth of the value of the
productive fixed assets in Soviet industry, reportedly is being set at
13.3 percent. The rates for the categories power machinery and equipment
and transportation equipment are to be 9.9 and 8.8 percent, respectively.
* Although this report anticipates the revision of the US Treasury
Department's Bulletin "F," the report was already in process of publica-
tion at the times that the new depreciation regulations (Depreciation
Guidelines and Rules, US Internal Revenue Service Publication No. 456,
July 1962) were actually issued. (See, however, the first footnotes on
pp. 28 and 53, below.) Because it will be some time before the impact
of these new regulations can be studied, it has not seemed advisable to
hold up the publication of this report.
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These standard rates reflect a significant increase above the basic rates
of 1930, which have remained essentially in use up the present time.
In the USSR, where virtually all industrial fixed assets are state
property, amortization deductions have been a source of financing capital
investment for many years. Accordingly, a rise in Soviet amortization
rates could signify an intention to increase the amount of capital
investment that is financed through amortization deductions. When
considering the significance of amortization rates and amortization
deductions in the USSR or when comparing them with depreciation rates
and depreciation accruals in the US, however, allowance should be
made for certain features of the Soviet system, primarily the division
of the amortization rate between a subrate for capital investment and
a subrate for capital repair.
Unlike most US depreciation rates, Soviet amortization rates are
not the reciprocals of the service lives of the fixed assets to which
they pertain, precisely because they include a very substantial allow-
ance for capital repair. Under the new over-all standard rate of
13.3 percent for the category production machinery and equipment in
the USSR, for example, a subrate of 6.5 percent is to be established
for the capital investment component of amortization, and a subrate
of 6.8 percent is to be established for the capital repair component.
The allocation of the amortization deductions of Soviet industry
follows the prevailing division of the over-all amortization rate
between the subrate for capital investment and the subrate for capital
repair. Under the 1960 plan, for example, approximately 2.7 billion
rubles* (47 percent) of the amortization deductions of state-owned
industrial enterprises and construction organizations were to be
used for financing capital investment in industry, and approximately
3.1 billion rubles (53 percent) were earmarked for capital repair.
Therefore, when Soviet economists discuss amortization deductions
as a percentage of capital investment, they ordinarily refer only to
those amortization deductions that are computed by using the capital
investment subrate. At present, about one-sixth of the centralized
capital funds invested annually in Soviet industry (including the
construction industry) is currently financed from these amortization
deductions. In general, amortization deductions have tended to be
* Ruble values in this report are given in new rubles established by
the Soviet currency reform of 1 January 1961. A nominal rate of ex-
change based on the gold content of the respective currencies is
0.90 ruble to US $1. This rate, however, should not be interpreted
as an estimate of the equivalent dollar value of similar US goods or
services.
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weighted slightly in favor of capital investment in most branches of
heavy industry and heavily in favor of capital repair in light industry
and in the food and paper industries.
The amortization deductions that industrial enterprises deposit
with the state for use as centralized capital investments may be redis-
tributed within industry in accordance witli the requirements of the
state investment plan. For this reason it is sometimes said that these
amortization deductions represent a form of state tax on fixed capital.
The state may use such funds either for the replacement in kind (simple
reproduction) of fixed assets that are being retired from use or for
net additions (expanded reproduction) to existing stocks of fixed assets.
There is no real counterpart of the Soviet capital repair system in
US industry. Virtually all capital repairs in Soviet industry are fi-
nanced from amortization deductions, and these deductions are deposited
by industrial enterprises with the local Gosbanks in special accounts
earmarked for the use of the depositor. Generally the deductions are
deposited before the repair work itself is performed. Capital repair
provides some leverage for deferring the replacement of fixed assets
in Soviet industry, although sometimes at considerable economic cost.
Of the total amortization deductions for capital repair, a very sig-
nificant share is used for the repair of machinery and equipment.
Based on 1956 data, a Soviet source has estimated that 60 to 75 per-
cent of the outlays for capital repair of productive fixed assets in
Soviet industry were expended on equipment alone in that year.
A significant point to be noted about the Soviet capital repair
program is that it is a form of capital investment. Capital repair
is referred to in Soviet publications as partial replacement of
fixed capital (in distinction to full replacement accomplished through
bona fide capital investment). The capital repair program is designed
to restore machinery and equipment to its original operating condition,
insofar as is possible, through the replacement or repair of working
parts at regularly scheduled intervals during the service life of the
item of machinery and equipment. When the capital repair of a fixed
asset is completed, the cost of the work is entered as an offset to
amortization charges, thereby restoring value to the asset and ex-
tending its service life.
Because amortization deductions for capital repair do represent
a capital consumption charge in Soviet industry and are used for
capital replacement, they are relevant to Soviet policy on capital
investment. If Soviet officials alter the scale of the capital repair
program but leave the over-all amortization rate intact, either more
or less capital is available for investment.
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The assumption that amortizatioA deductions for capital repair
represent an alternative form of capital investment is implicit in
Soviet criticism leveled at the costliness and ineffectiveness of
capital repair relative to capital investment in new machinery and
equipment. Economically a capital repair program of such magnitude
would not be feasible in a market economy and probably is not entirely
justified in the Soviet planned economy. For example, Soviet spokesmen
acknowledge that the cost of the capital repair of a given item of
equipment may well exceed the cost of completely replacing it with a
new asset. Certainly over the entire service life of an item of
machinery and equipment subject to four or five capital repairs an
inordinate amount of resources is expended to preserve an asset that
is usually no more productive at the end of the repair process than
it was when originally acquired.
The principal justification of the Soviet capital repair program
has been and continues to be the unavailability of a sufficient number
of new assets for replacement. This unavailability follows in some
measure from the priority given to newly constructed plants in the
allocation of new machinery and equipment as well as to chronic prob-
lems in the supply of machinery and equipment.
Directly calculable costs are not the sole criterion for judging
the efficacy of the capital repair program. The program was adopted
originally as a measure of central control to maintain standards of
operating efficiency in state enterprises at a time when many personnel
could not or would not voluntarily maintain them. To this day the
capital repair program is centrally planned and is monitored through
the centralized finance system. The extensive use of capital repair
of old machinery and equipment to permit the forced expansion of new
industrial plant probably has exacted a high economic price. For the
present and immediate future, however, the capital repair program
appears to be a firmly established and integral part of the Soviet
system of amortization.
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I. Introduction
Except in very specific cases, the term depreciation has largely
supplanted the more restricted term amortization in US usage, even
though the two terms are not entirely synonymous. The term depreci-
ation may have any one of several meanings depending on the context
in which it is used -- decrease in value, amortized cost, difference
in value between an existing old asset and a hypothetical new asset
taken as a standard of comparison, or impaired serviceableness. ?../
Only in the case of amortized cost does the term depreciation neces-
sarily coincide in meaning with the term amortization.
Amortization is essentially an accounting concept. Its function
is to allocate systematically the cost (or other basis of valuation)
of fixed assets over their estimated service lives as a "prepaid ex-
pense of operation." V Generally speaking, amortization of a capital
cost does not involve accounting for economic factors that may inde-
pendently influence the current value of fixed assets.** Under account-
ing convention, therefore, amortization is properly concerned with the
recovery of historical cost, not the recovery of current economic value.
The practice of recovering the historical cost of a fixed asset during
the period of its useful life is commonly known in the US today as
"orthodox depreciation accounting." IV
It is sometimes assumed that the unamortized cost (book value) of
a fixed asset is, for most practical purposes, a reasonable measure of
its economic value. Today this assumption is largely discredited in
the US. In the postwar period, obsolescence and inflation have tended
to widen the gap between the economic value of most fixed assets and
their accounting value as measured by unamortized cost. Nevertheless,
depreciation accounting in US industry remains largely orthodox. From
the point of view of accounting principles and business practices,
orthodox depreciation accounting has several features that recommend
it to the private firm. It is highly conventionalized, it is sanc-
tioned by the accounting profession, and it meets the practical re-
quirements of US tax legislation.
In authorizing allowances for depreciation, the US Internal Revenue
Service has held steadfastly to the "original [historical] cost --
useful life" concept of depreciation. Because of the inconvenience
** This statement does not imply, however, that economic factors do
not independently influence the period of usefulness of fixed assets
and, hence, the period over which capital recovery may be allocated.
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and cost of maintaining more than one set of books, many US firms have
tended simply to pattern their depreciation accounting on the require-
ments of federal tax legislation.
In recent Congressional hearings, several alternatives to ortho-
dox depreciation accounting were discussed on the basis of experience
in other countries. Even if an alternative system of depreciation
accounting were permitted for tax purposes, many US firms, preferring
to meet the effects of obsolescence and inflation through other fiscal
measures, might well continue to use orthodox depreciation accounting.*
At present, steps are being taken by the US Government to revise the
table of useful lives established for machinery and equipment. In
recognition of the considerable influence of obsolescence, these steps
will tend to sanction shorter periods of capital recovery without dis-
turbing traditional US adherence to the principles of orthodox depreci-
ation accounting.
Characteristically, under the Soviet system of state ownership of
industrial enterprises and suppression of market forces, concepts of
depreciation other than amortization have been virtually nonexistent.
Attention has been focused almost exclusively on amortization (amorti-
zatsiya) as a tool of state accounting. Obsolescence either was held
not to exist under the Soviet system or was not recognized officially
as a factor affecting the service lives and values of fixed assets.
State enterprises acquired new fixed assets at prices established by
the state on the basis of the accounting cost of production. In the
event that a used fixed asset was "sold" by one state enterprise to
another state enterprise, the exchange value was normally taken to be
its unamortized cost. As fixed assets are owned by the state, the ex-
change of such assets was largely a bookkeeping operation unattended
by considerations of "fair market value." Consequently, the depreci-
ation of fixed assets from causes other than wear and tear was not a
subject of discussion.
About 1955 an awakened awareness of the economic impact of techno-
logical advances in the period since World War II resulted in a revi-
sion of the official Soviet position concerning obsolescence and the
valuation of fixed assets. Recognition of discrepancies between the
unamortized cost of productive industrial fixed assets valued in
prices of different years (mixed prices) and the current cost of re-
placing them was an important factor leading to the revaluation of
Soviet fixed assets at current replacement cost as of 1 January 1960.
* This attitude is partly explained by the desire of some firms to
show maximum profits in their financial reports. To the extent that
depreciation charges are decreased, profits may be correspondingly
increased. The corporate profits tax tends, in some cases, to moderate
the desire to show maximum profits.
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Under present plans the use of historical cost is to be discon-
tinued in the valuation and amortization of fixed assets in the USSR.
Instead, a uniform cost basis reflecting current replacement value
expressed in the prevailing planning prices is to be used. Such a
system would place the USSR in the group of countries that practices
some form of "price level" depreciation.
Meanwhile a major objective in the current revision of the schedule
of amortization rates in the USSR is the inclusion of an allowance for
obsolescence. In recognizing obsolescence as an independent factor
contributing to a decline in the value of fixed assets, the Soviet
government has retained the sole right to determine the "proper"
allowance for obsolescence. This solution prevents any weakening of
state control over the determination of value and the planning and
accounting system built thereon.
Although Soviet convention, like US convention, regards the useful
life of an asdet as the period over which capital recovery should
properly be effected, the Soviet position on the capital sum to be
recovered through depreciation during this period differs markedly
from the US position. Traditionally, in the USSR the planned cost of
capital repairs scheduled to be performed during the service life of
an asset has been added to the historical cost of the asset as part
of the sum to be recovered through amortization.
Because of current concern in the US and the USSR with rates of
capital investment and economic growth, there has been an increasing
tendency to identify depreciation accruals and amortization deduc-
tions as actual or potential sources of capital investment. Compari-
sons have been made between the ratio of depreciation accruals and
annual capital investments in US industry and the ratio of amorti-
zation deductions and annual capitL investments in Soviet industry.*
Although it is entirely possible to make such comparisons, they are
of limited usefulness and may actually be misleading because of
differences between the two economic systems.
* See, for example, ,source J.
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II. Comparison of Amortization Practices in the US and the USSR
A. Treatment of Fixed Assets
1. Fixed Asset Accounts and Depreciation Reserve Accounts
a. General
This section of the report is concerned with the types
of items that are entered in the fixed asset accounts of industrial
firms and with the methods of classifying and grouping them in order
to facilitate depreciation accounting. Ordinarily a close interre-
lationship exists between the character and composition of the items
entered in a fixed asset account, the type of depreciation reserve
account that is established for them, and the method of depreciation
employed.*
Only durable or semidurable items that are charged off
to the cost of production over more than one annual accounting period
are capitalized and entered in fixed asset accounts. Not every item
entered in the fixed asset account of an industrial firm, however,
is necessarily depreciated. The most notable exception in the case
of UB firms is land (except when used for agricultural pursuits). In
the USSR, no formal economic value is placed on land itself; so it is
not even entered in the fixed asset accounts of Soviet industrial
firms. Small tools and fixtures are items that may be capitalized but
not necessarily depreciated. Because of the relatively small value
involved, the replacement of tools and fixtures is often simply
charged to current maintenance accounts without disturbing the fixed
asset account.
In contrast to Soviet practice, in the US an item need
not have an officially established minimum value to qualify as a fixed
asset. In both the US and the USSR, machinery, equipment, and acces-
sories used for testing or experimental purposes usually are not capi-
talized if their usefulness is expected to be of short duration. In
the US the cost of such expendable items is often treated as a current
or deferred expense and charged to a developmental account.
b. In UB Industry Y
Bulletin "F," issued by the Internal Revenue Service
of the US Treasury Department, contains a compilation of average useful
* Examples of the primary classes of machinery and equipment used by US
and Soviet industrial firms are shown in Appendix A, p. 67, below.
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lives* of individual types of buildings, structures, machinery, and
equipment used in US industry.** The bulletin is quite detailed and
contains entries for thousands of items. Generally, individual items
are listed under the industry in which they are used.*** There are,
however, independent headings for the categories buildings, motor and
other vehicles, and office furniture, inasmuch as these items are com-
mon to virtually all industries.
Bulletin "F" also contains composite average lives
applicable to groups of heterogeneous fixed assets used in combination
in various industries or production processes. The use of composite
average lives usually simplifies the setting up and keeping of accounts.
Other than to place various types of machinery, equip-
ment, structures, and fixtures under the appropriate industries, however,
Bulletin "F" itself does not attempt to classify fixed assets on the
basis of similarity of type or other criteria. Such classification is
left to the individual firm.t
* For a discussion of useful lives of fixed assets, see 3, p. 24, below.
** Because depreciation accounting in the US is so closely related to
Federal income tax legislation, it will be assumed for the purpose of
this report that Bulletin "F" provides a reasonable basis for discussing
the practices followed by most US business firms equally for internal
accounting as for tax depreciation purposes. Although Bulletin "F" is
designed primarily to help taxpayers determine reasonable rates of de-
preciation, the approach to depreciable property accounts followed in
the bulletin undoubtedly has influenced individual US business firms in
the setting up and keeping of their accounts.
*** In general, a US business firm can tell whether tax depreciation is
allowable for a given asset by consulting Bulletin "F" or representatives
of the Internal Revenue Service. The introduction to the current reprint
of tables from Bulletin "F" (revised in 19)42) acknowledges that the bul-
letin is out of date and states that "as soon as possible, a supplement ...
will be issued containing schedules of useful lives of new types of equip-
ment not shown in the 1942 edition." 7/
The attitude of many US industrial firms toward centralized regula-
tion of depreciation practices is summed up well in the following:
Nationally standard or industrially standard
rates or methods, whether for tax or control pur-
poses, are not practicable because they do not
realistically reflect the facts or requirements
of a dynamic technology. Individual plants present
individual problems due to the diversity of assets
and their varied employment. The incidence of
wear and obsolescence is not constant or uniform
but is as subject to change as any factor in any
business. 8/
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Bulletin "F," however, does prescribe four acceptable
types of "depreciable property accounts" that may be used in the prepa-
ration of tax schedules. These fixed asset accounts provide some lati-
tude to individual US business firms in their approach to depreciation
accounting. A US company may have a single account, comprising all de-
preciable assets of whatever kind or nature used in the business, with
accrued depreciation set up in one reserve. Or it may have a number of
fixed asset accounts each consisting of a group of assets or even an
individual asset with a separate depreciation reserve account for each
group or single asset. The range of possibilities open to US enterprises
in the establishment of depreciable asset accounts is in marked contrast
to the standard system required of all Soviet industrial enterprises.
Based on available information concerning actual US
practice, it is the view of competent authorities that many firms have
abandoned single-asset accounts (item accounts) in favor of multiple-
asset accounts (composite, classified, or group accounts), not only
because bookkeeping is facilitated but also because tax regulations tend
to discourage item accounting. Apparently it is common practice for
many companies, especially the smaller and medium-size companies, to
maintain classified accounts that have only four account headings:
buildings, machinery and equipment, transportation equipment, and office
furniture and fixtures.
One of the most important considerations in the group-
ing of fixed assets for purposes of depreciation accounting is generally
held to be the homogeneity of the assets with respect to their estimated
average lives. Such grouping facilitates the computation and recording
of depreciation charges. There are usually practical limitations on the
degree of homogeneity that can be established with respect to other fac-
tors, such as type and age, in setting up accounts for machinery and
equipment:
This requirement of homogeneity does not mean
that all assets in any one account must be physi-
cally similar. For example, in some circumstances
it is justifiable to include in a single machinery
account such different assets as milling machines
and drop hammers. Inevitably there is bound to be
some dissimilarity between the assets in a single
account, even if it is merely the difference be-
tween a 1930 milling machine and a 1950 one. 9/
Frequently, however, fixed assets with similar life estimates are subdi-
vided on the basis of the common year of acquisition.
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c. In Soviet Industry 12/
The fixed asset accounts and the depreciation reserve
accounts of US industrial firms appear to be more complementary than
those of Soviet industrial firms, largely because of the difference
in the approach to the classification of fixed assets. Unlike the
US, where the setting up of depreciable property accounts can be
ordered largely to the convenience of the individual firm, the USSR
has a rigid system of fixed asset classification that severely limits
the freedom of Soviet industrial enterprises in the establishment of
their accounts. Furthermore, the present fixed asset classification
system does not correspond entirely to the classification system on
which the still operative schedule of basic amortization rates estab-
lished in 1930 was based (see Appendix D*). Present comments will be
confined to Soviet attempts to use a standard classification system
of fixed assets for purposes of accounting for amortization.
