Sunday, September 20, 2015

Depreciation Systems by Frank K. Wolf & W. Chester Fitch

Depreciation System, by engineering professors Frank K. Wolf and W. Chester Fitch, describes methods for estimating depreciation for utilities. Rates of regulated public utilities are usually based on balancing the public need for affordable rates with then investor’s need for a reasonable rate of return. While it is only one factor in setting utility rates, a reasonable accounting of depreciation is needed to determine the rate base and assure that the capital of the investors is recovered.

Depreciation can be estimated in several way, some more practicable and popular than others. Wolf and Fitch present these methods in a systematic and orderly fashion. They present a system of classification by which methods can be compared or contrasted using a handful of more basic concepts or methods. This permits them to be thorough, though the result is sometimes tedious. Fortunately, they do not give equal attention to every possible combination of elements because some are not used or are not very workable.

Some of the methods they describe have been in use for more than a century, but the book was written in the early 1990s, so the authors assume the readers will be using computers. Because this is mostly a matter of spreadsheets, the computerized calculation methods hold up even after 20 years. However, depreciation methods do not change rapidly; many depreciation professionals are still using software that was developed in the mid-1980s, which is still considered current (at least from a methodological point of view).

Like most references or textbooks, this does not make for interesting reading. I undertook the task for professional reasons. It is a good reference, though. In some cases it may be a little too complicated for someone new to the profession. In general, the authors try to focus more on the concept than the more complex details (you can’t write a reference that prescribes a solution to every problem a depreciation professional might face), while still presenting thorough descriptions, with examples, of the major methods in use.

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Wolf, Frank K., & W. Chester Fitch. Depreciation Systems. Ames, IA: Iowa State University Press, 1994.