Imputed Depreciation
“Imputed depreciation is a cost equivalent for the devaluation of long-term usable operating resources (see Wolfgang Kilger, Flexible Plan Cost Accounting and Contribution Margin Accounting, 9th Improved Edition, Wiesbaden, 1988, p. 398).”
Imputed depreciation amounts are intended to lead to corresponding amounts of money being “reserved” in the financial assets for replacement investments, in order to procure replacement assets if necessary and thus be able to continue to meet the operational purpose. The devaluation equivalents mentioned by W. Kilger are to be calculated on the basis of the replacement values of the investments from the point of view of value retention.
It follows that imputed depreciation should not be calculated on the basis of the historical acquisition value of long-term working assets, but on the amount to be paid at the end of the year for equally efficient assets. From our point of view, a company’s profit potential is only preserved when the equally efficient operating resources can be procured again. As a consequence, there is no distributable profit for the owners/shareholders until the imputed depreciation calculated from the replacement value has been deducted. Only the residual amount can be distributed with a clear conscience if the company is not to suffer a loss of substance.
In order to determine replacement values and imputed depreciation, it must be clarified annually what changes in the purchase prices are to be expected for the various fixed assets. There are many reasons for imminent purchase price increases or expenses for updates:
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- Inflation in procurement markets
- New technical or legal regulations to be complied with
- Changed safety regulations for the operation of the facilities (and buildings)
- Adaptation of computer programs, program extensions and release changes
- Switching to another machine supplier because the previous one no longer exists.
It also happens that equipment to be replaced becomes cheaper to purchase because physical plant components are replaced by electronics or metal by plastic.
In the event of expected increases as well as reductions in the purchase prices of fixed and intangible assets, imputed depreciation for the plan year must be recalculated and taken into account in management accounting. Like all other costs they determine the annual internal profit.
Imputed depreciation should not only be calculated for long-term assets such as buildings, facilities, machinery and vehicles. Increasingly, the resources also include rights and potential benefits of a non-physical nature such as ERP- and CRM-systems, rights of use and sales, purchased customer addresses, time-limited licenses of use. If such potential benefits lose their value over time and require new investments to preserve their benefits, the corresponding estimated amounts have to be taken into account in the replacement value, which in turn leads to higher imputed depreciation.
Sustainably successful corporate management requires the inclusion of imputed depreciation and amortization in the income statement. This prevents funds from being distributed to the owners, which will be necessary to maintain the company’s potentials for success and thus its continued existence.