Perhaps the major point to be noted is that the Soviet
standard classification system is expected to serve a multipurpose role
in the planning and administration of the national economy. It must
meet the statistical requirements of national accounting as well as the
operational needs of the individual state enterprise. In the process
of developing a classification system suitable for a number of inter-
related functions and indexes, the effectiveness of the system with
respect to any one function may be weakened. Thus the present standard
classification system for fixed assets in the USSR represents but the
latest stage in a continuing search for the most effective all-round
system in terms of the multiple requirements of a planned national
economy. Characteristically, then, Soviet accounting for amortization
is keyed to the Soviet fixed asset classification system, the new
schedule of amortization rates to be introduced in 1963, for example,
being based on the standard fixed asset classification system of 1959.
Although the standard fixed asset classification system
of 1959 was drawn up with the revaluation of fixed assets and the prepa-
ration of new amortization rates in mind, it does not depart signifi-
cantly in its primary categories from its numerous predecessors, includ-
ing the classification system of 1954.** These categories reflect major
types of fixed assets, not unlike the conventional divisions of fixed
assets found in the so-called classified accounts of US industrial
firms.***
* P. 79, below.
** The number of primary categories used in classifying Soviet indus-
trial fixed assets gradually increased from 3 in 1925 to 10 in 1947 and,
with some slight variation, has remained approximately at that number
down to the present time.
xxx See p. 11, above.
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In the past, Soviet economists have sometimes charged
that the standard fixed asset classification system was not sufficiently
developed for purposes of establishing widely differentiated amortization
rates for individual types of equipment having different life character-
istics. Under the classification system in effect when the basic amorti-
zation rates were established in 1930, for example, all machinery and
equipment (with the exception of transportation equipment) fell under
one primary category, equipment of enterprises. For purposes of estab-
lishing amortization rates, this category was divided into only six
subgroups (see Appendix D*). One subgroup included all the machinery
and equipment of such diverse industries as metallurgy, perfumes and
cosmetics, machine building, pharmaceuticals, footwear, and canning --
to name but a few. Such a grouping of disparate types of equipment
under one heading could hardly be expected to produce meaningful results.
Under this classification system, apparently, there was
no attempt to classify machinery and equipment by various types, such
as generators, machine tools, compressors, and the like. As a result,
machinery and equipment generally common to all industries, such as
materials handling equipment and machine repair equipment, was depreci-
ated at different rates among the six groups of industries, even if the
life characteristics and use pattern of such equipment happened to be
similar.
In the half dozen or so revisions of the Soviet fixed
asset classification system that have occurred since 1925, increasing
emphasis has been placed on subdivision of fixed assets in the classi-
fication system, allegedly so that the system could be utilized more
effectively for differentiating amortization rates. The increase in
the number of primary categories actually has been quite limited com-
pared with the increase in subcategories.
Although the complete classification system of 1959
itself is not available in published form, it is reported that the
10 or so primary categories are subdivided into about 470 subgroups
for which approximate average service lives have been established.
These average service lives are being firmed up as work on the new
amortization rates is completed; the subgroups are being further di-
vided into smaller groups of fixed assets having the same service
lives and approximately the same amortization rates. In this way the
USSR hopes to eliminate many of the past inadequacies that have re-
sulted from the superimposition on the amortization system of a
standard classification of industrial fixed assets.
* P. 79, below.
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Apparently there remains on the part of at least some
Soviet economists, however, an element of confusion as to the exact
correlation between the formal classification of fixed assets and the
amortization of fixed assets:
Some Soviet economists think that the present
classification of fixed assets by type is unsatis-
factory for subdividing the various elements of
fixed assets on the basis of service-life, that
it hampers control over the condition of fixed
assets, that it makes ascertainment of the degree
of wear difficult, and that it is unsatisfactory
for making amortization charges. However, the
grouping of fixed assets by type is not designed
primarily for the purpose of determining the
size of amortization deductions or the length
of service life.
A special grouping of fixed assets must be
elaborated in order to calculate amortization ... .
Of course in grouping fixed assets for the pur-
pose of calculating amortization it is necessary to
hold to the maximum to the grouping by type -- that
is, to build the one in conformity with the other.
Furthermore, the grouping of fixed assets for pur-
poses of calculating amortization may fully coincide
in the primary divisions with the grouping of fixed
capital by type. However, the internal structure
must be more patterned to the requirements of dif-
ferentiated calculation of amortization. 11/
The reader may well wonder exactly why amortization
has become so involved with the standard classification of fixed assets
in the USSR. A full explanation lies outside the competence of this
report. It may be noted, however, that a standard classification of
fixed assets is needed by the state planners in gathering data on the
composition of industrial fixed assets in the various branches of in-
dustry and in planning the distribution of new fixed assets among
these industries. Fixed asset accounts are the basic source of the
information needed to plan and monitor the development of industries
with respect to the physical types and numbers of fixed assets, their
ages, and their values. To the extent that amortization rates and
amortization deductions influence the unamortized value of such assets
and inasmuch as composite amortization rates established for individual
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industries as a means of planning investment and production costs are
based on the composition of the major types of fixed assets in each
industry, it is undoubtedly considered desirable to have a single
system of classification for purposes of coordinated planning.*
Soviet regulations limit the minimum value and minimum
estimated service life of items that can be entered in fixed asset ac-
counts. Only fixed assets with a service life of more than 1 year and
a cost of more than 50 rubles are entered in the fixed asset accounts,
all others being treated as working assets.
In view of the Soviet distinction between productive
and nonproductive fixed assets and the Soviet position that it is proper
to amortize only assets that are materially productive, some industrial
fixed assets do not fall under the amortization system or are not amor-
tized under certain conditions. Nonproductive industrial fixed assets
include the buildings of industrial enterprises that are used for hous-
ing the workers as well as for educational, health, cultural, and social
activities. Productive industrial fixed assets are not amortized when
they are prematurely retired because of flood, earthquake, and the like.
They are not amortized when they are unused, abandoned, shut down, de-
clared surplus, in storage,** undergoing prolonged repair, or idle for
an excessively long time. An exception, however, is unused equipment
that is kept in so-called "normal production reserve," a category
which includes standby and emergency equipment that is kept available
to forestall possible interruptions in normal production. Because
repairs are considered necessary to the production program, equipment
continues to be amortized as long as it is in a normal repair status.
2. Valuation
a. General
The book valuexxx assigned to a fixed asset when it
is first acquired by a firm plays an important role in the subsequent
* For a discussion of the composite amortization rates of Soviet
industries and their relation to the composition of fixed assets, see
B, 2, b, p. 44, below, and Appendix C, p. 73, below.
** When stored in a warehouse, equipment falls in the category of
"potential fixed assets." 1.2./
*** The term book value is used conventionally to denote the value at
which an asset is carried in the accounts of an enterprise. When the
current valuation of the asset represents the difference between its
original cost and the total of the depreciation charges made as of
the current date against the asset, the term unamortized cost is con-
sidered more accurate and less ambiguous than the term book value. lq/
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depreciation (amortization) of the asset. Under orthodox depreci-
ation accounting the original book value of a fixed asset represents
a capital cost that is to be recovered during the useful life of the
asset. As such the capitalized valuation will have a direct bearing
on the amount annually charged to depreciation.
In most cases, industrial firms are concerned with maxi-
mizing their returns from the use of fixed assets and with recovering
at least the equivalent of their investment. Some spokesmen for industry
contend that capital charges during the life of an asset should be set
so as to cover the cost of replacing the asset if it differs from the
original cost.*
NO one can predict with complete certainty how long a
given asset will be economically useful to a firm. An asset may re-
cover for a firm either more or less than its original cost, depending
on a number of factors, including the durability of the asset itself.
Among the factors that may influence the economic value of equipment
in a market economy are (1) changes in the supply of and demand for
such equipment, (2) changes in demand for the article that the equip-
ment produces (with resulting inadequacy or obsolescence), (3) the
appearance on the market of new and improved equipment that is sub-
stitutable, (4) the development of entire new technologies of produc-
ing the article that the equipment was designed to produce, (5) changes
in the interest rate, and (6) inflation.
Thus the placing of an initial valuation on equipment
when it is entered, generally at acquisition cost, in a fixed asset
account does not preclude the necessity of subsequently reexamining the
value of the asset on the basis of its economic worth. However, the
adaptation of depreciation accounting to reflect roughly the current
economic value of an asset rather than merely its unamortized cost, as
some contemporary theorists propose doing, poses many problems. The
question of the economic value of fixed assets is central to the problem
of replacement policy, a subject that is too large and complex to be
treated adequately in this report. The present section, therefore, is
concerned primarily with current practices in the accouhting valuation
and revaluation of fixed assets in the US and the USSR.
* There is serious doubt whether or not the provision of future re-
placement funds is a legitimate aim of depreciation accounting, inas-
much as it implies the charging of the cost of a future obligation to
current operating expenses. It also raises many questions connected
with changing price levels and the character of replacement assets.
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b. In US Industry 111/
Under existing US tax legislation "the basis for comput-
ing the amount deductible on account of depreciation and obsolescence
of property is, in general, the cost of such property."* 12/ Most au-
thorities on depreciation accounting in the US are rather well agreed
that for purposes of depreciation the proper initial valuation of a
purchased asset is the historical cost to the owner. For purposes of
tax depreciation, US law permits owners of fixed assets to recover the
original cost of an asset and no more.**
Between tax regulations and accounting literature in the
US, there is also general agreement on the elements of cost that should
properly be included in the original book value assigned to machinery
and equipment for purposes of capitalization. Bulletin "F" states that
"the costs ... of installation, as well as freight charges ... are capital
expenditures to be added to the cost of the property recoverable through
depreciation deduction." Le/ The accounting manual of the Machinery and
* Bulletin "F" of the US Internal Revenue Service contains detailed
provisions for establishing the book value of assets acquired by means
other than purchase (for example, by gift, bequest, exchange, merger,
termination of lease, and the like). In some cases the basis for valu-
ing such assets is their fair market value as of the date of acquisition
rather than the unamortized cost shown in the account of the previous
owner. Bulletin "F" employs the term cost or other basis to cover the
acquisition value of all depreciable fixed assets.
** Bulletin "F" reads as follows on this point:
The proper allowance for exhaustion, wear and tear,
including obsolescence, of property used in trade or
business is that amount which will, at the end of the
useful life of the property in the business, equal the
cost or other basis of the property. In no instance
may the total amount allowed be in excess of the amount
represented by the difference between the cost or other
allowable basis and the salvage value which reasonably
may be expected to remain at the end of the useful life
of the property in the trade or business. 1?./
A Report of the Select Committee on Small Business of the United States
Senate in 1960 noted that, in spite of other measures to liberalize de-
preciation in the postwar period, "there has been no change in the total
amount of depreciation permitted," which "has been limited to the actual,
historical cost of an item ... ." 12/
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Allied Products Institute (MAPI) advocates inclusion of the cost of
transportation, the cost of original foundations, the cost of instal-
lation, "and also the cost of motors, accessories, and attachments,
which appertain to and are necessary for the proper functioning of the
machine or equipment." 12/
Although there is agreement that the original cost
of an asset to the owner is a legitimate expense to be recovered from
income* and is therefore the value properly entered in the fixed asset
account, problems of valuation insofar as capital recovery and replace-
ment are concerned arise from the fact that the original cost is re-
covered over a period of time during which factors outside the account-
ing system may substantially affect the economic value of the asset.
A measure of protection against some of these contingencies is provided
for under existing regulations for tax depreciation.** In spite of
some talk, however, there has been no serious consideration on the part
of either the US Government or the business community of revaluing
fixed assets at roughly their current economic value for purposes of
tax depreciation, partly because of insurmountable practical diffi-
culties connected with equitably establishing the "current economic
value" of the assets of all taxpayers and partly because the purpose
of such a revaluation, usually a change in the size of annual depreci-
ation allowances, can be achieved more simply by other means, primarily
a change in the depreciation rate or the method of writeoff.***
Although changes in the book value of fixed assets made
solely to reflect changes in their nominal economic value are rarely
made in fixed asset accounts in US industry, changes in book value re-
sulting from "additions, improvements and betterments" are required to
be added to the cost or other basis under provisions of Bulletin "F." L/
Similarly the "cost of all property retired, abandoned, sold, destroyed,
* If a US firm does not, in a given year, take the full tax depreci-
ation allowable, it cannot apply the allowance, or portion thereof, to
another tax year (Sec. 2.1016-3, Internal Revenue Code of 1954).
** Primarily an allowance for "normal obsolescence" and provisions for
the taxpayer to revise estimates of useful life in the face of rapidly
changing economic conditions (see 3, b, p. 27, below).
*** As an alternative to the use of historical cost, some witnesses at
recent Senate hearings on tax depreciation allowances have proposed
doing what several other nations have done in the postwar years --
namely, to permit .substantial, even multiple, increases in value or
depreciation bases of equipment purchased at prewar or preinflation
prices. 22/ This idea has not gained popular support or the serious
consideration of most US Congressmen and economists currently inter-
ested in reform measures for tax depreciation.
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or otherwise disposed of" is deducted from the fixed
so that in practice there may be frequent adjustments
for annual depreciation charges.
Bulletin "F" states that the "cost of
which neither materially add to the value of property
prolong its life, but merely keep it in an ordinarily
ing condition, may be deducted as expense items."
asset account, L/
other than merely
incidental repairs
nor appreciably
efficient operat-
Thus in the US,
as in the USSR, routine repair and maintenance costs are not entered in
the fixed asset accounts but are charged off to current expenses.
In a different category, however, are "amounts spent in
restoring property or in making good the exhaustion thereof, for which
an allowance is or has been made, or amounts spent for replacements
which arrest deterioration and appreciably prolong the life of the prop-
erty." LV Such expenditures are capital expenditures and should be
shown in the capital account. If a new major part is used to replace
an old one, for example, the value of the asset should be adjusted to
reflect the difference between the cost (including installation) of
the new part and the unamortized cost (less scrap value) of the part
that is replaced. To simplify accounting procedures, Bulletin "F"
stipulates that "it is permissible to charge the cost of rehabili-
tations or small replacements directly to the depreciation reserve,
leaving the capital account undisturbed, provided there has been no
material change in price levels and no substantial improvements in
the new equipment." 22/
In practice the line between repairs that are properly
chargeable to capital account and those that are chargeable to current
account is often hard to distinguish. There are indications that in
the US costs connected with repairs and partial replacements which
properly should be capitalized sometimes are charged to current ex-
penditures. Often the ambiguity of terminology and the lack of clarity
in the line of demarcation between capital and current repairs permits
the individual enterprise, whether in the US or the USSR, to handle
the accounting of such expenditures in the way that is most favorable
to it rather than in strict accordance with official regulations.*
Although US legislation is unequivocal about the necessity of capi-
talizing improvements and betterments to assets already entered in the
books, the valuation of such changes is often difficult to determine,
* The existence of a large number of ill-defined concepts such as
replacement, rehabilitation, restoration, and the like in most regu-
lations governing repair work necessarily contributes to a loose
interpretation of such regulations and a certain loss of control by
governmental authorities over accounting at the enterprise level.
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open to interpretation, or negligible in amount. The result is that no
very satisfactory solution has been found to the problem of controlling
the valuation and charging of repair work in borderline cases.
In many ways the pragmatic approach to the matter of
valuation followed in the US is the byproduct of a market-oriented
economy. Although the practice of deciding problems of valuation,
often on an individual and ad hoc basis through consultation with the
Internal Revenue Service, has sometimes given rise to charges of un-
equal treatment among the taxpayers, it is difficult to see a way
around the problem. Many of the problems of valuation that confront
Soviet economists have not assumed critical importance in the US, pri-
marily because it is not necessary to justify the valuation of fixed
assets within the framework of a doctrinaire economic theory. The
fact that Plant A and Plant B in the US may have identical assets
entered in their respective accounts at different valuations because
of a price change or some other occurrence is not considered a disturb-
ing fact. And yet a similar situation in the USSR is cause for great
concern. Such discrepancies in a Soviet-type planned economy, with
its emphasis on uniformity of prices and standardization of accounting,
was an important factor leading to the revaluation of all industrial
fixed assets at full replacement cost (in 1955 prices) as of 1 January
1960.
c. In Soviet Industry 26/
As in the US the machinery and equipment of Soviet indus-
trial firms are generally "capitalized" at their full original (acquisi-
tion) cost. The major part of this cost represents funds transferred
by the state, generally through accounts in the state banking system,
to the producer (or the transferor, if the equipment is not new); a
supply organization; or a construction organization, as the case may
be.* The full original cost of fixed assets is entered in the fixed
asset account of Soviet firms in current rubles -- that is, in the
prices of the year in which the asset was acquired or the construction
work was completed and accepted.**
The elements included in the full original cost of Soviet
machinery and equipment are generally similar to those included in the
cost of fixed assets in the US, although they vary in certain details.
The Soviet elements are as follows
* As in the US the historical cost of given types of machinery and
equipment has varied, depending on when and how they were acquired.
** The "mixed" price system is to be discarded in favor of a uniform
system of valuation for fixed assets when new amortization rates, cur-
rently scheduled for January 1963, go into effect.
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(1) The current wholesale price of the asset.* For
serially produced machinery and equipment, such prices are contained in
official government wholesale price lists. In the case of small-batch
and individual production, prices were set, previous to 1957, by the
ministry in charge of production; they are now set by the regional eco-
nomic council (sovnarkhoz) of the region where the equipment is manu-
factured. When a product is manufactured on contract, the price usually
is stipulated in the contract concluded between the producer and the
purchaser.
(2) The cost of packing and crating (when not already
included in the wholesale or contract price).
(3) Transportation charges (to the extent that they
are not included in the wholesale or contract price).**
(4) The cost of foundations for machinery and equip-
ment (except in several industries where the cost of such foundations is
included in the value of the building or structure).
(5) The cost of installing, lining, insulating, and
enameling (or painting) machinery and equipment.
