Abstract The article comments on two accounting terms: present value depreciation and income tax allocation. A depreciable asset encompasses a series of future net cash flows. The cost or value of the asset is equal to these net cash flows, discounted to the present by some appropriate interest rate. For any particular period, depreciation may be viewed as the decrease in the present value of these net cash flows as between the beginning and end of the period, and the net income from the asset may be viewed as the net cash flow for the period less depreciation. Accordingly, the net income from the asset for any particular accounting period is also equal to the product of the value of the asset at the beginning of the period and the discount rate employed in these calculations. Additionally, the timing of depreciation for tax purposes affects the value of the asset and hence the amount of depreciation expense to be recognized in the accounts. Depreciation timing differences are indicative of a decrease in net assets; of this proponents of both the net-of-tax method and the liability method concur. But whether this net asset decrease represents a decrease in an asset or an increase in a liability remains subject to controversy.
Hugo Nurnberg (Tue,) studied this question.