Imputed depreciation
“Imputed depreciation is the cost equivalent of the value depletion of long-term usable operating resources (Wolfgang Kilger, Flexible Plankostenrechnung und Deckungsbeitragsrechnung, 9th improved edition, Wiesbaden, Germany, 1988, p. 398)”.
Imputed depreciation should lead to corresponding amounts of money for replacement investments being “bunkered” in financial assets in the operating profit and loss account in order to be able to procure replacement equipment if necessary and thus continue to fulfill the purpose of the business. The depreciation equivalents mentioned by W. Kilger must be calculated on the basis of the replacement values of the investments from the point of view of value preservation.
The result is that imputed depreciation should not be calculated o from the basis of the historical acquisition value of equipment that can be used in the long term, but on the basis of the amount that would have to be paid at the end of the year for equipment with the same performance. In our view, the profit potential of a company is only maintained when equally efficient resources can be bought again. Only when the existing elements of the fixed assets can be procured again at current purchase prices is the substance preserved. Only the profit after deducting depreciation that preserves substance can be distributed to the owners / shareholders with a clear conscience.
The valuation at replacement value and the derivation of imputed depreciation from this requires that it be clarified before the annual financial statements what changes in purchase prices are to be expected for the various parts of the fixed assets. There are many reasons for impending cost price increases or expenditure for updates:
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- Inflation in the procurement markets
- New technical or legal regulations to be complied with
- Changes in safety regulations for the operation of systems (and buildings)
- Adaptation of computer programs, program extensions and release changes
- Change to another machine supplier because the previous one no longer exists.
On the other hand, systems to be replaced can become cheaper to purchase because physical system parts are replaced by electronics or metal by plastic.
Both with expected rising and falling purchase prices of assets and intangible assets, imputed depreciation must be recalculated for the year to plan and taken into account in the planned cost calculations. This is because in management accounting, like other costs, depreciation is one of the factors determining the level of profit.
Imputed depreciation should not only be calculated for long-term assets such as buildings, equipment, machinery and vehicles. Operating resources also increasingly include rights and potential benefits of a non-physical nature such as ERP and CRM systems, rights of use and usage and sale, purchased customer addresses and time-limited usage licenses. If such potential benefits lose their value over time and new investments are required to maintain them, the corresponding estimated amounts must be included in the replacement value, which in turn leads to higher imputed depreciation.
Sustainably successful corporate management requires the inclusion of imputed depreciation in the internal income statement. This prevents money from being distributed to the owners that will be needed to maintain the company’s potential for success and thus its continued existence.