As in the US, "attachments and fixtures which are essential to [the
operation] of machinery and equipment" are included in the original
cost of such assets. 2f./
For practical purposes, there are now two different
systems of valuation in the USSR: one expresses the cost of the asset
in the year in which it was acquired (historical cost), and the other
expresses what the same asset would cost under contemporary conditions
(full replacement cost). Both types of valuation are based on whole-
sale prices derived from production accounting costs. If a given type
of asset is no longer being produced, replacement cost may represent
a theoretically based value rather than an actual value. Also, re-
placement cost may be expressed in current planning prices rather
than in actual prices. Both the full cost and the unamortized cost
of an asset can be expressed in either system of valuation. When
* In the USSR, capital goods are usually "sold" by the producer to
the user (generally both are state-owned enterprises) at enterprise
wholesale prices. Sometimes, however, a supply or sales organization
may be involved in the transaction, in which case small additional
markups result in the goods being sold at industry wholesale prices.
** The wholesale prices of most machinery and equipment are quoted
f.o.b. station of shipment in the USSR.
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an asset is new, its historical cost and its full replacement cost will
be identical if there is no divergence between current planning prices
and actual prices. These Soviet concepts of the valuation of fixed
assets are basic to an understanding of the recent Soviet revaluation
of fixed assets and the role of this revaluation in the current Soviet
amortization reform. The concepts are formally identified and described
in Appendix B.*
One of the most significant differences between the US
and the USSR in the matter of placing an economic value on industrial
fixed assets subsequent to their original purchase arises from the
absence in the USSR of market values and interest rates as a basis
for making decisions regarding replacement and future income oppor-
tunities. In a market-oriented economy, such as the US economy, there
are essentially two measures of economic value -- market value and value
to the owner -- as distinct from accounting values such as original
(historical) cost and unamortized cost. It is recognized that the inter-
play of many factors and forces determines the economic value of an as-
set. The principal criteria used to establish the economic value of a
used asset, however, probably are its saleability and/or its usefulness
to the present owner when measured against a real or hypothetical new
asset taken as a standard of comparison. Although economic valuations
short of an actual transaction are generally made in market economies
by professional appraisers or experienced businessmen, it is the aim
in the USSR, in the absence of such "subjective" criteria, to establish
the current economic worth of an asset through a documented procedure
that relies on a production theory of value supported by the statistics
of Soviet cost accounting.
Because the monetary value of an object under the Soviet
system is held to arise not primarily from the supply and demand situ-
ation or even from the usefulness of the object to actual or potential
owners but rather from the "social labor" required to produce it, a
synthetic system for trying to establish value "objectively" through
accounting has been developed. The reasoning is that in a socialist
society, where the state mobilizes the factors of production, the
value (stoimostt) of an article is essentially its production cost
(sebestoimost1) -- that is, the sum of the cost of the outlays required
at a given time to produce such an article. Market situations of sup-
ply and demand are held to be eliminated through state planning of pro-
duction and consumption requirements.**
* P. 69, below.
** This statement does not imply that scarcities do not exist in the
USSR or that they do not affect values outside of the state system
(for example, in exchanges of certain consumer goods among private
citizens). Theoretically, however, [footnote continued on p. 23]
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Theoretically, prices follow production costs in the
USSR. For any given item of machinery or equipment, prices are gener-
ally uniform throughout the economy. When an article is produced by
several firms at differing costs, the differing costs are averaged
and the standard price is set on the basis of the average cost. Thus
Soviet prices, with some exceptions, are generally held to represent
the inherent "social cost" of commodities in the USSR. The state,
presumably having within its power the ability to mobilize production
resources in a successively more efficient manner over a period of
time, has merely to plan, control, record, and compute the outlays
of production in order to establish the specific changing value of
each article produced.* In the USSR the measure of the current eco-
nomic value of used equipment is found by taking its full replacement
cost (or the cost of a currently produced equivalent) and then adjust-
ing this cost to reflect the degree of wear in such equipment.**
In contrast to the US, the USSR on occasion has re-
valued some of its amortizable fixed assets*** at their economic value
(current replacement cost), the latest and most complete revaluation
being that of 1 January 1960. The USSR has had a number of motives
for revaluing assets. Most Soviet economists agree that it would be
desirable to revalue all fixed assets at their replacement cost every
year in order to have them reflect current economic value in a com-
mon price system. Such a procedure, it is claimed, would facilitate
relative scarcity does not affect value within the state system. Never-
theless, under some circumstances the Soviet leadership has sanctioned
the use of artificially high values for the scarcer commodities as a
means of discouraging their use. Under a theoretically perfect plan-
ning system, there would be no critical scarcities, because planned
supplies and planned consumption, in physical terms, would be balanced
perfectly.
* This description of how Soviet cost accounting operates necessarily
ignores the rationale for the valuation of the production resources them-
selves.
xx This description of the Soviet process of valuation and revaluation
is oversimplified and ignores many of the very real methodological and
economic problems that confront Soviet planners and administrators. For
a formal identification and description of the Soviet concepts of valu-
ation and revaluation, see Appendix B, p. 69, below.
xxx In addition to the exceptions already noted on p. 15, above, the
fixed assets of so-called budgetary organizations -- that is, organi-
zations financed entirely from the state budget -- are not subject to
amortization. Such assets represent a relatively small share of the
total Soviet fixed assets.
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rational economic planning. The economists hasten to point out, how-
ever, that an operation of such magnitude is not feasible, and so most
fixed assets have continued thus far to be carried at their full origi-
nal cost in Soviet fixed asset accounts.*
3. Service Life
a. General g92
Together with the valuation placed on a fixed asset, the
estimated service life of an asset is a major factor in determining the
size of annual allowances for depreciation. For if the valuation ordi-
narily determines the amount of capital to be recovered through charges
to depreciation, the service life ordinarily defines the period of time
over which the total recovery is to be effected. The estimating of the
service life** of a fixed asset, like the valuing of it, is subject to
problems of both a theoretical and a practical nature.
On the theoretical level the major problem probably is
that of making reliable estimates of service lives. This problem cen-
ters, in part, on the inadequacy of statistical data available for mak-
ing such estimates and, in part, on the limited usefulness of statistical
averages computed from historical data as guides to life expectancies
in the future, especially under conditions of rapid technological change.
An unerring estimate of the economically useful life of a fixed asset
presupposes knowledge of future developments -- not only knowledge of
markets but also of scientific and technological breakthroughs as well
as commercial applications of them. Obviously, such foreknowledge is
outside the range of human power and imposes definite limitations on
trying to establish exactly how long a given asset is going to be eco-
nomically useful.
* It is believed that the replacement costs (in 1955 planning prices)
computed for Soviet fixed assets as of 1 January 1960 have not yet been
substituted for full original costs (in mixed prices) in the presently
active fixed asset accounts. A transition to the new system of valu-
ation probably will take effect when the new amortization rates are
introduced in 1963.
** In discussing the service (or useful) life of a fixed asset, a dis-
tinction generally is made between the physical life, which is based
largely on the serviceability of the asset itself, and the economic
life, which is determined by a combination of factors relating to the
economic feasibility of continuing to use the asset. It is possible,
of course, for the physical life and the economic life of an asset to
coincide. But such a coincidence is more apt to be the exception than
the rule in a modern industrial economy in which price dynamics and
technological advances tend to accentuate the difference.
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In general, therefore, estimation of the probable service
lives of given types or classes of equipment usually is based on average
figures reflecting the historical experience of individual firms as re-
flected in their capital accounts and records of retirements. Estimates
of service lives statistically derived from experiential data ordinarily
will differ from engineering estimates based on the physical properties
of the fixed assets in that the former reflect the influence of economic
factors at work in the selected historical period.
The data acquired for statistical studies of this sort,
however, usually are subject to a number of inconsistencies that reflect
differences in the methods and quality of bookkeeping among individual
firms surveyed. Even where accounting is highly standardized, as in the
USSR, there are often serious inadequacies in records relating to the
retirement of fixed assets. The reasons for retiring fixed assets in
a market economy are various, ranging from complete decrepitude to obso-
lescence and inadequacy. Unless the reported historical data on service
lives are analyzed to determine the basis of retirement, the resulting
statistical average may not be very meaningful and may even be mislead-
ing to an individual firm that is trying to establish a realistic esti-
mate of the life expectancy of a particular fixed asset under a par-
ticular set of conditions.*
Another factor limiting the validity of estimated aver-
age service lives based on empirical data is the difference between the
period to which the sample data pertain and the period to which the
estimated service life pertains. Differences in operating conditions and
in the level of care and maintenance, as well as qualitative improve-
ments introduced in machinery and equipment through continuing research
and quality control programs may appreciably prolong the physical life
of a new asset as compared with its predecessor. At the same time its
useful economic life may well be shorter under conditions of continu-
ously improving technology.
In at least one other respect, estimates of service
lives may fall short in providing a reliable guide in the case of par-
ticular assets or particular conditions. Because depreciation account-
ing ordinarily is organized on an annual basis in conformity with busi-
ness and tax procedures, the life expectancies of fixed assets generally
are estimated in terms of years. It is clear that when machinery and
* The problem facing the individual firm in applying an estimPted
average service life generalized from a large statistical sample in
such cases is essentially a problem of statistical averaging. There
is always the chance that an average service life computed from group
data reflecting the sum of many dispersions may not coincide with the
actual service life of a particular asset.
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equipment are operated under "abnormal" conditions or on an "abnormal
schedule," the life expectancy based on data reflecting "normal" oper-
ation and care will have little relevancy.*
The estimating of average useful lives of new types of
machinery and equipment for which no historical data are available also
presents a problem. Although an estimate of the physical life under
normal conditions may be made on the basis of engineering studies and
tests, estimates of the useful economic life necessarily must rely
largely on historical data pertaining to analogous assets.
With respect to practical accounting problems, the use
of estimated average service lives based on historical data usually
places a heavy burden on depreciation accounting whenever changes affect-
ing the economic life of an asset occur. Strictly speaking, accounts
should be adjusted to reflect such changes in order to recover capital
value that otherwise might be lost. Undue reliance on average estimated
service lives often prevents firms from undertaking an examination of
the economic feasibility of early replacement with more efficient assets.
Many fixed assets, both in the US and in the USSR, undoubtedly are used
long after the point at which it would be economically feasible to re-
tire them and replace them with new assets. In such cases the producers
are incurring an unnecessary production cost, thereby reducing their
level of profitability.
Every machine has a limit to its physical life, after
which time absolutely no further use can be made of it (except possibly
as scrap) -- "It has been aptly said that 'all machinery is on an irre-
sistible march to the junk heap.'" 1(2/ When this limit is reached, re-
tirement becomes mandatory because the asset has become decrepit and
cannot be used in its existing form any longer. Before this limit is
reached, however, a piece of machinery or equipment may reach a level
of physical deterioration where its operability is impaired but not
beyond repair. At such a time it is generally necessary for the firm
to decide whether or not the asset is worth repairing or overhauling.
If not, the service life of the asset is terminated. If this point
in the actual service life happens to coincide with the estimated life,
* . A machine that operates two shifts per day under adverse conditions
may have only a third of the service life (measured in months and years)
of one that operates only one shift a day under more favorable condi-
tions. For some types of equipment, where service life is established
by standards based on average hours of operation or average volume of
work performed, the 6tandards must be converted into years of antici-
pated service life on the basis of coefficients relating such standards
to calendar years.
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the asset is written off the books without any loss, the historical
cost of the asset presumably having been recovered through the accrued
depreciation charges plus the net salvage value of the asset.
Against the alternative of replacement by a new asset
at such a time, however, the cost of repairing the old asset -- and
thereby extending its service life -- must be weighed. It is clear
that marginal costs, between repair and replacement, are important
in making such a decision. Obviously, there is always a point beyond
which it is not feasible to extend the physical life of a fixed asset,
simply because the cost of repair or restoration is greater than the
cost of complete replacement. The point at which extension of the
physical life of an asset through repair or restoration is no longer
economically feasible marks the maximum limit of the useful economic
life of the asset. Thus there may be a wide variation in the length
of the service life of similar assets in different firms, depending
on the degree to which the accounting practices of a firm can be and
are used to make economic calculations with respect to repair versus
replacement.
From an economic point of view, the use of estimated
average service lives for fixed assets is, at best, an imperfect method
of establishing appropriate periods of capital recovery. Unfortunately,
there appears to be no ready alternative to the use of such estimates.
Thus it will remain necessary to make appropriate adjustments in capital
and depreciation accounts as periodic physical examination of fixed as-
sets and economic considerations may warrant. In the case of enter-
prises having large numbers of different types or classes of assets,
physical inspection of them and detailed accounting adjustments may be
out of the question. In such cases a sampling procedure may be used to
determine what adjustments, if any, should be made.
b. In US Industry Li
The most authoritative single source of information on
the service lives of fixed assets in US industry is Bulletin "F" of
the Internal Revenue Service, the major part of which is devoted to
"Tables of Useful Lives of Depreciable Property." In 1955, and again
in 1959, the tables of lives first issued in January 1942 were reprinted
without change but with the following new introductory comments:
The [Internal Revenue] Service recognizes that
some of the schedules of useful lives in this re-
print of the 1942 revision of Bulletin "F" are out-
moded. In some cases they may be too long, in
others too short ... . Although Bulletin "F" is
out-of-date, the tables of useful lives are re-
printed so that taxpayers may not be left without
any guide. L/
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The weighted average life of the industrial equipment
listed in Bulletin "F" is 19 years,* a period characterized by many
persons as excessively long under present economic conditions.** Lti
It should be noted, however, that taxpayers have not been entirely
bound by the lives contained in Bulletin "F":
Taxpayers are cautioned that the useful lives
shown are not mandatory, and were originally pub-
lished solely as a guide to what might be con-
sidered reasonably normal periods of useful life.
Taxpayers may determine reasonable periods of
useful life for their depreciable property on the
basis of their particular operating conditions, ex-
perience, and informed judgment as to technological
improvements and economic changes. However, the
periods of estimated useful life used by taxpayers
are subject to review by the Internal Revenue Ser-
vice, and taxpayers should be prepared to substan-
tiate the periods so used. L/
Thus the US industrial firm has an opportunity to use
an estimate of service life that is considered more realistic with re-
spect to its particular situation than the official one, provided the
firm is willing to substantiate the estimate. This element of choice
is in marked contrast with the USSR, where officially established ser-
vice lives are mandatory for state enterprises. It is impossible to
estimate the degree to which firms in the US use the service lives in
Bulletin "F" in preference to establishing independent estimates. In
* Revenue Procedure 62-21 issued by the Internal Revenue Service in
July 1962 claims to provide "new guideline lives for machinery and
equipment ... which, on the whole, average 30 to 4o percent shorter
than those previously suggested for use by taxpayers." The new revenue
procedure departs significantly from the approach of Bulletin "F,"
however, in that it does not seek to establish useful lives for indi-
vidual items of machinery and equipment but rather average lives for
about 75 broad classes of assets. The new procedure states that "the
emphasis in this broad class approach is on achieving a reasonable
overall result in measuring depreciation rather than a needless and
labored item-by-item accuracy." L/
** A consideration injected in the discussion of service lives in US
industry is the economic effect of present lives on the position of US
manufacturers in international trade. It is frequently claimed that
the shorter lives permitted by the governments of other industrial coun-
tries place US industry at a relative disadvantage in meeting foreign
competition.
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a sense the initiative of individual firms in seeking to develop ser-
vice lives that are more realistic than the sometimes outmoded official
ones is an important method of keeping official thinking abreast of the
times, a method that is absent in the USSR. In addition to individual
firms, some trade associations in the US, using privately gathered data
relating to the service lives of fixed assets, undertake research on
depreciation.
Nevertheless, publication of schedules of useful lives
in Bulletin "F" undoubtedly has had a great standardizing effect on the
periods of capital recovery used by US industrial firms in setting up
their depreciation accounts. It is sometimes alleged by private busi-
ness, especially small business, that the alternative to acceptance of
the official lives places too heavy a burden on their accounting depart-
ments and legal advisers to be worthwhile.
Of particular interest is the treatment accorded physi-
cal wear and obsolescence, respectively, in Bulletin "F." The Foreword
states that the bulletin "contains information and statistical data re-
lating to the determination of deductions for depreciation and obso-
lescence." 36/ It is clear from the context that depreciation is viewed
in this passage as applying to loss of value due to wear (as distinct
from loss of value due to obsolescence). The Introduction further states
that "much of the discussion hereinafter having specific reference to
depreciation only is in fact equally applicable to normal obsolescence." 37/
Bulletin "F" defines depreciation, however, as "a reasonable allowance for
the exhaustion, wear and tear of property used in the trade or business,
including a reasonable allowance for obsolescence." 38/ Subsequent pas-
sages in Bulletin "F" make it clear that the estimated average service
lives contained therein are based on physical wear plus normal obsoles-
cence. In other words, they reflect the existence of normal obsolescence
as an element of depreciation in the historical data used to determine
average useful lives.
With respect to obsolescence, Bulletin "F" contains the
following definition:
Obsolescence may be defined as the process of
becoming obsolete due to progress of the arts and
sciences, changed economic conditions, legislation,
or otherwise, which ultimately results in the re-
tirement or other disposition of property. As said
by the Supreme Court in United States Cartridge Co.
v. United States (1932 ...), 'Obsolescence may arise
from changes in the art, shifting of business cen-
ters, loss of trade, inadequacy, supersession, pro-
hibitory laws and other things which, apart from
physical deterioration, operate to cause plant ele-
ments or the plant as a whole to suffer diminution
in value.' .12/
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The Bulletin draws a distinction between the "two principal forms or
types of obsolescence" that the Internal Revenue Service recognizes --
normal obsolescence and extraordinary obsolescence:
Normal obsolescence is caused by factors which
can be anticipated with substantially the same de-
gree of accuracy as other ordinary depreciation
factors, such as wear and tear, corrosion or decay.
Accordingly, it is included in estimating the nor-
mal useful life of depreciable property, the effect
of which is to include the allowance for normal obso-
lescence in the depreciation deduction.)12/
The view of normal depreciation held by the Treasury Department assumes
a fairly even and constant incidence of normal obsolescence in the aver-
age useful lives estimated for various types of fixed assets even though
such obsolescence cannot be isolated and quantified. Thus it is held
that the element of normal obsolescence is implicit in the experiential
data on the useful lives of fixed assets in the particular period to
which the data pertain and that such obsolescence will continue to be
present in about the same degree in the future. The position taken
by the Treasury Department is a practical solution to an otherwise com-
plex and difficult problem, although the soundness of the assumption
may sometimes be open to question. It is not hard to think of a number
of types of fixed assets where the rate of "normal obsolescence" in the
postwar period is perceptibly higher than in the prewar period, the
period on which the average useful lives in Bulletin "F" are based.
