AMORTIZATION OF MACHINERY AND EQUIPMENT IN SOVIET INDUSTRY

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• Document Creation Date: December 23, 2016
• Document Release Date: May 20, 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
(Summary)
CIA/RR ER 62-40-SI
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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FOREWORD
Current Soviet developments in the field of amortization, primarily
the amortization of industrial machinery and equipment, are summarized
in this report.
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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 publi-
cation at the time that the new depreciation regulations (Depreciation
Guidelines and Rules, UB Internal Revenue Service Publication No. 456,
July 1962) were actually issued. 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 with 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, 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 amortization 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 econdmic 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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Table 1
USSR: Comparison of Composite Amortization Rates in Industry
1938, 1950, 1952, and 1956
Percent of Full Original Cost of Fixed Assets
Industry
Total industry
Food.
Food
Fish
Meat and aairy
Heavy
Chemical
Coal
Construction materials
Construction of heavy
industry enterprises
Electric power stations
Electrotechnical
Ferrous metallurgy
Petroleum
Light
Machine building
Agricultural machine
building
Communications equipment
Construction and road
machine building
1938 1950 1952
Subrate Subrate Subrate
1956
Subrate
Over-All Capital Capital Over-All Capital Capital Over-All Capital Capital Over-All Capital Capital
Rate Investment Repair Rate Investment Repair Rate Investment Repair Rate Investment 12222.141_
N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. , 5.3 2.7 2.6
6.0 3.2 2.8 6.3 2.0 4.3 6.3 2.2 4.1 6.8
6.0 3.2 2.8 6.5 0.5 6.0 6.5 0.7 5.8 6.5
6.0 3.2 2.8 5.0 1.5 3.5 5.0 1.5 3.5 5.6
5.6 3.2 2.4 4.5 1.1 3.4 4.5 1.6 2.9 4.6
5.6 3.2 2.4 4.2 0.9 3.3 4.2 1.1 3.1 4.3
5.6 3.2 2.4 5.5 0.7 4.8 5.5 1.3 4.2 5.2
5.6 3.2 2.4 5.8 1.4 4.4 5.8 2.3 3.5 N.A.
5.6 3.2 2.4 5.3 1.5 3.8 5.3 2.1 3.2 4.5
5.6 3.2 2.4 4.5 2.2 2.3 4.5 2.5 2.0 4.5
5.6 3.2 2.4 4.8 1.8 3.0 4.8 2.2 2.6 4.7
5.6 3.2 2.4 6.5 2.8 3.7 6.5 3.3 3.2 5.6
5.5 1.9 3.6 6.5 0.7 5.8 6.5 1.1 5.4 6.6
5.5 3.3 2.2 5.6 2.0 3.6 5.6 2.3 3.3 5.6
-5.5 3.3 2.2 4.4 1.9 2.5 4.4 2.1 2.3 4.4
5.5 3.3 2.2 4.6 2.1 2.5 4.6 2.3 2.3 4.6
3.1
0.9
1.9
2.2
1.7
2.6
N.A.
2.3
2.7
2.6
3.6
3.7
5.6
3.7
2.4
2.6
2.6
N.A.
2.2
1.8
2.1
2.0
2.3 4.3
3.6 2.0
2.9 1.5
2.7 1.9
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Table 1
USSR: Comparison of Composite Amortization Rates in Industry
1938, 1950, 1952, and 1956
(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
4.0
4.0
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.
5.2
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Table 2
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. Plan data.
b. Including the construction industry.
Table 3
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 Industry12/ Economy Industry 12/
1959 6.00 2.74 4.72 2.72
1960 7.00 3.14 5.30 3.10
a. Plan data.
b. Including the construction industry.
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Table 4
USSR: Amortization Charges as a Percent of Total Outlays
for Production in Selected Industries 2/
Selected Years, 1940-59
Percent
Industry
Total industry
1940 1950 1952 1954 1955 1957 1959
2.2 2.7 N.A. N.A. 3.4 3.4 3.5
Coal 3.1 3.4 4.7 N.A. N.A.12/ 5.1 5.7
Construction materials 4.1 3.9 5.1 5.4 N.A. N.A. 6.3
Electric and thermal 10.5 9.7 N.A. 14.1 16.8 19.4 20.3
power
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
Garment
Machine building and
metalworking
Machine tool
building
1.1 2/ N.A. N.A. N.A. 1.1 1.2 1.3
N.A. N.A. N.A. N.A. 0.2 N.A. 0.3
2.9 N.A. 4.o 1/ N.A. 4.1 3.9 3.9
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
a. Amortization is an essential element in calculating the cost of output.
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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Table 5
USSR: Relative Value Weights for Primary Categories
of Industrial Equipment in Various Industries al
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
40.9
Ferrous metallurgy
7.4
32.8
4.6
448
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
40.6
3.2
49.0
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
44.0
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. Data are as of 1 January. Industries listed conform to ministerial organi-
zation 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 productive
fixed assets of the ministry.
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