Depreciation and Capital Gains: A "New" Approach.

Abstract In this article the author comments on different approaches, suggested by various accounting professionals, for the calculation of depreciation of changes in expectations and acquisition value above cost. The use of discounted cash flow techniques has been advocated by a number of writers as the ideal basis for calculating depreciation. Depreciation is a problem of cost allocation based on ex ante valuation, and capital gains or losses resulting from changes in expectations and differences between ex ante and ex post net cash flows in a particular period are joint to the periods. These gains or losses are due to the fact that the investment decision is made under conditions of uncertainty, consequently, they are an original error, causally related to the investment decision and joint to the time horizon of that decision. The author states that in recent years the concept of basing period depreciation on expected discounted cash flows has gained increasing acceptance. This approach enables a dear distinction to be made between depreciation, on the one hand, and capital losses on the other.