The provisions of Bulletin "F" pertaining to extraordi-
nary or special obsolescence apply to individual cases, probably not
too common, of relatively sudden and complete obsolescence that cannot
be predicted:
The estimated useful lives shown herein ... do
not contain any provision for extraordinary obso-
lescence, such as is occasioned by revolutionary
inventions, abnormal growth or development, radical
economic changes, or other unpredictable factors
which may force the retirement or other disposition
of property prior to the termination of its normal
useful life.)11/
Extraordinary or special obsolescence rarely
can be predicted prior to its occurrence. However,
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this does not necessarily imply that the assets
already must have been completely discarded or
become useless, but merely that a point has been
reached where it can be definitely predicted that
its use for its present purposes will be discon-
tinued at a certain future date. Deductions for
obsolescence of this type may be taken over the
period beginning with the time such obsolescence
is apparent and ending with the time the property
will become obsolete. In every case the burden of
proof is entirely upon the taxpayer to establish
a claim for obsolescence by facts and evidence
that are definite and indisputable. No amount
may be charged off in any year merely because,
in the opinion of the taxpayer, property may be-
come obsolete a number of years later. The allow-
ance will be confined to such items or such por-
tion of the property on which obsolescence is
definitely shown to be sustained, and cannot be
held applicable to an entire property unless all
portions thereof are affected by the conditions
to which the obsolescence is found to be due.
Nor can obsolescence be allowed retrospectively
in the light of subsequent events or happenings
not anticipated during the period for which the
obsolescence is claimed. In no case may the de-
duction for obsolescence be extended to include
shrinkage in value due to other causes, as, for
instance, a general drop in the price of com-
modities.)22/
c. In Soviet Industry Lg./
Much less attention has been devoted to the study of the
service lives of individual fixed assets in the USSR than in the US. In
particular, few statistical studies have been made on the service lives
of individual types of equipment in Soviet industry.* In Soviet indus-
trial enterprises the apparent lack of attention to developing and sub-
stantiating statistically based average useful lives for individual types
* Recently, there has been an awakened Soviet interest in the service
lives of equipment in the US. In 1959 a book on Amortization and the
Service Lives of Fixed Capital by the Soviet economist Ya.B. Kvasha
was published by the Economics Institute, Academy of Sciences, USSR.
Largely theoretical in nature, the book depends heavily on US sources
for supporting statistical data, the author acknowledging the lack of
Soviet data.
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of machinery and equipment probably stems in part from the centralized
method of planning service lives and from the almost universal adherence
to multiple asset accounts. The use of such accounts has tended to ob-
scure the importance of establishing reliable life estimates for indi-
vidual assets.*
Another factor tending to discourage research in this
area has been the relative absence under a planned economy of inde-
pendent economic forces affecting the retirement of machinery and equip-
ment. Reliance on periodic capital repairs to keep machinery and equip-
ment in operation for a maximum period of time has tended to prolong
the lives of many assets until they were fully depreciated or even longer.
Therefore, study of the historical service lives of industrial machinery
and equipment would have had little relevance to objective considerations.
Concern expressed over the service lives presently in
effect has been connected primarily with the financial losses suffered
by the state when individual assets have been prematurely written off
at industrial enterprises. A number of writers have urged, in the name
of stricter khozraschet (cost accountability) at the enterprise level,
that such losses be borne by the individual enterprise rather than di-
rectly by the state. In recent years a number of Soviet economists
have expressed the view, but without supporting data, that the present
service lives established for industrial machinery and equipment in the
USSR are much too long, particularly when compared with US service lives.
In spite of the longstanding demands of Soviet econo-
mists for a greater differentiation of amortization rates based on the
study of the actual service life characteristics of individual types of
fixed assets, the average service lives established in 1930 apparently
have remained substantially in force down to the present time. Although
the basic amortization rates of 1930 are available (see Appendix D**),
the estimated average service lives on which these rates presumably were
based are not available. Nor can they be inferred from the rates, inas-
much as there is not a simple inverse relationship between Soviet service
lives and amortization rates.
* Strictly speaking, of course, multiple asset accounts should be
based on groupings of fixed assets that have homogeneous service life
characteristics. This grouping presupposes some study of the service
life characteristics of the individual assets included in a given group.
To the extent that Soviet multiple asset accounts contain machinery and
equipment with highly diverse service life characteristics, Soviet group
accounting practice does not always meet the basic requirements of sound
depreciation accounting.
** P. 79, below.
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It is logical to assume that the six categories of equip-
ment differentiated by industry in the schedule of rates published in
1930 reflect, to some degree, differences in the length of the planned
service lives of equipment in the respective industries and not merely
differences in the number and cost of planned capital repairs.
It is not at all certain that the estimated average
service lives on which the six broad categories of basic amortization
rates are based have ever been published. One writer has asserted, how-
ever, that the "amortization rates established for equipment in 1930 ...
were, on the whole, based on a 20-year service life," 21/2/ a figure not
very different from the 19-year average given for industrial equipment
in Bulletin "F."
Although the service lives of machinery and equipment
were not differentiated by type in the schedule compiled in 1930, they
were differentiated on the basis of operating load and daily hours of
operation. Consequently, coefficients of operation must have been taken
into account when establishing average service lives expressed in years
of service. The 20-year service life, cited above as an average for all
industrial equipment (with the exception of transportation equipment),
probably reflects such an adjustment.* The same source refers to the
fact that the service lives of equipment contained in the schedule of
1930 range from 10 to 22 years, suggesting that the average 20-year
life planned for industrial equipment as a whole represents a weighted
average.
In contrast to the Soviet schedule of 1930 with its table
of rates differentiated on the basis of operating load and daily hours
of operation, the average service lives shown in Bulletin "F," it will
be remembered, are based on "normal operating conditions." 1[2/ The US
firm that is faced with the prospect of other than normal conditions of
* Unknown is the percent of Soviet equipment that is operated on a one-
shift basis and the percent that is operated more than one shift per day.
Undoubtedly the percentage has fluctuated through the various periods
of Soviet economic development. Because of the detailed provisions for
computing amortization charges on more than a one-shift basis (compared
with the lack of such provisions in the US Bulletin "F"), however, there
is reason to believe that multishift operation of equipment has been far
more common in the USSR than in the US. In any assessment of future
patterns in the two countries, the influence of automation on the eco-
nomic feasibility of multishift operation in certain industries must be
weighed.
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operation must establish its own rates and be prepared to support them
on the basis of independently derived life estimates.*
Soviet estimates of average service lives are based on
a specifically planned number of capital repairs that have the effect
of prolonging the useful life of equipment. It is true that the useful
lives shown in Bulletin "F" are "predicated on a reasonable expense
policy as to the cost of repairs and maintenance."/ But US industry,
lacking a comprehensive and uniform approach to capital repairs (prob-
ably because it is more inclined to replace than repair extensively),
almost certainly does not put the same emphasis on planned repair work
when estimating average service lives as does Soviet industry.**
There is no clear indication in Soviet publications on
amortization as to just how the effects of planned capital repair are
calculated when estimating the service life of machinery and equipment.
It may be surmised, however, that engineering considerations rather
than economic calculations primarily govern the relationship between
the planned number and frequency of capital repairs and the estimated
length of the service life of equipment. Although it is unquestionably
true that capital repair does tend to prolong the useful life of ma-
chinery and equipment, it is also true that capital repair has as its
primary aim the restoration of equipment as nearly as possible to its
original technical performance characteristics in order to maintain
productivity within given limits. As the service life of a machine
can be extended almost indefinitely through repeated capital repairs
(provided replacement parts are available), it is clear that some over-
all criterion must govern the number of years during which equipment is
expected to serve in the USSR.
* Bulletin F" contains the following provisions with respect to such
occurrences: "It is recognized that the useful life of some depreciable
property, or items thereof, may be affected by a radical increase or de-
crease in plant activity, or diversion in use, extending over a period
of time so that depreciation in excess of, or less than, the amounts
allowable under normal operating conditions or use may be sustained.
Such increase or decrease in depreciation is dependent upon the decrease
or increase, respectively, in the normal useful life resulting from the
exceptional operating conditions or use."
** In a recent Soviet article entitled "Peculiarities of the Amortiza-
tion of Fixed Capital in the USA During the Postwar Period," the authors
take pains to point out that "outlays for capital repair [in the US] are
included directly in the outlays of production (current expenditures)
and are not provided for in amortization rates."/111/ This statement
points up an important difference in Soviet and US approaches to capital
repair when estimating the service life of equipment.
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Under past Soviet economic policy the alternative be-
tween replacement and repair during the latter years of the service
life of a machine has frequently been decided in favor of repair, pri-
marily on the basis of maximizing the over-all industrial capacity of
the country rather than on the basis of relative costs. Much of the
new machinery and equipment that would have been available for purposes
of replacement under a different economic system has been earmarked for
new industrial enterprises, and the life of used assets has often been
prolonged uneconomically through the labor-intensive and costly method
of capital repair.
There is growing interest in the USSR, however, in
establishing methods of determining the economic feasibility of replac-
ing machinery and equipment before it has reached the limit of its
planned service life. This interest stems in part from an increasing
availability of new and more productive equipment for replacement. It
also stems from increasing attention to the "qualitative" indexes of
production, especially the cost index. In general, where early replace-
ment is a possibility, the decision to replace is based on a consider-
ation of the cost involved in replacing an existing asset with a new
asset, the anticipated change in the level of productivity, the in-
creased earnings (savings) to be derived therefrom, and the length of
the period of recoupment in terms of the anticipated increase in earn-
ings. Equipment retired from first-line production, if still in work-
ing condition, is ordinarily relegated to secondary use in the economy.
Until recently there has been no coordinated attempt
to revise the schedule of basic amortization rates of 1930 or the esti-
mated service lives on which presumably it is based. It is evident
from information published on the proposed amortization rates for ma-
chinery and equipment for 1963,* however, that the planned service
lives of such assets are now to be reduced. It is to be hoped that
data on these new life estimates, which are based on engineering
studies of physical life characteristics under current conditions of
use as well as on coefficients computed for obsolescence, will be
published by the Soviet authorities.
B. Mechanics of Depreciation and Amortization
1. Principal Methods of Depreciation112/
The method of depreciation (or, as it is often called, the
writeoff procedure) determines the pattern of capital charges during
the service life of a fixed asset. The three most widely used methods
in the US are the straight line method, the declining balance method,
* See B, 2, cl p. 49, below.
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and the sum of the year digits method (see Table 1*). Of the three
methods, the straight line method is the only one used in the USSR.
a. Straight Line Method
Straight line depreciation may be used with any type of
depreciation account. The greater the number and diversity of assets
in any one account, however, the more cumbersome the straight line
method becomes. Under this method the cost or other basis of a fixed
asset is written off in equal annual installments during the estimated
service life of the asset. If the estimated salvage value of an asset
is excluded from the sum to be recovered through depreciation, the rate
is simply the reciprocal of the estimated service life.
Under existing US tax regulations a firm using the
straight line method may revise its depreciation schedule when it be-
comes demonstrable that the actual service life and/or the actual sal-
vage value will vary from the original estimate. In the revised sched-
ule the remaining value to be recovered is simply prorated over the
remaining estimated service life. Under existing US tax legislation,
straight line depreciation may be used for all types of fixed assets
regardless of their date of acquisition. Until 1954 the straight line
method of depreciation was by far the most commonly used method in the
US.
The straight line method is the only method of depreci-
ation presently sanctioned in the USSR. AS far as is known, there are
no provisions under the Soviet system for revising schedules when and
if it becomes apparent that actual service lives are going to deviate
from life estimates.** Instead, a profit or loss is calculated on
retirement of the asset.
The major disadvantage of the straight line method with
respect to machinery and equipment is that the book value (unamortized
cost) computed under this method rarely corresponds to the remaining
use value, exchange value, or replacement value. Some US authorities
on depreciation argue that under conditions of rapid technical change,
unexpectedly heavy use, or intense inflationary pressures the pattern
of capital recovery resulting from straight line depreciation of
* Table 1 follows on p. 37.
** It might be more accurate to refer to the estimated lives of ma-
chinery and equipment in Soviet industry as planned lives, inasmuch
as economic factors have not been allowed significantly to hasten
retirement and the program of capital repair usually has kept ma-
chinery and equipment physically operable for the full prescribed
period.
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Table 1
US: Comparison of Capital Recovery Under the Principal Methods of Depreciation 2/
Straight Line Method 12/
US $
Liberalized Methods Authorized by the Internal Revenue Code of 1954
Double Rate Declining Balance Method 2/ Sum of the Year Digits Method 1/
End of Year
Annual Deduction 2/
Cumulative
Amount Recovered
Annual Deduction f/
Cumulative
Amount Recovered
Annual Deduction e
Cumulative
Amount Recovered
1
2
3
4
5
10,000
10,000
10,000
10,000
10,000
10,000
20,000
30,000
40,000
50,000
24 ,000
14,40038,400
8,640
2,960 y
o
24,000

47,040
50,000
5o,000
16,667
13,333
10,000
6,667
3,333
16,667
30,000
40,000
46,667
50,000
a. A hypothetical example, assuming an asset account capitalized at $60,000 with an estimated useful life of 5 years and an estimated
salvage value of $10,000.
b. The constant base is computed by subtracting the estimated salvage value from the capital cost ($60,000 minus $10,000 equals $50,000),
and the rate is the reciprocal of the estimated service life (1/5 equals 0.20).
c. This rate is twice that allowable under the straight line method (0.20 times 2 equals 0.40).
d. The depreciable base is computed by subtracting the estimated salvage value from the capital cost ($60,000 minus $10,000 equals $50,000).
The annual rate is a fraction in which the numerator is the number of years of the estimated useful life remaining (including the current year)
and in which the denominator is the sum of the total years of the estimated useful life (1 plus 2 plus 3 plus 4 plus 5 equals 15). Therefore,
the rates for this example would be as follows: for the first year, 5/15; for the second year, 4/15; for the third year, 3/15; for the fourth
year, 2/15; and for the fifth year, 1/15.
e. The annual deduction is computed by applying the constant rate to the constant base (0.20 times $50,000 equals $10,000).
f. Computed by applying the constant rate to the declining balance. The base is not adjusted for the estimated salvage value but is re-
duced each year by the amount of the previous annual deduction. Therefore, the balance for this example would be as follows: for the first
year, $60,000; for the second year, $36,000; for the third year, $21,600; fox: the fourth year, $12,960; and for the fifth year, $10,000.
g. Computed by applying the declining rate to the constant base.
h. The asset account cannot be depreciated below the estimated salvage value ($10,000) under the declining balance method. If the useful life
of the account is extended and the estimated salvage value is reduced, depreciation continues (but not below the new salvage value) until as-
sets are retired.
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machinery and equipment is particularly unrealistic. Furthermore, in
the event tnat capital recovery is to be accelerated or decelerated on
the basis of changes in the life expectancy of fixed assets, extensive
and detailed revision of the depreciation schedule may become necessary.
The advantage of simplicity often attributed to the straight line method
may be more apparent than real if, for any reason, the life expectancies
and rates of a large number of diverse fixed assets are subject to re-
vision.
b. Liberalized Methods
Proponents of realistic depreciation in the US have
argued -- and so convincingly that some of their proposals were embodied
in the Internal Revenue Code of 1954 -- that a more rapid recovery of
capital than occurs under straight line depreciation should be author-
ized for purposes of tax depreciation. The pattern of capital recovery
under the liberalized methods permits a greater percentage of the cost
(or other basis) to be recovered in the first half of the service life
of an asset than in the second (see Table 1*). The pattern of recovery
thereby conforms more closely to the pattern of loss in economic value
than is the case under the straight line method. Under the liberalized
methods, as much as two-thirds of the original cost of machinery and
equipment may be recovered during the first half of the estimated service
life.
In permitting the preponderance of capital outlays for
machinery and equipment to be recovered more quickly than under the
straight line method, the liberalized methods of depreciation afford
US industrial firms greater tax relief in the early years of operation
and less of a financial loss in the event that unforeseeable economic
developments in the later years preclude the possibility of full capital
recovery. Compared with straight line depreciation, liberalized depreci-
ation tends to accelerate economic activity by freeing invested capital
more quickly. Against this advantage must be weighed the possible short-
run loss of tax revenue to the government.
The principal liberalized methods of depreciation offici-
ally recognized in the Internal Revenue Code of 1954 are the declining
balance method and the sum of the year digits method. It should be
emphasized that although these liberalized methods permit a more rapid
rate of recovery, they do not reflect a departure from the rules of
orthodox depreciation accounting under which the historical cost less
the salvage value represents the maximum recoverable sum and the use-
ful life defines the over-all period during which recovery may be
effected.
* P. 37, above.
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(1) Declining Balance Method
Under the declining balance method of depreciation
the annual capital charge to depreciation is greatest in the first year
and gradually declines in size each subsequent year during the life of
the fixed asset (see Table 1*). Although the annual charges are not
uniform, as in the case of straight line depreciation, the depreciation
rate is constant. The variation in annual charges is explained by the
fact that a constant rate is applied to a declining recoverable base
(balance). Thus the recoverable base is reduced each year by the
amount of depreciation taken in the preceding year. The balance of
unrecovered cost in any year is held to reflect the remaining use
value of machinery and equipment more accurately than is the case under
straight line depreciation.
It is obvious that to qualify as a more liberal
method than the straight line method the constant depreciation rate
used under the declining balance method must be higher in view of the
constantly declining base on which annual charges are computed.xx
Actually the rate allowable under the declining balance method is
established as a percentage of what the straight line rate would be,
given the estimated service life of the asset. Although the declining
balance method was recognized as a legitimate method in the 1942 edi-
tion of Bulletin "F," the allowable rate was only 1.5 times the corre-
sponding straight line rate. The Internal Revenue Code of 1954 author-
ized the use of a rate that was twice that of the corresponding straight
line rate. This provision has given rise to the designation of the
more liberalized method as the "double rate declining balance method."
Under the declining balance method the original
cost of an asset theoretically cannot be fully recovered, because the
recoverable base never reaches zero. This feature ordinarily is not
a practical obstacle, inasmuch as tax regulations provide that the re-
coverable base may not be reduced below a reasonable salvage value.
Thus the original cost of an asset that is not recovered through depreci-
ation is recovered through salvage on its retirement.
