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Volume 31, Number 3, 2009

The Straight-Line Depreciation is Wanted, Dead or Alive
 

Danny Ben-Shahar
Israel Institute of Technology
Technion City
Haifa 32000
Israel

Email: dannyb@technion.ac.il

Yoram Margalioth
Tel Aviv University
Ramat Aviv 69987

Israel

Email: margalio@post.tau.ac.il

Eyal Sulganik
The Arison School of Business
The Interdisciplinary Center Herzliya
P.O. Box 167
Herzliya 46150

Israel

Email: sulganik@idc.ac.il

Abstract:

We propose a simple axiomatic system that any depreciation method—complying with the core of the accounting of depreciation—must obey. We show that, while none of the prevalent depreciation methods (e.g., straight-line) ex ante conforms to these principles, the accredited proportional depreciation method not only maintains the axiomatic system, but also, for a plausible family of depreciation methods, is the unique method that complies with the axiomatic system. We further propose two consistency requirements of a depreciation method—partition consistency and dynamic consistency—and show that, in contrast to the commonly used methods, the proportional depreciation method is the only one to always sustain both. Our analysis may provide further resolution to the arguable evidence on the dominance of Funds From Operations over net income in measuring performance in the real estate industry..

 


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