Depreciating Fixed Assets
Phil Kenkel
Bill Fitzwater Cooperative Chair
Fixed assets are a necessary evil for agricultural cooperatives. Along with fixed assets comes the
topic of depreciation. Depreciation can be thought of in at least three ways. The layman’s
concept of depreciation is the decline in market value with use or obsolescence. We all expect a
truck to depreciate when we drive if off the lot. That’s a great example to explain depreciation to
your teenagers but doesn’t help us much in agribusiness where the current market value of a
grain facility is difficult to determine. The accounting concept of depreciation is the process of
allocating the appropriate portion of an asset’s cost to the periods during which the asset
generates revenue. The tax concept of depreciation is the process of deducting the cost of an
asset over the time period allowed by the IRS.
In most cooperatives depreciation methods are driven by tax rules. Accelerated depreciation
(taking the most rapid depreciation that IRS will allow) increases depreciation expense and
thereby reduces net income and patronage distributions while increasing cash flow. This
“conservative” approach also impacts the balance sheet. For example, under textbook
accounting depreciation a steel grain bin would have some value for up to 25 years. In practice
most cooperatives would depreciate it over 10 years based on IRS class life tables or take more
rapid bonus depreciation if it available. The grain bin becomes fully depreciated and has no
value reflected on the balance sheet for more than half of its actual useful life.
Depreciation practices are just one reason why financial statements prepared on a book basis will
differ from those prepared on a tax basis. Cooperatives should continue to use available
strategies to reduce taxable income. However, as your board and your banker strategize over the
strength of your balance sheet it might be useful to consider how it would look if the fixed asset
values were more in line with their actual remaining life. That path takes you into some other
interesting differences between tax and book values which I will discuss in future newsletters.
7-19-2012