A firm that elects to use the declining balance
method of depreciation is free at any time to shift over to the straight
line method. In this event the unrecovered balance, less the estimated
salvage value, is simply depreciated at the rate appropriate to the re-
maining life expectancy. The declining balance method is not authorized
* P. 37, above.
** It should be noted, however, that the cost recoverable through
depreciation under the declining balance method is not reduced by the
amount of estimated salvage value as is done in most other methods.
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for depreciation of property with a useful life of less than 3 years
or for depreciating intangible property such as patents, copyrights,
and leases.
(2) Sum of the Year Digits Method
The sum of the year digits method is subject to the
same restrictions of use as the declining balance method. As under the
declining balance method, the size of depreciation charges (accruals)
decreases each year (see Table 1*). The sum of the year digits method
resembles the straight line method, however, in that the rate is applied
to a constant base -- the original cost less the estimated salvage. It
differs from both the straight line method and the declining balance
method in that the depreciation rate changes each year in relation to
the remaining estimated life of the asset.
In any given year the rate is a fraction in which
the numerator is the number of years remaining (including the current
year) in the average estimated useful life of an asset (or group of
assets), and the denominator is the sum of the number of total years
of estimated useful life (see Table 1). In the event that the useful
life of an asset is extended, the unrecovered cost (less the estimated
salvage) at the time of revising the life estimate becomes the new base,
and the new rate is determined from the revised life estimate. As in
the declining balance method, a firm is free to shift from the sum of
the year digits method to the straight line method at any point in the
service life of an asset or group of assets.
A variant of the sum of the year digits method is
the so-called "remaining life plan." Under this plan, changing frac-
tions are applied to a base reflecting the unrecovered cost (less sal-
vage) rather than the original cost. Moreover, although the numerator
of the fraction is again the remaining years in the estimated life of
the asset, as in the conventional sum of the year digits method, the
denominator changes each year to correspond to the sum of the numbers
of remaining years in the estimated useful life of the asset. When
the remaining life plan is used for multiple asset accounts, the re-
maining useful life of the account must be redetermined each year.
(3) Economic Effects
The economic effects of the decision by the US
Treasury Department to permit accelerated depreciation through the
use of the declining balance and the sum of the year digits methods
is not fully known. At the present time the Treasury Department is
* P. 37, above.
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engaged in a study of the depreciation practices of US firms, partly
in order to determine the extent to which firms are using the faster
depreciation methods authorized by the 1954 law. One of the most
persuasive arguments advanced by the proponents of liberalized depreci-
ation to allay official fears of revenue losses was that the more rapid
recovery of capital by business firms would permit an upswing in in-
vestment activities, thereby creating a broader tax base.
Many methodological problems are involved in trying
to measure the correlation between changes in the level of investment
activity and liberalized tax depreciation, and in this particular in-
stance it was not made mandatory that the firm commit the additional
depreciation claimed or the tax savings realized from such claims to
investment. There has been some adverse criticism of liberalized tax
depreciation as a "tax gimmick." In support of this charge, critics
have cited the opportunity for firms to take a liberalized depreciation
allowance in their tax schedules and a less liberal allowance in finan-
cial statements prepared to impress public opinion and credit institu-
tions with the profitability of the firm.
2. Amortization Rate and Amortization Charge in Soviet Industry
Inasmuch as the straight line method is the prescribed
method of amortization in Soviet industry, Soviet amortization prac-
tices have many features in common with the practices of those US firms
that employ the straight line method. There are, however, some note-
worthy differences between the two systems, and these differences tend
to invalidate a comparative approach to quantitative information on
rates and annual charges. Differences stem primarily from the Soviet
practice of including allowances for planned capital repair* in amorti-
zation rates and amortization charges.
Perhaps the most striking point of difference between
straight line depreciation in the US and the USSR is the method of
calculating the amortization rate. The amortization rate in the USSR
is not the reciprocal of the service life as is ordinarily the case
under US conditions.** Reflecting the inclusion of allowances for
* Under the Soviet capital repair program the cost of major repair
work, including the replacement of major operating parts and components
at scheduled intervals in the service life of equipment, is estimated
at the time the equipment is acquired.
** It is precisely for this reason that it is incorrect to infer the
service lives of Soviet machinery and equipment from published data on
over-all amortization rates in industry. Service lives so derived
will greatly understate the length of the planned lives. The new
standard rates to be introduced in 1963, however, appear to reveal
the average planned life for each primary category of equipment on an
economy-wide basis (see the first footnote on p. 51, below).
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capital repair, it is an adjusted rate.* This point will become clearer
as the method of computing the Soviet rate is described.
a. Calculation of Basic Amortization Rates 22/
As the first step in calculating the amortization rate
of a single fixed asset, an adjusted amortization sum** (raschetnaya
amortizatsionnaya summa) is computed. The full original cost (V) of a
piece of machinery, for example, is added to the cost of the capital
repair (R) scheduled to be carried out during its useful life. From
this sum the estimated terminal salvage value (S), less dismantling
costs (D), xxx is subtracted. Symbolically the adjusted amortization
sum is represented by the following formula: V + R - S + D.
The size of the annual amortization charge (A) is deter-
mined by using the formula V + R - S + D, where t represents the esti-
mated service life of the asset. Substituting hypothetical values, we
find that in the case of a machine whose cost (V) is 20,000 rubles,
whose capital repair (R) is estimated at 10,000 rubles, whose salvage
value (S) is estimated at 3,500 rubles, less dismantling costs (D) of
500 rubles, and whose useful life (t) is estimated at 15 years, the
formula reads as follows:
A _V+R-S+D_ 20,000 + 10,000 - 3,500 + 500 _ 27,000 = 1,800 rubles
15 15
Thus the size of the annual amortization charge (A) is computed on the
basis of the adjusted amortization sum (the total recoverable cost)
and not simply on the basis of the full original cost at which the asset
is capitalized.
* To be the reciprocal of the service life, the amortization rate
must be an unadjusted rate (see the footnote on p. 43, below).
** Sometimes referred to simply as the amortization sum. This sum
represents the total value to be recovered through amortization during
the life of an asset. In this sense it is a concept that is comparable
with adjusted (depreciable) basis in US depreciation accounting. In
the USSR, however, the adjusted amortization sum is greater than the
original cost of the asset, whereas the adjusted basis in the US is
usually less than the original cost. As a result, adjusted rates are
generally lower than unadjusted rates in the US. In the USSR the
opposite would be true if both adjusted and unadjusted rates were used.
*** Salvage value less the dismantling cost is commonly referred to as
net salvage value.
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The amortization rate (r) is then derived by expressing -
the annual amortization charge (A) as a percentage of the full original
A
oostMoftheasset--thusr=,x100 percent.
V
Substituting the hypothetical values from the example above,
r = 1/800 x 100 percent = 9 percent
20,000
It should be noted that the amortization rate is derived by relating
the annual amortization charge not to the adjusted amortization sum
but to the full original cost of the asset. If the adjusted amorti-
zation sum were used to determine the rate, the rate would be only
6 2/3 percent (the reciprocal of the estimated 15 year service life).
To derive the amortization rate directly, the following formula may
be substituted for the two steps shown above:
V +R-S+ D
r - x 100 percent
t x V
It is clear that an amortization rate calculated in
this manner is significantly higher than if the cost of capital repair
were not included in the sum to be recovered through amortization and
only the original cost of the asset less net salvage (V - S + D) were
used to compute the adjusted amortization sum.
_V-S+ D000 - 3500 + 500
x 100 percent . 20, , x 100 percent =
t x V 15 x 20,000
17,000
x 100 percent = 5.7 percent*
300,000
Thus, in effect, the charging of capital repair to amortization raises
the amortization rate. At the same time, capital repair tends to
* This rate, like the 9-percent rate, is an adjusted rate that would
necessarily be applied to the full original cost of 20,000 rubles in
computing annual amortization charges. An unadjusted rate of 6 2/3
percent (the reciprocal of the 15-year service life) would be in order
if the annual charge were computed on a base of full original cost less
net salvage (17,000 rubles).
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prolong the service life of machinery and equipment, thereby offset-
ting, to some extent, the higher recoverable sum.*
From the preceding discussion it may be concluded that
Soviet amortization rates are somewhat overstated relative to compar-
able US depreciation rates by the inclusion of a charge for capital
repair. The effect of charges for capital repair has been partly off-
set, however, by the absence of an allowance for normal obsolescence
in the Soviet rate.** Because of these differences in the structure
of rates, comparisons of Soviet amortization rates and US depreciation
rates are not entirely meaningful.
After calculating basic rates for individual fixed
assets, an average basic rate may be computed for a group of assets.
The basic rates contained in the schedule of 1930 (see Appendix Dxxx),
for example, are average basic rates. The new rates scheduled to be
introduced in 1963 also will be average basic rates but, in distinc-
tion to the rates of 1930, are designated as standard amortization
rates (yedinyye normy amortizatsii).t
b. Use of Composite Rates 21/
(1) Composite Rates for Industries
Aside from differences in the method of computing
basic rates in US and Soviet industry, there is another major barrier
to making comparisons. The problem here turns on the fact that there
are scarcely any data available on official basic rates in Soviet
industry for individual types of machinery and equipment. The practice
in the USSR has been to establish average basic rates for broad groups
of equipment, primarily for use in calculating composite (weighted
average) rates that include all fixed assets (buildings, structures,
and equipment) for each industry.
* If the service life of the asset were reduced from 15 to 10 years
because capital repair was entirely eliminated, then the adjusted rate
would be 8.5 percent 012.213_ times 100 percent equals 8.5 percent), and
200,000
the unadjusted rate would be 10 percent. Prolongation of service lives,
however, is not the sole economic function of the capital repair program,
so that the chance of its elimination appears remote at the present time.
** This situation will be changed with the introduction of a new sched-
ule of amortization rates in 1963.
xxx P. 79, below.
t For a discussion of this apparent major difference between the aver-
age basic rates of 1930 and those of 1963, see c, p. 49, below.
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The composite amortization rate established for each
individual industry is designed primarily to facilitate planning. It
provides a useful tool for the central planners in determining the budge-
tary revenues from amortization that will be available for capital in-
vestment and capital repair.* Aggregative data on charges to amorti-
zation at industrial enterprises also are needed by the planners to plan
the cost of industrial output** and the prices based thereon.
Composite rates, being weighted average rates, re-
flect the composition of the various types of productive fixed assets
found within the respective industries.*** Theoretically, composite
rates should be recomputed each year to reflect changes that occur
from year to year in the composition and use pattern of the fixed as-
sets in each industry. Actually, there have been only three revisions
of composite rates in the USSR since 1938 -- in 1950, 1952, and 1956 22/
(see Table 2t). Within the composite rate for industry as a whole,
the value weight of the equipment component (exclusive of some equip-
ment buried in the category of transmission facilities of fixed assets)
was slightly above 40 percent during 1951-56 (see Table 7tt). At the
same time, there was a relatively high uniformity in the over-all com-
posite amortization rates of most Soviet industries during 1950-56.
A decline in the 1960 value weight of the equipment component from
40.1 percent to 37.3 percent occurred as a result of the revaluation
of fixed assets at current replacement cost on 1 January of that year.ttt
* Amortization charges for industry as a whole, for individual in-
dustries, or for individual enterprises may be computed simply by
applying the appropriate composite rate to the aggregate value of
the respective productive fixed assets. Depending on the require-
ments of the planners, over-all amortization deductions, amortization
deductions for capital investment, or amortization deductions for
capital repair may be computed with equal facility using composite
rates. See (3), p. 48, below.
** Amortization as an element of cost in production of industrial
output is discussed in III, C, p. 63, below.
*** Composite rates for individual industries and for industry as a
whole are derived by multiplying the aggregate value (based on full
original cost) of each major category of fixed asset by the appro-
priate basic rate established for that category in the schedule of
1930. The sum of the results is then divided by the total value of
fixed assets in the respective industry to obtain the composite
(weighted average) rate for that industry. For statistical data
on value weights used to compute composite rates in Soviet industry,
see Appendix C, p. 73, below.
? t Table 2 follows on p. 46.
tt Appendix C, p. 76, below.
ttt The effect of the revaluation on the value weights of machinery
and equipment is shown in Table 8, Appendix C, p. 77, below. (Text
continued on p. 48.)
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Table 2
USSR: Comparison of Composite Amortization Rates in Industry 2/
1938, 1950, 1952, and 1956
Percent of Full Original Cost of Fixed Assets
Industry
1938
1950
1952
1956
Over-All
Rate
Subrate
Over-All
Rate
Subrate
Over-All
Rate
Subrate
Over-All
Rate
Subrate
Capital
Investment
Capital
Repair
Capital
Investment
Capital
Repair
Capital
Investment
Capital
Repair
Capital
Investment
Capital
122221E_
Total industry
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
5.3
2.7
2.6
Food
Food
6.0
3.2
2.8
6.3
2.0
4.3
6.3
2.2
4.1
6.8
3.1
3.7
Fish
6.0
3.2
2.8
6.5
0.5
6.0
6.5
0.7
5.8
6.5
0.9
5.6
Meat and dairy
6.0
3.2
2.8
5.0
1.5
3.5
5.0
1.5
3.5
5.6
1.9
3.7
Heavy
Chemical
5.6
3.2
2.4
4.5
1.1
3.4
4.5
1.6
2.9
4.6
2.2
2.4
Coal
5.6
3.2
2.4
4.2
0.9
3.3
4.2
1.1
3.1
4.3
1.7
2.6
Construction materials
5.6
3.2
2.4
5.5
0.7
4.8
5.5
1.3
4.2
5.2
2.6
2.6
Construction of heavy
industry enterprises
5.6
3.2
2.4
5.8
1.4
4.4
5.8
2.3
3.5
N.A.
N.A.
N.A.
Electric power stations
5.6
3.2
2.4
5.3
1.5
3.8
5.3
2.1
3.2
4.5
2.3
2.2
Electrotechnical
5.6
3.2
2.4
4.5
2.2
2.3
4.5
2.5
2.0
4.5
2.7
1.8
Ferrous metallurgy
5.6
3.2
2.4
4.8
1.8
3.0
4.8
2.2
2.6
4.7
2.6
2.1
Petroleum
5.6
3.2
2.4
6.5
2.8
3.7
6.5
3.3
3.2
5.6
3.6
2.0
Light
5.5
1.9
3.6
6.5
0.7
5.8
6.5
1.1
5.4
6.6
2.3
4.3
Machine building
Agricultural machine
building
5.5
3.3
2.2
5.6
2.0
3.6
5.6
2.3
3.3
5.6
3.6
2.0
Communications equipment
5.5
3.3
2.2
4.4
1.9
2.5
4.4
2.1
2.3
4.4
2.9
1.5
Construction and road
machine building
5.5
3.3
2.2
4.6
2.1
2.5
4.6
2.3
2.3
4.6
2.7
1.9
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Table 2
(Continued)
Percent of Full Original Cost of Fixed Assets
Industry
1938
1950
1952
1956
Over-All
Rate
Subrate
Over-All
Rate
Subrate
Over-All
Rate
Subrate
Over-All
Rate
Subrate
Capital
Investment
Capital
Repair
Capital
Investment
Capital
Repair
Capital
Investment
Capital
Repair
Capital
Investment
Capital
Repair
Machine building (Continued)
General machine building
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
5.7
2.8
2.9
Heavy machine building
5.5
3.3
2.2
5.5
3.0
2.5
5.5
3.4
2.1
5.6
3.6
2.0
Machine and instrument
building
5.5
3.3
2.2
5.5
2.0
3.5
5.5
2.5
3.0
5.6
2.9
2.7
Machine tool building
5.5
3.3
2.2
5.6
3.2
2.4
5.6
3.5
2.1
5.7
3.7
2.0
Motor vehicle and tractor
5.5
3.3
2.2
5.5
3.0
2.5
5.5
3.2
2.3
5.6
3.6
2.0
Transport machine building
5.5
3.3
2.2
4.8
1.8
3.0
4.8
2.1
2.7
4.8
2.4
2.4
Timber and paper
Paper
6.0
3.0
3.0
4.7
1.7
3.0
4.7
1.7
3.0
5.0
2.3
2.7
Timber
6.0
3.0
3.0
4.7
1.7
3.0
4.7
0.2
4.5
5.0
0.5
4.5
Transportation
Maritime fleet
N.A.
N.A.
N.A.
7.0
0
7.0
7.0
1.0
6.0
N.A.
N.A.
4.6
River fleet
N.A.
N.A.
N.A.
4.0
0
.0
4.o
0.1
3.9
N.A.
N.A.
2.8
Railroads
N.A.
N.A.
N.A.
6.5
0
6.5
6.5
0.5
6.0
N.A.
N.A.
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(2) Composite Rates for Enterprises
A common complaint of Soviet economists has been
that the individual industrial enterprises have calculated annual
amortization charges by applying the composite rate established for
their respective industries to the value of the fixed assets of the
enterprise instead of computing separate composite rates.* This prac-
tice tends to distort the charge to amortization in the cost of output
at the individual enterprise.**
As an alternative to using a composite rate, of
course, a Soviet enterprise might apply basic amortization rates
directly to the respective groups of assets for which such rates are
established. Such a procedure requires only that similar types of
assets be grouped together in multiple asset accounts and that the
basic rate applicable to that group be used to compute amortization
charges. The advantage of this method would be that it would avoid
the necessity of periodically recomputing the composite rate and prob-
ably would allocate amortization charges more accurately among the cost
accounts of the various articles produced by the enterprise.
(3) Division of Over-All Composite Rates into Subrates
for Capital Investment and Capital Repair
The composite rates shown in Table 2xx* are subdi-
vided into a rate for capital investment and a rate for capital repair.
Amortization charges for capital repair were incorporated when the
basic amortization rates of 1930 were computed. It was not until the
establishment of composite rates in 1938, however, that the practice
of formally delineating separate rates for capital investment and
capital repair was adopted. These subrates for capital investment
and capital repair are also composite rates. In spite of the rather
uniform over-all composite rates during the 1950's, the composite
rates for capital investment and capital repair fluctuated markedly
in most industries. The availability of composite rates for capital
investment in various Soviet industries would appear to invite com-
parisons with US composite depreciation rates, where available, for
corresponding industries. Unfortunately it is not usually possible
to isolate the equipment component in such composite rates.
The problem of determining the division of over-all
composite rates between capital investment and capital repair apparently
continues to be a troublesome one for the Soviet planners. The exact
* See d, p. 51, below.
