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Comment by chii | Hacker News Reader

> If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it.

but does a company have to be "honest" about such depreciations? What if the asset isn't actually losing value at the stated depreciation rate? Then at the end of the depreciation period, the company may still extract the residual value by either selling or continue using the asset. Does that somehow then count as revenue? Or did they just magically managed to tax dodge using a fake depreciation schedule?

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The asset will eventually have to be replaced. In the long term, it doesn’t make a difference - ignoring the time value of money.

Theoretically, the only reason we have depreciation expenses at all instead of just expensing the entire cost at once (cash accounting) is that we decided that accrual accounting was more representative than cash based accounting.

I am not an accountant. I’m an MBA dropout after almost finishing.

Also, taxes. If we were able to fully expense capital plants and equipment, there wouldn't a single company paying taxes, they would continually purchase more to offset profit, eliminate taxation, and accelerate growth.

Is that a bad thing?

As far as governments are concerned, yes, as they will never get tax revenues from companies if they are allowed to fully expense large purchases.

Accounting was a decade ago for me, but as I recall if you sell an item you've depreciated to $0, you will incur a "Gain on Item Sold" which is taxable.

This might be different in various countries, but in general companies cannot play games with depreciation. The financial audit is done according to certain rules and common practices. In reality some of these investments might be hard to properly calculate and audit, but simply reporting them as zero is malicious. EBITDA numbers should provide the insight into profitability without hiding anything.

It's generally fine to mark down your assets faster than they actually become obsolete, so you can take all the depreciation in year 0 if you want. Marking them down slower and overstating profitability is not so cool.

There are rules in place which assets depreciate at which rate. Otherwise companies could just cheat their way through accounting.

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