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April 08, 2009


Eddie Thomas

I'm sure you've explained this before, but what do you do with depreciation if assets are valued at replacement cost? My understanding of depreciation is not that it approximates fair value but that it embodies the principle of matching expenses to revenues. Would an upward adjustment in the value of a capital lease (due to an increase in replacement value, under your suggestion) lead to an adjustment in depreciation taken?

Historic cost, for all of its deficiencies when it comes to the balance sheet, is fairly intuitive for the income statement. I paid certain costs, received certain revenues, and count the difference as profit. Fair market valuations, via exit prices or replacement costs, seem counter to this intuition, although admittedly it is much worse with exit prices. (Using exit prices to value inventory would seem to make every sale a zero profit action. Income would then be only the change in value of a firm's assets from one point in time to another.)

Blair Stover

I really enjoyed the read - keep them coming.

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