** See d, p. 51, and III, C, p. 63, below.
*** P. 46, above.
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rationale behind the three revisions since 1938 is not known, but the
rates for capital repair in 1950 were greatly increased at the expense
of the rates for capital investment (see Table 2*).**
Some Soviet economists have claimed that the capital
repair rates were revised to reflect changes in the estimated cost of
capital repair and that the rates for capital investment were then estab-
lished as the difference between the capital repair rate and the over-
all rate. If true, this policy reflects a strange bias in Soviet
economic planning. Ostensibly it indicates a policy that favors the
use of amortization deductions for capital repair in preference to using
them for replacement (capital investment). Although the trend in most
industries has been for the capital repair rate to decline slightly
since 1950 relative to the capital investment rate, the new standard
amortization rates proposed for 1963 do not indicate a continuation of
this trend, particularly in the case of machinery and equipment.
c. New Standard Rates 2LV
It would be premature to try to pass final judgment on
the new Soviet amortization rates proposed for 1963, considering the
preliminary and limited nature of the data available These data, how-
ever, seem to indicate that the new rates will be considerably higher
than existing rates. They also indicate that, compared with the pro-
cedure in 1930, a different approach has been taken in the establish-
ment of average basic rates.
The new rates shown in the tabulation that follows*** are
standard rates established for the primary categories (types) of fixed
assets cohtained in the 1959 classification of fixed assets and used in
the revaluation of 1 January 1960. These rates presumably have been de-
rived by averaging all basic rates calculated for individual types and
subgroups of fixed assets within each primary classification category.
Unlike the other (1930) rates for equipment shown in this report, these
standard rates apparently are applicable to all sectors of the economy
regardless of conditions of use. In this respect the rates for equip-
ment are not strictly comparable with the 1930 rates for equipment.t
* P. 46, above.
** The relationship between the rate for investment and the rate for
repair in any given industry is a fair reflection of state policy toward
that industry with respect to replacement of plant and equipment. In-
directly, of course, this relationship reflects state policy with re-
spect to the allocation of resources in its industrial production and
construction programs.
*** P. 50, below.
t The 1930 schedule established average basic rates for equipment
according to groups of industries and intensity of use but not accord-
ing to major types of equipment (see Appendix D, p. 79, below).
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Primary Categories
of Fixed Assets
Percent of Full Replacement Cost
Over-All
Rate
Subrate
Capital Investment
Capital Repair
Buildings
3.1
1.4
1.7
Structures and trans-
mission facilities
4.6
1.6
3.0
Power machinery and
equipment
9.9
4.6
5.3
Production machinery
and equipment
13.3
6.5
6.8
Transportation equipment
8.8
3.3
5.5
Measuring and regulating
devices
9.1
6.6
2.5
Tooling
18.6
13.9
4.7
Office and building
12.7
7.5
5.2
equipment
The use of standard rates conforming to the classifi-
cation of fixed assets in the accounts of state organizations should
facilitate the centralized planning and accounting of amortization
deductions. Although they readily lend themselves to the formulation
of composite rates for industries and enterprises, standard rates of
this type, if used in accounting at the enterprise level, would tend
to distort the accounting cost calculated for individual products.
One of the most striking features of the new rates
is the preponderant share of the subrates for capital repair in the
over-all rates for buildings, structures and transmission facilities,
and the three categories of equipment. Under the 1960 revaluation
these categories account for 96.4 percent of the fixed assets re-
valued in the entire economy and 97.6 percent of those revalued in
Soviet industry. Only in the case of measuring and regulating de-
vices, tooling, and office and building equipment -- often items of
shorter life -- is the rate for capital investment higher.
The new average rates for machinery and equipment re-
flect a significant increase above the rates shown in the 1930 schedule.
In individual cases the new basic rates from which the average is de-
rived probably are double or more the corresponding 1930 rates. The
rise in rates apparently reflects a planned increase in the intensity
of use (level of operating capacity and number of shifts) as well as
an allowance for obsolescence.* The upward adjustment in the amorti-
zation rate for capital investment is said to be due to a reduction
* To the extent that the service life of an asset is shortened by more
intensive use, the period of obsolescence also will be lessened.
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in the length of the planned service life of equipment.* The upward
adjustment in the amortization rate for capital repair is said to re-
flect the inclusion of allocations for modernization in cases where it
is combined with capital repair as well as for some categories of re-
pair work that formerly were treated as current repair. It is also
possible that more intensive use may cause charges for capital repair
to rise.
d. Amortization Charge 25/
The annual amortization charge, or the amortization
deduction (amortizatsionnoye otchisleniye) as it is more commonly called
in Soviet economic publications, ordinarily is determined at the enter-
prise level simply by multiplying the full original cost of the fixed
assets of the enterprise by a composite rate. The most appropriate
composite rate at this level, as noted above, would be an enterprise
composite rate that reflected the Composition of the fixed assets of
the particular enterprise.** Theoretically this rate should change
annually in accordance with changes in the composition and use pattern
of the fixed assets of the enterprise in order to ensure the correct
over-all capital charge.*** That such a procedure is more often the
exception than the rule is amply indicated in Soviet self-criticism,
which frequently alleges that industrial enterprises are given to using
the composite rate established for their particular industry.
* Under the new standard rate system it may be possible to infer the
average service lives for the major categories of machinery and equip-
ment with respect to the economy as a whole. Assuming an inverse re-
lationship between the standard rate for capital investment and the
average life in each category, the following approximate average ser-
vice lives may be inferred: power machinery and equipment, 22 years;
production machinery and equipment, 15 years; transportation equipment,
30 years. The relatively higher subrates for capital repair in each
category indicate that, on the average, the funds spent for capital
repair during the service life of machinery and equipment are to ex-
ceed the original cost of such assets.
** The method of computing composite rates is explained in the third
footnote on p. 45, above.
xxx Changes in composite rates also would reflect any changes that
might occur in basic rates resulting from a redetermination of service
lives and capital repair costs. There have been no significant changes
in Soviet basic rates since 1930, although new basic rates are now
scheduled to be introduced at the beginning of 1963 (see c, p. 49,
above).
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If this latter practice were followed universally at
all enterprises of an industry, receipt of the total amortization de-
ductions which had been centrally planned would not be affected. Such
a practice, however, probably would introduce significant distortions
in the cost program of the individual enterprise, inasmuch as the rate
relative to the theoretically correct composite rate for the enter-
prise would be either overstated or understated. In turn, amortiza-
tion charges as an element in the cost of production would be either
overstated or understated.* For this reason, Soviet theory opposes the
use of the industry composite rate for purposes of calculating amorti-
zation deductions at the enterprise level.
On the other hand, if each enterprise were to use the
composite rate appropriate to its own fixed asset accounts, the sum
total of amortization deductions made at all enterprises would still
be equal to the centrally planned total for the industry as a whole
and at the same time would be the theoretically correct amount charge-
able to amortization as a cost of production. As a matter of practice,
some industrial enterprises apparently use the composite rate estab-
lished for their industry, while others compute their own composite
rates. As a result, there may well be an excess of amortization deduc-
tions in some industries and a shortfall in others relative to the
planned total.
As far as the "theoretically correct" charge for amorti-
zation is concerned, it should be pointed out that amortization charges
are correct only to the extent that the valuation and the rate are cor-
rect. Belated Soviet recognition that economic losses result from con-
tinued operation of obsolescent equipment has led to a branding of
present amortization charges as incorrect and to the preparation of new
rates. The problem of determining the "correct" allowance for obsoles-
cence, however, is an extremely difficult one to solve, especially in
a planned economy such as that of the USSR, in which there has been no
previous experience. It may be anticipated that there will continue to
be considerable discussion of the "correctness" of amortization charges
even after the proposed new rate schedule is introduced.**
The disposition of amortization charges in the USSR pro-
vides an interesting contrast with US practice. In the US the amount of
depreciation charged and the disposition of the depreciation accruals is
largely a matter of intrafirm policy. The amount of accruals in any
* For additional comments on amortization as an element of cost in
the Soviet industrial production program, see III, C, p. 63, below.
** Soviet pricing policy with respect to producer durables and the
effect of this policy on the correctness of capital (amortization)
charges also is examined in III, C, p. 63, below.
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one year may or may not be the same as the depreciation allowances
claimed for that year in tax returns. Under the rules of orthodox
depreciation accounting as widely practiced in US industry, the pri-
vate firm is not obligated to commit its depreciation accruals for
any one preestablished purpose, be it replacement, repair, new invest-
ment, retirement of indebtedness, or whatever. Depreciation accruals
represent the recovery of a historical prepaid cost of operation that
may be used as the firm determines. The government has no jurisdic-
tion over the depreciation accruals of US industry,* although it can
exert some influence through its fiscal policies on the use and dispo-
sition of such accruals. XX
In the USSR the individual industrial enterprise has
very little voice in the matter of amortization policy or amortization
practice. The state, as the owner of industrial fixed assets, has full
authority for the amount of amortization charged annually and for the
disposition of the deductions. In the USSR the amortization deductions
of all state industrial enterprises are earmarked for and committed to
either one of two purposes: capital investment or capital repair. The
allocation between these two funds presumably is determined, within
limits, by the exigencies of economic planning and is regulated by
changes in the subrates for capital investment and capital repair within
the over-all amortization rate.
Amortization deductions for capital investment are
deposited in the Construction Bank (Stroybank) xxx and are not accessible
to the contributing enterprises. Rather, they are at the disposal of
the central government for financing its capital construction program,
an integral part of the national economic plan that is drawn up by the
State Planning Committee (Gosplan) and ratified by the Council of
Ministers, USSR. These funds may be redistributed among industries
as the plan requires. For this reason it is said sometimes that amorti-
zation deductions designated for capital investment represent a form of
tax on fixed capital. Such funds may be used either for the replacement
in kind of fixed assets that have been completely retired (simple repro-
duction) or for net additions to existing stocks of fixed assets (ex-
panded reproduction).
* The regulated public utilities are a different matter, of course,
but it is beyond the scope of this report to go into the subject. Mean-
while, Revenue Procedure 62-21 issued by the US Internal Revenue Service
in July 1962 does tdnd to limit the taxpayer more to capital replacement
in the use of his depreciation accruals.
** More realistic than the use of depreciation allowances to stimulate
internally generated investment by private industry is the recently pro-
posed tax credit plan. Under this plan, private firms are committed to
invest all the funds for which they receive tax credits.
*** Formerly the Industrial Bank (Prombank).
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Industrial enterprises deposit amortization deductions
for capital repair in special accounts established in their names in
regional branches of the State Bank (Gosbank). The depositing enter-
prises are expected to draw on these accounts in accordance with the
centrally planned capital repair program. In fact, it is incumbent
on the Gosbank, as an arm of the central government, to see that
enterprise directors use the capital repair funds in their accounts
to carry out planned capital repairs on schedule.* Capital repair is
referred to in Soviet publications as partial replacement of fixed
capital as opposed to full replacement accomplished through capital
investment.
* A limited redistribution of capital repair funds among industrial
enterprises within a region may be authorized under certain conditions
on the initiative of the regional economic council (sovnarkhoz).
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III. Importance of Amortization in the USSR
A. As a Source of Financing Capital Investment 2?_/
In the USSR, all amortization funds are allocated either to
capital investment or to capital repair. Nevertheless, when analyz-
ing the availability and disposition of funds from amortization deduc-
tions, it is still sometimes useful and meaningful to consider over-all
amortization deductions as an entity, viewing the two components as
somewhat arbitrary and variable quantities within the given sum total.
Furthermore, amortization deductions for capital repair could be an
important source of financing additional capital investment in full
replacement, should the Soviet planners choose to deemphasize the
capital repair program.
For the immediate purposes of this report the term amortization
deductions for capital investment has been used in the restrictive
sense -- that is, to refer to those deductions that are deposited by
state enterprises in the Stroybank and are available to the central
government for financing its capital construction program.* What is
the relative importance of these amortization deductions in capital
investment? And what is their role in such investment?
A recent Soviet source states that "at present, one-sixth of
the total state capital investments is covered from amortization."
The following tabulation shows amortization deductions as a percent
of the centralized (planned) financing of capital investments in the
Soviet economy and in Soviet industry during 1956-60**:
Year
Economy
Industry
(Including Construction)
1956
14.4
18.1
1957
13.9
16.5
1958
13.6
15.9
1959
13.9
16.5
1960
13.8
18.0
Arithmetic average
13.9
17.0
* In Soviet economic publications, amortization deductions earmarked
for capital investment are often referred to as "amortization deductions
for capital Construction" rather than "amortization deductions for
capital investment." Although the terms capital investment and capital
construction are often used interchangeably in the USSR, they are not
always synonymous.
** Percentages shown in the tabulation were derived from data contained
in Table 3, which follows on p. 56.
?
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Table 3
USSR: Amortization Deductions as a Source
of Financing Centralized Capital Investment
in the Economy and in Industry 2/
1956-60
Billion Current Rubles
Centralized Financing Amortization Deductions
of Capital Investments for Financing Capital Investments
Year
Economy
Industry b/
Economy
Industry b/
1956
16.08
10.44
2.31
1.89
1957
17.88
11.12
2.49
1.83
1958
20.38
12.99
2.77
2.06
1959
23.31
13.55
3.25
2.23
1960
26.24
15.00
3.61
2.70
a. Flan data.
b. Including the construction industry.
A figure of one-seventh more appropriately expresses the ratio of
amortization deductions to the centralized financing of capital invest-
ments in the economy as a whole.
It is not surprising that the share of amortization deductions
in capital investments for the economy as a whole tends to be more con-
stant than the share for industry alone, inasmuch as the emphasis in
allocations among the individual sectors of the economy changes from
year to year. It is logical, however, that a greater part of the
capital investments for Soviet industry should be financed from amorti-
zation deductions, inasmuch as industry has proportionally fewer non-
productive (and therefore nonamortizable) fixed assets than the other
sectors of the economy.* Because amortization deductions are computed
using composite rates, it is not possible to calculate the share of
such deductions that is derived from the amortization of machinery and
equipment.
The amortization deductions that Soviet industry deposits with
the Stroybank return to Soviet industry in the form of investment,
* If industry were excluded from consideration, only about 9 percent
of the financing of capital investments in the remainder of the economy
would be obtained from amortization deductions.
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even though some of the investment funds may be redistributed among
and within individual industries. Apparently, there is a -aide vari-
ation from industry to industry in the percentage of capital invest-
ments financed from amortization deductions, as evidenced by the
following data for 1955 2!8_/:
Industry
Percent
Coal
10.0
Petroleum
27.9
Machine tool building
22.6
Light
15.8
Food
21.9
It is reasonable to assume that these percentages change from year
to year as the proportions between amortization deductions and allo-
cations of capital investments in each industry change.
It is sometimes thought that amortization deductions for
capital investment represent the share of capital investments used
for replacement* and, as such, indicate the scope of the Soviet
replacement program. If amortization deductions for capital invest-
ment in the USSR are regarded as the repayment of a prepaid cost of
operation, then it is clear that use of the deductions need not
necessarily be limited to replacement.** Soviet economists have long
acknowledged that amortization deductions for capital investment are
used both for the replacement of fixed assets that are being retired
and for net additions to existing stocks of fixed assets.
* A distinction is drawn in Soviet economic theory between the "full
replacement" (polnoye vozmeshcheniye) of fixed assets, such as normally
occurs when they are retired from service, and "partial replacement"
(chastichnoye vozmeshcheniye), which occurs during capital repair. In
this report the term replacement is used to denote "full replacement,"
any variation therefrom being appropriately qualified.
** It is significant, of course, that the use of these deductions is
determined by the central government in accordance with the over-all
national considerations and not by the enterprise. This procedure
reflects the fact that it is the state that finances and owns the
industrial fixed assets. The industrial enterprise in the USSR is
entrusted with these state-owned assets merely for the purpose of
operating them in accordance with a planned production program. Even
fixed assets acquired by industrial enterprises through decentralized
capital investment (from retained enterprise profits or through bank
loans) are considered state property and are amortized in the same
manner as fixed assets acquired through centralized capital investment.
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Starting with the premise that the primary use of amorti-
zation deductions is properly the replacement in kind of fixed
assets that must be retired, Soviet economists explain the use of
deductions for financing net additions in terms of the theory of
the declining investment cost of replacement.* The argument runs
that the cost of producing an article declines with repetition of
the production process under conditions of controlled prices. As-
suming that the acquisition cost (price) of a given machine follows
the production cost downward over a period of time and assuming
further that the original cost of one such machine, which has been
in use during this period has been fully recovered through amorti-
zation, there exists in the amortization reserve a greater sum than
is needed to replace the old machine with an identical new machine.**
This being the case, some amortization funds are available for net
investment. These funds may be used to acquire additional fixed
assets or to replace old assets with better and more productive new
assets (possibly having a higher social cost). Such a position pre-
supposes that the theory of the declining social cost of production
under socialism rests on a sound basis in fact, a theory that clearly
was not substantiated in much of Soviet industry before the wholesale
price reform of 1949. xxx
Probably a more valid explanation of the availability of
amortization deductions as a source of financing net additions to
stocks of fixed capital is to be found in the over-all rate of
growth of Soviet capital investments and in the nature of the Soviet
capital repair program. When the annual growth of capital investment
* The Russian term used to indicate replacement in kind through
amortization is "simple reproduction" (prostoye vosproizvodstvo), and
the term used to indicate net additions financed from amortization is
"expanded reproduction" (rasshirennoye vosproizvodstvo).
** Rarely in a modern industrial economy will a machine that has
served out its normal life expectancy be replaced with an identical
new machine. The social cost involved in the development and manu-
facture of machines with improved performance characteristics is a
factor that tends to raise replacement costs, sometimes possibly even
to a level above the original cost of the old machine. From the point
of view of the user, however, a replacement cost that is the same as
or even higher than the cost of the asset being retired may be worth
incurring, if it is more than offset by lower operating costs and
higher productivity.
xxx The theory of the declining social cost of production involves
many complex questions that are beyond the scope of this report.
Furthermore, under a Soviet-type economy there is always the plaguing
question of whether the accounting costs which Soviet leaders cite to
buttress their claims of the increasing efficiency of the socialist
system of production reflect real costs.
