Asset consumption

Ideally, all investments should be capitalized and amortized in accordance with their changes in market value. However, such changes would be difficult to objectively track and impossible to predict, and the resulting treatment too subjective and complicated to administer. Thus, most long-lived assets are expected to depreciate, i.e., decline in value over some "useful life," i.e., the time they are expected to generate profits.

Some assets, like purchased brands, franchises, property, or various sources of goodwill may hold their value indefinitely, or even appreciate. Any depreciation of such assets would misrepresent their value.

Furthermore, some appreciating assets don’t generate any revenue over multiple accounting periods (e.g., real estate, film libraries, or pharmaceuticals). Instead they create unrealized gains or losses. Tracking unrealized gains or losses can encourage managers to derive more value from such assets through more aggressive development or trading.

© 2015 by Hodak Value Advisors.