The Influence of Machinery and Equipment Degradation on Their Depreciation

The preparation of financial statements in accordance with IFRS involves the choice of such methods of depreciation for assets that are supposed to reflect most accurately the expected pattern of consumption of future economic benefits from the use of assets. However, in relation to machinery and equipment items this requirement is difficult to implement, since it is not clear how to understand and measure the economic benefits associated with such assets and the pattern of their consumption. In our opinion, the consumption of future economic benefits from the use of an asset is reflected in its fair value, and the depreciation of an asset over a period of time expresses a decrease in the fair value of the asset in that period. Having regard to this position, it is necessary to be be choosing such a depreciation method which affords the best correspondence between the carrying amount of assets and their fair values. We show that the often used linear depreciation method does not satisfy this requirement even for an asset that generates equal annual benefits from year to year. The article is devoted to the selection of the most suitable method of depreciation for machinery and equipment items. In our opinion, it is necessary to take into account the dynamics of their degradation processes (deterioration of operational characteristics). In this regard, we provide numerous data on a decrease in productivity and an increase in operating costs with age for various machinery and equipment categories. The analysis of such data allows us to offer a simple linear model of machine impair­ment/de­gradation, as well as a depreciation method based on it. This method turns out to resemble the sum of the years’ digits method and can be considered as a generalization of such a method. Its applicability to measuring the depreciation of real machinery and equipment items is confirmed by the results of economic and mathematical modeling and experimental estimates.

machinery, equipment, performance, operating costs, benefits, degradation, carrying amount, fair value, residual value, depreciation

1. Anistratov K.Yu. et al. (2006). Investigation of the patterns of changes in the performance of mining trucks during their service life. Mining Industry, no. 6 (in Russian).

2. Arkhipov V. S., Nisnevich A. I., Shcheltsyn N. A. (2003). Some characteristics of the used foreign tractors market. Tractors and agricultural machines, no. 2 (in Russian).

3. Gribovsky S. V. et al. (2003). Real estate valuation. Moscow, Interreclama. 704 p. (in Russian).

4. Maximenko A. (2011). Analysis of the influence of the output parameters of construction, road and hoisting-and-transport vehicles on the efficiency of their use at the stage of life cycle operation. Construction Science and Technology, no. 1 (34) (in Russian).

5. Maximenko A. N. et al. (2009). The influence of operating time from the beginning of operation on the performance of construction and road vehicles and the cost of mechanized work. Construction Science and Technology, no. 6 (27), pp. 73–76 (in Russian).

6. Maximenko A. N., Zarovchatskaya E. V., Maslovskaya S. V. (2014). Determination of main output parameters for hydroficated construction and road-building machines at operational stage of their life cycle. Science and Technique, no. 5, pp. 60–66 (in Russian).

7. MDS 12-13.2003. Mechanization of Construction – ​Annual Operating Schedules for Construction Machinery (in Russian).

8. MDS 12-38.2007. Rationing of fuel consumption for construction machinery (in Russian).

9. Metho­dology for determining the economic efficiency of technologies and agricultural machinery. Part II. Normative and reference material. (1998). Moscow, RIC GOSNTII. 252 p. (in Russian).

10. Normative and reference materials for the planning of mechanized work in agricultural production: Collection. (2008). Moscow, Federal State Institution “Rosinformagrotekh”, 316 p. (in Russian).

11. Repin S. V., Zazykin A. V., Khovalyg N.-D. K.-O. (2015). The influence of service life on the performance of transport-technological machines in operation. Eurasian Union of Scientists, no. 3 (12), part 5, pp. 24–26 (in Russian).

12. Smolyak S. A. (2008). Problems and paradoxes in machinery and equipment valuation. Moscow, RIO MAOC. 305 p. (in Russian).

13. Smo­lyak S. A. (2016). Valuation of machinery and equipment. Moscow, Option. 377 p. (in Russian).

14. ASAE D497.7 (2011). Agricultural Machinery Management Data.

15. Berg M., Moore G. (1989). The choice of depreciation methods under uncertainty. Decision Sciences, vol. 20 (4), pp. 643–654.

16. Jackson S. B., Liu X. K., Cecchini M. (2009). Economic consequences of firms' depreciation method choice: Evidence from capital investments. Journal of Accounting & Economics (JAE), October, vol. 48, no. 1, pp. 54–68.

17. Jackson S. B., Rodgers T. C., Tuttle B. (2010). The effect of depreciation method choice on asset selling prices. Accounting, Organizations and Society, vol. 35, is. 8, November, pp. 757–774.

18. Measuring Capital (2009). OECD MANUAL. 2nd ed.

19. De Waegenaere A. M.B., Wielhouwer J. L. (2002). Optimal tax depreciation lives and charges under regulatory constraints. OR Spectrum, vol. 24 (2),

20. pp. 151–177.

21. Wakeman L. M. (1980). Optimal tax depreciation. Journal of Accounting and Economics, vol. 2, is. 3, pp. 213–237.