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remains as high as it has been in recent years, the percentage of
young fixed assets in the economy tends to be maintained over the
years. In such a situation, and assuming that the replacement rates
do not change in response to changing relative costs in the economy,
annual receipts of amortization deductions tend to exceed the re-
placement requirements arising from the retirement of wornout fixed
assets. Rtrtly because there has been this maintenance of a rela-
tively large share of young fixed assets in the Soviet economy and
partly because the service life of old assets has been prolonged
through the capital repair program, the replacement requirements on
centralized capital investment funds have been kept low.* The post-
ponement of the replacement of older fixed assets through capital
repair may properly be considered an investment cost even though it
does not show up in data on state capital investments.**
Actually the question of the allocation of amortization de-
ductions for capital investment as between replacement and net addi-
tions probably is an academic one. Amortization deductions presumably
are consolidated with the balance of funds available for capital in-
vestment. Total available funds are allocated according to the re-
quirements of the economy as determined by the central planners
(primarily Gosplan). Even if the amount of funds allocated for re-
placement should fortuitously correspond to receipts of amortization
deductions for capital investment, it should be remembered that
centralized capital investment is not the only source of financing
replacement. Some replacement is financed from decentralized capital
investment.
Unfortunately there are no quantitative data published in
the USSR to indicate the amount of replacement financed from decen-
tralized capital investment. But were such data available, it still
would not be justifiable to equate amortization deductions earmarked
for capital investment with replacement financed from centralized
capital investments and, at the same time, equate the balance of the
replacement program with decentralized investment. Centralized
capital investment in any given year may contain allocations for the
replacement of fixed assets that are either greater or less than the
funds available from amortization deductions for capital investment.
* The demand on centralized capital investments with respect to
funds for replacement is reduced further by the fact that a signifi-
cant amount of decentralized capital investment is used to replace
obsolescent plant and equipment. Decentralized capital investment
is capital investment that is not provided for in the state plan.
The total of such investments for any given year is not centrally
predetermined.
** For the financing of the capital repair program from amortization
deductions for capital repair, see B, p. 60, below.
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B. As a Source of Financing Capital Repair 22/
The Soviet concept of capital repair has already been touched on
in various sections of this report. The Soviet rationale for financing
capital repair from the amortization fund is based on the fact that
capital repair is a form of capital replacement -- in particular, partial
replacement. Unlike other forms of repair work, which are charged to
current account and necessarily consist of much unplanned repair work,
capital repair is scheduled and largely financed in advance.
Without going into the finer distinctions between capital repair
and other forms of repair, it may generally be said that capital repair
may involve fairly lengthy shutdowns of machinery and equipment. Tra-
ditionally,-capital repair has been carried out at the producing enter-
prise, although impetus is currently being given to a program under
which capital repair centers would be established -- machinery and equip-
ment would then be shipped by enterprises to the nearest center for the
capital repair to be performed there.
Capital repair involves periodic complete overhaul of machinery
and equipment, including the replacement of moving parts that wear out.
Generally, machinery and equipment must be disassembled in order to
effect the replacement of all the required parts. Then the machinery
or equipment must be reassembled and tested to make sure that it oper-
ates according to technical specifications laid down by the state. The
aim of capital repair is to restore machinery and equipment as nearly
as possible to its original operating efficiency.
There is an increasing trend in Soviet industry toward moderniz-
ing machinery and equipment while it is undergoing capital repair. The
term modernization has a very specific meaning in the Soviet context.
With respect to machinery and equipment, it means replacement of wornout
parts and components with new parts and components of more advanced de-
sign and with higher performance characteristics, which thereby raise
productivity nearer the level of currently manufactured models. In some
cases, modernization may involve not merely the overhaul and replacement
of older standard parts and components with new improved ones but the
individual redesigning and custom rebuilding of a machine or piece of
equipment. Sometimes additional accessories are added to increase
efficiency and productivity.
Modernization is regarded in the USSR as a form of "expanded
reproduction."* To the extent that modernization is financed from
amortization deductions for capital repair, it is analogous to net
investment financed from amortization deductions for capital investment.
* See the first footnote on p. 58, above.
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In other words, modernization involves not just a simple replacement
in kind of parts and components but the creation of additional pro-
ductive capacity compared with original capacity. As in the case of
production, so presumably in the case of capital repair, economies in
costs resulting from repetition of certain operations make some funds
available for expanded reproduction. Only a limited amount of moderni-
zation, however, is currently financed from capital repair funds. Some
Soviet economists insist that it is improper to finance any moderniza-
tion from such funds, although they agree that a good time to modernize
is when machinery or equipment is undergoing capital repair. It is
clear that the combining of capital repair and modernization in the
same operation poses a real accounting problem as far as valuation of
machinery and equipment is concerned.
The Soviet capital repair program requires sizable financial
outlays, in 1959 and 1960 equaling about one-fourth of the value of
the centralized financing of capital investments in each of those years,
as follows:
Year
Billion Rubles
Capital Investments Capital Repairs
1959 23.31 6.00
1960 26.24 7.00
Unlike centralized capital investments, the major part of capital repairs
in the economy as a whole and virtually all capital repairs in industry
are financed from amortization deductions.
The following tabulation, which shows amortization deductions
as a percent of the centralized (planned) financing of capital repairs,
indicates that in 1959 and 1960 the USSR planned to finance more than
three-fourths of the capital repairs in the economy and about 99 per-
cent of the capital repairs in industry from amortization deductions*:
Year Economy
1959 78.7
1960 75.7
Industry
(Including Construction)
99.3
98.7
Percentages shown in the tabulation were derived from data contained
in Table 4, which follows on p. 62.
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Table 4
USSR: Amortization Deductions as a Source
of Financing Centralized Capital Repair
in the Economy and in Industry 2/
1959-60
Billion Current Rubles
Centralized Financing Amortization Deductions
of Capital Repair for Financing Capital Repair
Year Economy Industry 12/ Economy Industry 12/
1959 6.00 2.74 4.72 2.72
1960 7.00 3.14 5.30 3.10
a. Plan data. _2/
b. Including the construction industry.
Except for a relatively small amount of capital repair of the fixed
assets of kolkhozes and possibly some in private housing, the data on
centralized financing of capital repair can be considered complete for
the USSR. Such data, then, reflect the over-all financial effort of
the USSR and of industry, respectively, in the field of capital repair
(plus that part that might more properly be considered modernization).
The high percentage of capital repair work in industry financed
from amortization deductions reflects the very large share of fixed
assets in industry that are subject to amortization.* Amortization de-
ductions for capital repair deposited in the Gosbank by enterprises in
the industrial sector are not available to organizations in other sectors
of the economy. In certain circumstances, however, a regional economic
council may redistribute excess funds from the capital repair accounts
of industrial enterprises under its jurisdiction.
Based on 1956 data, a recent Soviet source estimates that 60 to
75 percent of the outlays for capital repair of productive fixed assets
* Capital repair of fixed assets that are not subject to amortization
(primarily nonproductive fixed assets such as housing, public buildings,
and the like) usually are financed from the state budget. As a result
of the abolition of most industrial ministries and the creation of
regional economic councils in mid-1957, the housing facilities of many
industrial enterprises were transferred from the jurisdiction of indus-
tries and placed under the jurisdiction of local administrative organi-
zations.
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in industry are expended on equipment. Assuming that the reference here
is to production equipment, as there is good reason to believe, it should
be recalled that production equipment accounts for only about one-fourth
of the value of the productive fixed assets of industry. It is apparent,
then, that the capital repair of equipment is relatively costly compared
with the capital repair of the remaining classes of fixed assets. The
Soviet planners apparently have been willing to incur costly repair work
on equipment as the price to be paid for maintaining it at, or near, the
original level of productivity in preference to replacement.
C. As an Element in the Cost of Production 61/
Charges made for amortization, whether allocated for capital
investment or capital repair, show up in the cost accounts of industrial
enterprises as a capital cost of production. Amortization is referred
to in Soviet economic publications as one of the primary economic ele-
ments of cost, being the accounting cost of the capital consumed in
the production process during a given accounting period. In general,
the total charges for amortization are simply lumped together, without
any further notation, in the cost plan and the cost account of the
enterprise.
The cost plan is intended to show the composition of cost, bro-
ken down by the various elements of cost, at the enterprise level and
the industry level. When calculating the cost of particular units of
output at industrial enterprises, however, charges for amortization
are entered under the item shop expenditures and/or general plant
expenditures, depending on whether the assets involved in producing
the output are recorded in the account of a particular shop or of the
plant in general.* For the purpose of this report the consideration
of amortization as a cost of production is limited to its importance
as an element in the composition of cost. Data on amortization charges
as a percentage of the total outlays for production (cost) in Soviet
industry as a whole and in selected Soviet industries are shown in
Table 5.**
By any standard the share of amortization (3.5 percent) in the
total outlays for production in Soviet industry as a whole is low.
Even so it is clear that the share of amortization has crept upward
during the last 20 years (from 2.2 percent in 1940 to 3.5 percent in
1959 (see Table 5**). This advance means that the rate of increase
in the absolute value of amortization charges from year to year has
exceeded the rate of increase in the absolute value of the total
* For a discussion of the methods of calculating cost in the Soviet
machine building industry, see source
** Table 5 follows on p. 64.
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Table 5
USSR: Amortization Charges as a Percent of Total Outlays
for Production in Selected Industries 2/
Selected Years, 1940-59
Percent
Industry
1940
1950
1952
1954
1955
1957
1959
Total industry
Coal
Construction materials
2.2.
3.1
4.1
2.7
3.4
3.9
N.A.
4.7
5.1
N.A.
N.A.
5.4
3.4
N.A. 12/
N.A.
3.4
5.1
N.A.
3.5
5.7
6.3
Electric and thermal
power
10.5
9.7
N.A.
14.1
16.8
19.4
20.3
Food
1.0
1.0
1.2
1.3
N.A.
N.A.
1.2
Sugar refining
N.A.
N.A.
N.A.
N.A-
2.9
1.8
1.9
Meat processing
N.A.
N.A.
N.A.
N.A.
0.5
N.A.
0.5
Dairy products
N.A.
N.A.
N.A.
N.A.
0.9
N.A.
1.1
Light
0.8
0.8
0.9
1.03
N.A.
N.A.
0.8
Cotton textile
1.1 2/
N.A.
N.A.
N.A.
1.1
1.2
1.3
Garment
N.A.
N.A.
N.A.
N.A.
0.2
N.A.
0.3
Machine building and
metalworking
2.9
N.A.
4.o 1/
N.A.
4.1
3.9
3.9
Machine tool
building
3.7
4.5
4.9
N.A.
N.A.
N.A.
N.A.
Metallurgy
3.3
3.8
4.3
N.A.
5.1
2/
5.6
2/
5.8
2/
Petroleum extraction
36.5 2/
N.A.
N.A.
N.A.
42.8
45.2
46.5
Timber
N.A.
2.3
2.9
3.2
4.0
N.A.
4.7
b. In 1955, amortization charges amounted to 6.3 percent of the outlays of pro-
duction in coal extraction and 1.2 percent in coal beneficiation.
c. Data are for 1939.
d. Data are for 1953.
e. Data are for ferrous metallurgy.
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outlays of production. The marked increase in the share of amortiza-
tion between 1950 and 1956 would have been even more pronounced than
it was had there not been several reductions in the wholesale prices
of machinery and equipment acquired during that period.
The same secular trend that occurred in industry as a whole
is observable with respect to most individual industries in spite of
the wide disparity between the share of amortization in the production
outlays of individual industries (from 0.3 percent in the garment
industry to 46.5 percent in the petroleum extraction industry).* A
significant exception is the machine building and metalworking industry
for which amortization charges declined from 4.1 percent of the outlays
of production in 1955 to 3.9 percent in 1957. Also, if the data for
light industry in 1954 and 1959 have a common basis, an even greater
decline occurred in light industry (from 1.03 percent to 0.8 percent).
In a period of increasing capital intensiveness it is difficult to
explain these exceptions without a thorough investigation.
Given the Soviet doctrine of "proportional development" of the
economy, many Soviet economists probably attach undue importance to
stabilizing the share of amortization in the outlays for production at
a historical normative level. Other Soviet economists profess to see
a favorable development in an increase in amortization as a share of
the cost of production, simply because it signifies an increase in the
capital intensiveness of production; others qualify their approval.
Only if an increase in the share of amortization results in an even
greater increase in productivity is such a development to be regarded
as economically desirable, they assert.
An increase in productivity ordinarily will be reflected by
a decrease in the unit cost of output. Rises in productivity to be
achieved by increasing the use of capital in production normally re-
quire the upgrading or augmenting of existing stocks of machinery and
equipment. Although buildings and structures may be requisite to house
most production operations, it is the machinery and equipment component
of fixed capital that actually performs the work.** Within limits,
* It is beyond the scope of this report to consider the variations
in amortization in the cost structure of individual industries and the
reasons for these variations.
** In accordance with this division of fixed assets according to func-
tion in the production process, Soviet economists generally distinguish
between the "conditions of labor" (usloviya truda), which embraces build-
ings and structures, and the "tools of labor" (orudiya truda), which
consists of machinery and equipment, as the two components of the "means
of labor" (sredstva truda). The means of labor, which is generally syn-
onymous with fixed capital, and the "objects of labor" (predmety truda),
which refers to working capital, together form the "means of production"
(sredstva proizvodstva), a term that covers all productive capital.
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therefore, buildings and structures are a constant factor in produc-
tivity, whereas machinery and equipment are a variable.
Because of their generally shorter service lives and higher
capital repair costs the amortization rates for machinery and equipment
are higher than those for buildings and structures. Hence an increase
in the relative share of machinery and equipment in the fixed capital
stocks of an industry (or an industrial enterprise) tends to raise the
composite industry (enterprise) amortization rate, the size of amorti-
zation deductions, and the share of amortization in the total outlays
of production. Such an increase, however, is ordinarily accompanied
by an increase in the over-all productive capacity of the enterprise.
Provided the resulting increase in output is sufficiently great, not
only the cost of amortization per unit of output but also the cost of
the total outlays of production per unit of output will decline.
Ordinarily the addition or replacement of machinery and equip-
ment does not involve particularly large outlays for investment (com-
pared with construction of new plant) nor a significant increase in the
cost of production. At the same time the benefits, in terms of produc-
tivity, may be very great. For this reason the determination of the
correct charge for amortization of machinery and equipment has more than
a mere bookkeeping importance in Soviet planning. It underlies basic
Soviet decisions on investment and the methods of maximizing the eco-
nomic growth rate of the USSR.
Under the present Soviet policy of establishing low prices on
the machinery and equipment which state enterprises produce and which
the state then acquires under its capital investment program, it is
almost certain that the cost of amortization of machinery and equipment
is understated relative to the cost of other factors of production. In
recent years, some Soviet economists have expressed concern that amorti-
zation charges do not reflect the full social cost of capital consumption
(including the equivalent of an interest charge). Other economists,
however, argue for the status quo on the grounds that any significant
increase in amortization charges would in itself raise the cost of out-
put, thus, in turn, leading to higher prices (acquisition costs) for
machinery and equipment in the state industrial investment and replace-
ment programs, a development considered detrimental to the interests
of the state.* This argument reflects the essentially noneconomic
Soviet approach to the subject of amortization as an element of cost.
* Prices of producers' machinery and equipment in the USSR essentially
reflect only two elements: the production cost and a fixed margin of
profit (much of which is returned to the state budget). Considering
the present level of amortization charges, it is hard to believe that
even a sizable percentage increase in such charges would have very
adverse effect on the unit production costs (and prices) of producer
goods.
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APPENDIX A
COMPARISON OF THE PRIMARY CLASSIFICATION OF MACHINERY ARD EQUIPMENT
COMMONLY FOUND IN THE FIXED ASSET ACCOUNTS OF US AND SOVIET INDUSTRIAL FIRMS*
US
Ordinarily, assets are arranged on the basis of a
primary classification by type (as below), although
some firms prefer to set up accounts with assets ar-
ranged by physical location (building or department).
Primary accounts may then be subdivided into group
accounts based on the physical similarity of assets
or on estimated useful life. Such group accounts
frequently are dubdivided further according to the
year of acquisition of the assets contained in them.
USSR
The Soviet classification system is built on
the primary division of machinery and equipment
by type and function (power, production, trans-
portation, and the like), much as in the US. It
may be subdivided further, however, on the basis
of its immediacy to the production process (pri-
mary, auxiliary, and the like). More recently
there has been a movement also to subdivide ma-
chinery and equipment on the basis of the degree
of mechanization or automation involved in its
operation.
A. Machinery and Equipment
A. Power Machinery and Equipment
1.
Machinery
1.
Generating equipment
2.
Electrical apparatus
2.
Engines and motors
3.
,Ovens and furnaces
3.
Conversion equipment
4.
Conveyor equipment
4.
Distribution equipment
5.
Shop fixtures and equipment
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COMPARISON OF THE PRIMARY CLASSIFICATION OF MACHINERY AND EQUIPMENT
COMMONLY FOUND IN THE FIXED ASSET ACCOUNTS OF US AND SOVIET INDUSTRIAL FIRMS
(Continued)
US
B. Transportation Equipment
1. Rolling stock
2. Automotive equipment
C. Office Equipment
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USSR
B. Production Machinery and Equipment
1. Primary equipment
2. Equipment of auxiliary shops
3. Hoist and transport (materials
handling) equipment
4. Nonstandard equipment
C. Transportation Equipment
1. Rolling stock
2. Automotive equipment
3. Water craft
D. Measuring and Regulating Devices
1. Instruments
2. Laboratory equipment
E. Office and Building Equipment
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APPENDDC B
METHODS OF VALUING AND REVALUING SOVIET INDUSIEIAL FIKED ASSETS*
The value of industrial fixed assets in the USSR can be expressed in any of four possible ways: full origindl
value, original value less wear, full replacement value, and replacement value less wear. All four valuations are
based on the Soviet accounting approach to value.
Original Value
A. Full Original Value
The full original value of a piece of machinery or
equipment in the USSR is its historical acquisition
cost as described in the text.** This value is entered
on the balance sheets of Soviet industrial enterprises
and on various accounting and inventory control docu-
ments when the asset is acquired.
In the past the full original value of fixed as-
sets, expressed in the respective prices of the years
in which the assets were acquired, has served as the
basis for computing annual amortization charges for
capital investment as well as for Soviet statistical
studies on the value, growth, age, and composition of
fixed assets. The full original value of an asset
Replacement Value
A. Full Replacement Value
Soviet fixed assets were recently revalued from
full original value in mixed prices to full replace-
ment value in 1955 prices as of 1 January 1960.***
The full replacement value of a fixed asset may be
defined as the current cost of replacing it with a
reproduction or an equivalent substitute without
regard to the remaining value of the existing asset.
