The question of expediency remains. The presumption is distinctly in favor of it, if the preceding arguments are valid. Even Professor Young admits that there is no great objection in the case of the railroads to the debit of retroactive depreciation charges as their amount is ascertained, if such debit is made direct to profit and loss, thus decreasing the stated surplus or increasing the stated deficit, rather than being charged against the annual earnings (p. 655). But one objection seems to him to be fundamental. Since replacements

and repairs tend to be fairly regular in amount, once the state of normal average depreciation is reached, there is no need for an accumulated reserve for accrued depreciation which permanently remains on the balance sheet. Such a reserve he dubs "unusable," "useless" (pp. 650-652, 658).

For clearness' sake it may be mentioned here that if depreciation is taken into account an item is regularly charged into operating expenses to cover estimated depreciation accrued through the fiscal period and credited to "Reserve for Accrued Depreciation," a balance sheet account. Against the credit so arising may be charged the cost of replacements; or, more satisfactorily, when an item of plant is retired the reserve may be reduced by the amount theretofore credited to it on account of this item, while the property account is reduced by the cost of the item retired. The net credit to "Reserve for Accrued Depreciation may be at once set off against the property account, reducing it by the amount of the net estimated depreciation. But more commonly it is carried separately, and either listed among the liabilities or, now more frequently, subtracted obviously from the cost figure for property account on the balance sheet, the net figure as well as the others being shown directly. In

short, it is an accounting device to record depreciation in numerical amount without acting as if the precise amount of decline in productive power were definitely ascertained.

In what sense is such a reserve unusable, useless? If it enables one to state with some approach to accuracy the net present investment in plant and equipment, without destroying what significance the cost figures may have, it unquestionably performs a useful if modest function. If, on the other hand, it prevents such an approach to accuracy and leads to an understatement of the present investment, the "reserve" is not useless but far worse, it is thoroly misleading and wrong. Professor Young does not directly charge the latter, and our reasons for holding to the former view have already been stated.

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The only assumption on which Professor Young's language is intelligible to me is that, in spite of his better knowledge, he has fallen into an error which arises out of the current abuse of the term " depreciation reserve," by employing it to designate not only the account above described but a thing essentially different, namely a segregated fund of particular assets, cash, securities, or what not, which may be drawn upon to meet ordinary or extraordinary repairs, renewals, and replacements. Such was the "growing fund which some of the early toll-bridge charters required to be built up against the decay or destruction of the bridge structure. A safer term for this is " depreciation fund " or" renewal fund." How large such a fund shall be is purely a practical business question: what amount may be needed to ensure the prompt coping with contingencies which ought to be taken into account? It has no necessary relation to the amount of depreciation in the property; the relation would normally be close in the

case of a toll-bridge company but very distant where a large and varied plant existed, whose different units had different ages and dates of installation. The utility of such a fund consists merely in the preparation which it provides for making expenditures on plant and equipment when needed.

In a word, the depreciation fund is an asset; the reserve for accrued depreciation " is not, but is frankly an "offset" to a frankly inflated asset figure. The reserve proper has no necessary counterpart in any particular assets; a "depreciation fund" of an equal amount or much less may be maintained at the same time, but very commonly no such fund is found needful, much less is it commonly required by law or public service commissions. The depreciation reserve proper has nothing whatever to do with ability to make expenditures for replacements or renewals, regular or irregular, except in so far as it may insure more comprehensive knowledge of the plant and thereby facilitate intelligent prevision of future needs for such purposes. Thus Professor Young is right in saying that " the deduction for depreciation cannot be justified by appealing to the necessity of providing for replacements " (p. 662); but this is not the whole truth. If the requirement of deducting for depreciation necessitated the accumulation of a " depreciation fund " equal to the accrued depreciation, such a fund would in large measure be unnecessary to ensure proper repairs and replacements, and, tho it would probably be invested in income-bearing securities and not be" idle money," it would be a superfluous provision and in this sense" useless." useless." Professor Young seems to imply throughout that this result tends to follow. On page 648 he asserts a modified form of this implication. "Altho no investment of a separate depreciation fund is required, yet the writing down of the capital assets

by the amount of the accrued' depreciation means in the long run either that other assets have to be larger in amount than they otherwise would have been or that liabilities have to be smaller. Usually the growth of the reserve for accrued depreciation means in practice that additional permanent investments are being made out of earnings. The reserve represents an additional, permanent, and compulsory investment in the business to take the place of the amount of the investment written off for depreciation."

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It will be noted that this consequence, if it be such, is no different in the case of companies starting out under strict regulation than in the case of companies existing prior to such regulation and summarily brought under its provisions. The " depreciation fund" or its equivalent is equally "useless" in the two types of cases. But consider the alternatives actually presented to a company when required from the outset to provide reserve for accrued depreciation" on its plant. There are at least three. During the period of settling down to the state of normal average depreciation the expenditures for replacements and repairs will be small. (1) It may not divide the earnings representing this temporary saving as profits, for they are not so. It may use them, however, to purchase additional items of plant or equipment, thus increasing its current productive capacity without increasing its net investment. (2) Or, it may invest them in income-bearing securities, securing thereby a supplementary income. (3) Or, it may divide them to the stockholders, as a return of part of the investment, and reduce the capital stock accordingly. The first of these alternatives is commonly chosen, chiefly because businesses seldom spring fullfledged from the heads of their promoters and if successful usually expand. Where, however, conditions are

static and increase of output would be unprofitable, uneconomical, this policy would be avoided, and one of the others adopted. The second policy has the advantage of making possible the making of replacements at most advantageous times and of maintaining a stable rate of dividends; but there is no assurance that a fund precisely the amount of the accrued depreciation would be required to serve these purposes, and the policy has the disadvantage of involving the company largely in affairs outside the realm in which its managers are presumably most efficient. In practice, however, a combination of these first two policies is usually found desirable. But the third policy is not ordinarily precluded by law or public service commission ruling. Where no contingencies need be provided against, where instability of dividends is not deemed probable or undesirable, where increase of operating facilities is not called for, a frank division of such part of the original investment as proved to be no longer necessary would be the appropriate policy. The requirement of the depreciation reserve merely ensures that such reduction shall take place openly and in due form rather than surreptitiously or in ignorance. Control to this extent of the financial policies of the companies affected is today, in the view of many observers, far from inexpedient. And the slight adoption of this alternative is to be regarded as indicating not the compulsory adoption of one of the others, but their greater profitableness.

Three alternatives are similarly present in the case of a company which has not heretofore taken account of depreciation. Additions beyond mere replacements may at once or gradually be made to plant and equipment until the net investment equals the amount originally carried. Or, funds may be segregated, at once or gradually out of earnings, to constitute an income-yielding

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