In the event that a substitute with higher perfor-
mance characteristics relative to the existing as-
set is used as a criterion for determining replace-
ment value, then its value must be reduced by a
coefficient that reflects the difference in the
productivity and versatility of the two assets.
**
***
_2/
See II, A, 2, c, p. 20, above.
The results of this revaluation are treated briefly in Appendix C, p. 73, below.
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METHODS OF VALUING AND REVALUING SOVIET INDUSTRIAL FIXED ASSETS
(Continued)
Original Value
theoretically represents its social cost in the year
it was produced. Contrary to Soviet theories on social
cost, however, the valuation of identical assets, even
when acquired at the same time, has not always been
uniform, primarily because different channels of acqui-
sition frequently have resulted in different acquisi-
tion costs.
Full original value reflects the full use value
of an asset, inasmuch as the serviceability of the
asset presumably is unimpaired when it is new. Also,
when an asset is new, its full original value and its
full replacement value (see opposite column) will tend
to be the same.
It should be noted that the full original value of
a Soviet fixed asset does not represent the full sum
to be recovered through amortization during the esti-
mated useful life of the asset, inasmuch as planned
outlays for capital repair also are included when ,
calculating the over-all amortization rate.*
Replacement Value
The concept of full replacement value reflects
the Soviet view that the value of an existing asset
depreciates as a result of changes that occur in
the real or hypothetical cost of replacing it with
an equivalent new asset. Such depreciation usually
is attributed to reductions in the social cost of
producing the equivalent of an existing asset.
When it is determined, for example, that the cur-
rent full replacement value of a machine is less
than the full original value entered in the fixed
capital accounts, then the latter may be reduced
by the amount of the difference. This has the
effect of reducing the recoverable base of the
asset and, if there is no accompanying change in
the amortization rate,** of reducing the size of
annual amortization deductions for capital invest-
ment. The size of amortization deductions for
capital investment will then be more in line with
capital replacement costs.
* See II, B, 2, a, p. 42, above.
** For a discussion of proposed changes in amortization rates in 1963, see II, B, 2, c, p. 49, above.
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METHODS OF VALUING AND REVALUING SOVIET INDUSTRIAL FIKED ASSETS
(Continued)
Original Value
B. Original Value Less Wear
Original value less wear represents the full
original value of an asset less charges made to
amortization (residual value). This valuation is
roughly comparable to unamortized cost in US depre-
ciation accounting but with at least one important
difference.
Because both the full original value and the
planned cost of capital repairs are amortized in the
USSR, total amortization charges are greater than
would be the case in the US. Thus the residual value
of machinery and equipment tends to be understated
except for periods immediately following capital re-
pair, when value is restored. The true residual
value of a fixed asset at any given time is further
obscured by the fact that planned annual amortization
charges for future capital repairs may not neces-
sarily coincide with the actual cost of such repairs.
71
Replacement Value
Beginning in 1963, Soviet fixed assets appar-
ently are to be amortized on the basis of full re-
placement cost rather than full original cost. The
price reform scheduled for 1963 may serve as the
occasion for a new revaluation of Soviet fixed as-
sets at current replacement cost in 1963 prices.
B. Replacement Value Less Wear
Under a Soviet-type economy, with its absence
of market values, replacement value less wear is
held to represent the current economic value of an
asset. As such, it is a concept of importance in
Soviet efforts to establish the economic basis of
replacement and repair policy.
Replacement value less wear represents the full
replacement value of an existing asset adjusted for
physical wear and tear. Thus it reflects the cur-
rent book value of an asset expressed in terms of
replacement value rather than original value. With
respect to amortization it is important primarily
as an indication of how much of the replacement
cost of an asset has been, or remains to be, re-
covered through amortization at any given time.
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METHODS OF VALUING AND REVALUING SOVIET INDUSTRIAL FIXED ASSETS
(Continued)
Original Value
This fact suggests that there may be little cor-
respondence between what the residual values of Soviet
fixed assets are and what they should be. It is per-
haps for this reason, among others, that original
value adjusted for wear has rarely, if ever, been used
in the USSR in compiling statistical data on the value
of fixed assets in Soviet industry.
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Replacement Value
Because of the diversity and complexity of the
machinery and equipment that were revalued as of
1960, a number of different methods were used to
determine the degree of wear. All of the methods
used in the revaluation, however, were based on
the engineering concept of impaired serviceability
rather than on the unamortized original book value.
This approach provided data needed to estimate the
service life of machinery and equipment under cur-
rent conditions of operation.
Through a laborious and time-consuming proce-
dure the physical condition of all fixed assets
subject to revaluation was examined. The remain-
ing useful life of each asset was estimated and
computed as a percentage of its total original or
revised estimated useful life. This percentage
was then applied to the full replacement value to
derive replacement value less wear.
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APPENDIX C
RELATIVE VALUE WEIGHTS
OF PRIMARY CATEGORTFS OF INDUSTRIAL EQUIPMENT
USED IN COMPUTING
COMPOSITE AMORTIZATION RATES FOR SOVIET INDUS2EY*
The weights shown in Table 6** represent the aggregative values of
primary categories of industrial equipment expressed as percentages of
the total value of all fixed assets in Soviet industries in 1956. Such
weights are used in the USSR in computing composite (weighted average)
amortization rates applicable to the fixed assets of Soviet industry as
a whole and of individual industries.xx* In Soviet economic publications
the composition of industrial fixed assets expressed in terms of the
relative value of primary categories, such as buildings, structures, and
equipment, is generally referred to as the "structure of productive in-
dustrial fixed capital" (struktura promyshlenno-proizvodstvennykh osnov-
nykh fondov). As the composition of the fixed assets in an industry
changes, so, naturally, should the composite amortization rate estab-
lished for that industry change.t
In drawing up the 1930 schedule of basic amortization rates,tt indus-
trial equipment was subdivided into six groups on the basis of the in-
dustry in which the equipment was used and not on the basis of the type
of equipment. In establishing the schedule of rates there was no attempt,
for example, to differentiate between power equipment and production
equipment as has been done subsequently in Soviet classification systems.
The six categories of rates for equipment in the 1930 schedule were fur-
ther differentiated according to the percentage of capacity and the num-
ber of shifts per day that the equipment was in operation.
A category of fixed assets known as transmission facilities includes
both structures, such as power transmission lines, pipelines, and the
like, as well as the equipment required to operate them; it was made a
separate category in 1936, having previously been divided, according to
its respective components, between structures and equipment. Official
data for 1939 contain only a combined relative value weight for production
equipment and transmission facilities. In the revaluation of industrial
** Table 6 follows on p. 74.
*XX Soviet composite amortization rates are explained in II, B, 2, b,
p. 44, above, and shown in Table 2, p. 46, above.
t The method of computing composite amortization rates is explained
in the third footnote on p. 45, above.
tt The schedule of basic amortization rates of 1930 is presented in
Appendix D, p. 79, below.
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Table 6
USSR: Relative Value Weights for Primary Categories
of Industrial Equipment in Various Industries 21/
1956
Percent of Total Productive Fixed Assets
Industry
Power
Equipment
Production
Equipment
Transportation
Equipment
Total for
Equipment 12/
Total industry
9
25
7
41
Chemical
6.3
33.5
3.8
43.6
Coal
5.5
16.4
6.1
28.0
Construction and road
machine building
3.4
37.0
3.7
44.1
Construction materials
6.7
29.8
8.4
44.9
Electric power stations
28.2
7.5
1.3
37.0
Electrotechnical
4.6
33.4
2.9
4o.9
Ferrous metallurgy
7.4
32.8
4.6
44.8
Fish
3.6
7.7
61.7 2/
73.0
Food products
9.5
27.4
7.2
44.1
Heavy machine building
6.0
35.0
3.1
44.1
Instrument building and
automation media
3.5
44.1
3.0
50.6
Light
6.6
47.5
2.8
56.9
Machine building
5.2
4o.6
3.2
49.o
Machine tool building
2.6
42.1
2.9
47.6
Meat and dairy products
6.1
18.8
6.7
31.6
Motor vehicle
5.8
44.o
2.1
51.9
Paper and woodworking
12.5
35.9
4.1
52.5
Petroleum
3.8
18.9
3.4
26.1
Timber
9.1
14.2
34.3
57.6
Tractor and agricul-
tural machine building
6.3
41.6
2.6
50.5
a. ff./. Data are as of 1 January. Industries listed conform to ministerial
organization as of 1956.
b. The total is computed as the sum of the three categories of equipment.
c. Including the fishing fleet, which comprised 58.4 percent of the pro-
ductive fixed assets of the ministry.
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fixed assets as of 1 January 1960, transmission facilities was reported
only in combination with structures,* an apparent reversal in classifi-
cation policy. Because of this latest grouping of transmission facili-
ties with structures and because the equipment component cannot be iso-
lated, this category of fixed assets has not been included in consider-
ing the value weight of the equipment component of productive industrial
fixed assets in this appendix.
As long as the 1930 basic rates for equipment remain in use, changes
in the relative value weights of power equipment and production equip-
ment have no significant effect on the composite rates of industry or
its various branches, inasmuch as these two categories share a common
basic rate structure under the schedule of 1930. The nonconformity of
the classification used in the rate schedule of 1930 with the categories
and subcategories of subsequent classifications of fixed assets was an
important factor leading to the present reform of amortization rates.
The relative shifts in the value weights of the primary categories
of industrial equipment in selected industries as well as in industry
as a whole during 1951-60 are shown in Table 7.** Although the relative
weight of total industrial equipment appears to have remained compara-
tively stable throughout the period, there was a marked shift in 1960 in
the weight of production equipment and transportation equipment. During
1951-56, there was a decided increase in the share of total equipment in
the fixed assets of the metallurgical industry and a decided decrease in
the machine tool industry, caused primarily by changes in the relative
weight of production equipment. Even where the shift in the total rela-
tive weight of equipment was less pronounced, as in light industry and
in the food industry, the shares of the major types of equipment were
rarely uniform throughout the period, reflecting, as they did, the chang-
ing patterns of retirement and investment.
As pointed out by Soviet economists themselves the meaningfulness
of relative value weights has suffered as a result of the fact that
they have been expressed in mixed prices. Hence the biases inherent
in the Soviet system of valuing fixed assets have been perpetuated in
the value weights used to establish composite amortization rates for
individual industries and for industry as a whole.
The revaluation of 1960 was designed to shift the valuation of fixed
assets from a mixed price basis to a uniform price basis. It was also
designed to express the value of fixed assets in terms of the cost of
replacing them under the production technology of 1960. As a result of
this revaluation, the relative weights of the primary categories of
industrial equipment were somewhat altered, as shown in Table 8.***
* See Table 8, p. 77, below.
** Table 7 follows on p. 76.
*** Table 8 follows on p. 77.
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Table 7
USSR: Relative Value Weights for Primary Categories of Industrial Equipment in Selected Industries W
Selected Years, 1951-60
Percent of Total Productive Fixed Assets
Power Equipment
Production Equipment
Transportation Equipment
Total for Equipment 12/
Industry
1951
1953
1956
1960
1951
1953
1956
1960
1951
1953
1956
1960
1951
1953
1956
1960
Total Industry
8
N.A.
9
8.9
27
N.A.
25
27.1 2/
7
N.A.
7
4.1
42
N.A.
41
40.1
Metallurgical
7.4
7.4
7.4 21/
N.A.
26.3
2/
32.0
32.8 51/
N.A.
5.7
5.5
4.6 1/
N.A.
39.4
44.9
44.8 1/
N.A.
Coal
6.9
6.1
5.5 1/
N.A.
N.A.
N.A.
16.4 1/
N.A.
8.1
7.2
6.1 I/
N.A.
N.A.
N.A.
28.0 1/
N.A.
Machine tool building
2.0
1.8
2.6 B./
N.A.
51.1
2/
49.4
1/
42.1 E/
N.A.
2.1
2.3
2.9 5./
N.A.
55.2
53.5
47.6 g/
N.A.
Light
6,8
6.7
6.6 1/
N.A.
45.5
2/
50.1
47.5 ?1/
N.A.
3.5
3.2
2.8 1/
N.A.
55.8
60.0
56.9 jJ
N.A.
Food
10.2
10.3
9.5 L./
N.A.
26.4
2/
26.0
27.4 y/
N.A.
9.8
9.7
7.2 II/
N.A.
46.4
46.0
44.1 L/
N.A.
a.
b.
c.
d.
e.
f.
g.
h.
1.
j.
k.
68
. Data are as of 1 January. Data for 1960 are computed as shown in Table 8, p. 77, below.
The total is computed as the sum of the three categories of equipment.
Including the category "Measuring and regulating instruments and devices and laboratory equipment."
Data are for enterprises of the Ministry of Ferrous Metallurgy.
Data are for 1949.
Data are for enterprises of the Ministry of the Coal Industry.
Data are for enterprises of the Ministry of Machine Tool Building and Tool Industry.
Data are for machine building in 1949.
Data are for machine building.
Data are for enterprises of the Ministry of Light Industry.
Data are for enterprises of the Ministry of the Food Products Industry.
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Table 8
USSR: Effect of the 1960 Revaluation on the Relative Value Weights
of Major Types of Productive Fixed Assets in Industry 2/
Type of Productive Fixed Asset
Valued at Full Original Cost 12/
Valued at Full Replacement Cost 2/
Billion Rubles
Percent
Billion Rubles
Percent
Buildings
22.00
27.3
21.71
27.5
Structures and transmission facilities
25.01
31.1
26.56
33.7
Power machinery and equipment
7.20
8.9
6.50
8.3
Production machinery and equipment
(including instruments and laboratory
equipment)
21.78
27.1
19.67
24.9
Transportation equipment
3.28
4.1
3.19
4.o
Office equipment, tooling, and
miscellaneous
1.23
1.5
1.26
1.6
Total
80.50
100.0
78.89
100.0
a. _2/. Data are as of 1 January, at which time productive fixed assets were revalued at full replacement cost.
b. In mixed prices. Data were derived from full replacement cost by applying the coefficients of change in
source
c. In 1955 prices.
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APPENDIX D
AMORTIZATION RATES ESTABLISHED IN THE USSR IN 1930 2/*
Amortization rates established in 1930 for productive fixed assets in the USSR were differentiated according to
the number of 8-hour shifts (or fractions thereof) that the assets were scheduled to be in operation. Expressed as
a percent of the full original cost of the assets, the rates were as follows:
Type of Fixed Asset
Number of 8-Hour Shifts
One
Two
Three
1.
Production buildings, normal-duty
a. Stone, concrete, reinforced concrete
2.25
2.6
2.7
b. Mixed materials
3.4
3.9
4.1
c. Wood
4.5
5.2
5.4
2.
Production buildings, light-duty
a. Stone, concrete, reinforced concrete
2.75
3.2
3.25
b. Mixed materials
4.o
4.7
4.8
c. Wood
5.4
6.2
6.5
3.
Structures
12/
a. Docks, moles, dams, canals, tunnels, wells, retaining walls
2.0
b. Underground pipe lines, drains, bridges, reservoirs, and auxiliary
structures
3.5
c. Blast furnaces, open-hearth furnaces, other furnaces, factory smoke
mine shafts, mine drifts, roads, fences, and auxiliary structures
stacks,
4.o
d. Wooden dams, wells, piers, reservoirs, and platforms
9.0
Footnotes follow on p. 81.
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Number of 8-Hour Shifts
One
Operating
at a Capacity of
Type of Fixed Assets
50 Percent
or Less
More Than
80 Percent
One to Two
Two to Three
1 to 1.25
1.25 to 1.5
1.5 to 1.75
1.75 to 2
2 to 2.5
2.5 to 3
Equipment of industrial enterprises producing:
a.
Oils and soap
4.5
5.5
5.75
6.0
6.25
6.5
6.7
6.9
b.
Feat, wine, brick, lime, gypsum, extracts,
impregnated railroad crossties
4.8
5.2
6.1
6.4
6.7
7.0
7.2
7.4
c.
Sugar, soda, gas, cement, asphalt-slate,
wood pulp; cellulose, paper, and the
like
5.0
6.25
6.6
6.9
7.2
7.5
7.8
8.0
d.
Bone meal, matches, superphosphate, beer,
starch, molasses, macaroni, confections,
hats
5.2
6.75
7.1
7.4
7.7
8.0
8.2
8.5
e.
Ores, gold and platinum, asbestos, coal,
Machinery and equipment, metal, rubber,
roofing paPer, wood products, leather
footwear, sewn garments, pharmaceuticals,
tobacco, canned goods, chemicals, per-
fumes and cosmetics, wallpaper, paper
board, and the like
5.4
7.0
7.4
7.7
8.1
8.4
8.7
8.9
f.
Storage batteries, electrocarbon products,
5.6 -
7.5
7.9
8.2
8.6
8.9
9.2
9.5
glass and electric lamps, porcelain,
baked goods, refined petroleum products
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Number of 8-Hour Shifts
One 2/
Operating
at a Capacity of
Type of Fixed Assets
50 Percent
or Less
More Than
80 Percent
One to Two
Two to Three
1 to 1.25
1.25 to 1.5
1.5 to 1.75
1.75 to 2
2 to 2.5
2.5 to 3
5.
Transportation equipment
a. Railroad rolling stock
5.0
5.4
5.8
6.2
6.5
6.75
7.0
b. Motor transport
2/
10.0
20.0
20.0
20.0
20.0
20.0
20.0
6.
Tooling (cutting tips, dies, and the like)
10.0
12.0
12.5
13.5
14.5
15.0
16.5
18.0
7.
Office and building equipment
2/
10.0
10.5
11.0
11.5
12.0
13.5
15.0
4'
b. There are no amortization rates established for structures on anything less than a 3-shift basis, because structures are subject to con-
stant use and deterioration.
c. When equipment is operating with a load between 50 and 80 percent of capacity, the amortization rate is computed in direct proportion
to the load. For example, the amortization rate for equipment in Group 4e operating at a 65-percent load would be 6.2 percent
[5.4 (7.0 - 5.4) x (65 - 50) _ 5.41.6 x 15 - 5.4 + 24'0 - 5.4 + 0.8 = 6.2].
80 - 50 30 30
d. No amortization rate was established.
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