Report to Congress 

on the 

Depreciation of Scientific Instruments 

Department of the 'Ilreasury 

March 1990 
DEPARTMENT OF THE TREASURY 

WASHINGTON 

March I990 

ASS1 STA N T SEC R ETA R Y 

The Elonorable Dan Rostenkowski 

Chairman 

Committee on Ways and Means 

House of Representatives 

Washington, DC 20515 

Dear Mr. Chairman: 

Section 201(a) of Public Law 99-514, the Tax Reform 

Act of 1986, required the Treasury to establish an office to 

study the depreciation of all depreciable assets, and when 

appropriate, to assign or modify the existing class lives of 

assets. Treasury’s authority to promulgate changes in class 

lives was repealed by Section 6253 of Public Law 100-647, the 

Technical and Miscellaneous Revenue Act of 1988. Treasury was 

instead requested to submit reports on the findings of its 

studies to the Congress. This report discusses the depreciation 

of fruit and nut trees. 

I am sending a similar letter to Representative Bill 

Archer. 

Sincerely, 

Kenneth W. Gideon 

Assistant Secretary 

(Tax Policy) 
DEPARTMENT OF THE TREASURY 

I WASHINGTON 

March 1990 

ASSISTANT SEC R ETA R Y 

The Honorable Lloyd Bentsen 

Chairman 

Committee on Finance 

United States Senate 

Washington, DC 20510 

Dear Mr. Chairman: 

Section 201(a) of Public Law 99-514, the Tax Reform 

Act of 1986, required the Treasury to establish an office to 

study the depreciation of all depreciable assets, and when 

appropriate, to assign or modify the existing class lives of 

assets. Treasury's authority to promulgate changes in class 

lives was repealed by Section 6253 of Public Law 100-647, the 

Technical and Miscellaneous Revenue Act of 1988. Treasury was 

instead requested to submit reports on the findings of its 

studies to the Congress. This report discusses the depreciation 

of fruit and nut trees. 

I am sending a similar letter to Senator Bob Packwood. 

Sincerely, 

Kenneth W. Gideon 

Assistant Secretary 

(Tax Policy) 
Table of Contents 

Chapter I . Introduction and Principal Findings ................................................................. 1 

B . Principal Findings ................................................................................................... 2 

A . Mandate for This Study .......................................................................................... 1 

Chapter II . The Useful Life of Scientific Instruments ...................................................... 5 

A . The Survey Results ................................................................................................. 5 

B . Determination of the Useful Life of Scientific Instruments From Retirement 

Data ............................................................................................................................. 12 

C . Distribution of Useful Lives ................................................................................... 15 

D . Estimated Total Useful Lives ................................................................................. 16 

Chapter III . Economic Life of Scientific Instruments ....................................................... 19 

B . Results ..................................................................................................................... 22 

A . General Approaches to the Measurement of Economic Lives ............................... 19 

Chapter IV . Conclusion and Recommendations ............................................................... 27 

References .......................................................................................................................... 29 

Acknowledgments .............................................................................................................. 31 

Appendix A . The Mandate for Depreciation Studies ........................................................ 33 

Appendix B . The Survey ................................................................................................... 37 

Appendix C . Determination of Equivalent Economic Lives from the Assumed Pattern 

of Service Flow and Pattem of Retirements ...................................................................... 49 

V 
Figure 1. The Retirement Density Curve for AA .............................................................. 14 

Figure 2. Pattern of Decline in Relative Value ................................................................. 20 

Figure 3. The Survivor Curve and the Age-Value Curve ................................................. 21 

vi 
Table of Tables 

Table 1 . Response Status of Surveyed Firms .................................................................... 6 

Table 3 . Distribution of Responses in the Chemical Industry ........................................... 8 

Table 2 . Responses by Single Digit SIC Industries and Code .......................................... 7 

Table 4 . Reported Book Depreciation Lives and Methods ............................................... 9 

Table 5 . Reported Lease and Loan Periods ....................................................................... 10 

Table 6 . Number of Scientific Instruments in Survey ....................................................... 11 

Table 7 . Instrument Dispositions by Type ........................................................................ 12 

Table 8 . Variation in Useful Lives and Expected Accuracy ............................................. 15 

Table 9 . Estimated lJseful Life of Scientific Instruments ................................................. 17 

Table 10 . Equivalent Economic Life ................................................................................. 24 

Vii 
Chapter I. Introduction and Principal Findings 

A. Mandate for This Study 

This study of the depreciation of scientific instruments has been prepared by the Depreciation Analysis Division of the Office of Tax Analysis as part of its Congressional mandate to 

study the depreciation of all assets. This mandate was incorporated in Section 168(i)( 1)(B) of 

the Internal Revenue Code (IRC), as modified by the Tax Reform Act of 1986 (see Exhibit 1 of 

Appendix A). This provision directed the Secretary of the Treasury to establish an office that 

"shall monitor and analyze actual experience with respect to all depreciable assets", and granted 

the Secretary authority to change the classification and class lives of assets. The Depreciation 

Analysis Division was established to carry out this Congressional mandate. The Technical and 

Miscellaneous Revenue Act of 1988 (TAMRA) repealed Treasury's authority to alter asset classes 

or class lives, but the revised IRC Section l68(i) continued Treasury's responsibility to "monitor 

and analyze actual experience with respect to all depreciable assets" (see Exhibit 2 of Appendix 

A). 

The General Explanation of the 2 986 Act (the "Blue Book") indicates that the determination 

of the class lives of depreciable assets should be based on their anticipated useful lives and the 

anticipated decline in their value over time after adjustment for inflation (see Exhibit 3 of 

Appendix A). lJnder current law, the useful life of an asset is taken to be its entire economic 

lifespan over all users combined, and not just the period it is retained by a single owner. The 

General Explanation also indicates that, if the class life of an asset is derived from the decline 

with age of its market value, such life (which, to avoid confusion, is hereafter referred to as its 

equivalent economic life) should be set so that the present value of straight-line depreciation over 

the equivalent economic life equals the present value of the decline in value of the asset (both 

discounted at an appropriate real rate of interest). 

The General Explanation of the Tax Reform Act of I986 indicates that initial depreciation 

studies are to include scientific instruments. Under current law scientific instruments are not 

generally assigned a separate class life, but rather are depreciated over the same period as other 

productive industry assets unless certain specific provisions apply. Scientific instruments used 

for research and experirnentatian purposes are specifically assigned a five year recovery period 

(IRC Section 168(e)(3)@)(v)). Qualified technological equipment, which includes high technology medical equipment, is also assigned a five year recovery period (IRC Section 

We)(3)(B)(iv)). 

1 
rincipal Findings 

The principal findings of this study are that the estimated useful lives of the scientific 

instruments examined range from 10.3 to 15.4 years, with a cost-weighted average useful life of 

12.8 years. Industry estimates of the life of currently owned instruments range from 9.1 to 12.2 

years, with a cost-weighted average estimated life of 10.4 years. Using only the observed resale 

prices and retirement patterns, the equivalent economic life for each individual type of scientific 

instrument could not be reliably established despite the collection of data on over 1,400 dispositions.’ For the entire group of scientific instruments examined, however, the observed decline 

in value with age yields an estimated cost-weighted average equivalent economic life of 11.4 

years if the taxpayer’s loss on disposition is considered (and 10.9 years if suchlosses are ignored). 

Because of the limited number of resale observations obtained, undue emphasis should not be 

placed on this specific estimate. Moreover, if scientific instrument resales for only the years 

1986 and 1987 are considered (instead of the years 1984 through 1987), the resulting average 

equivalent economic life is estimated to be 7.6 years (although the uncertainty associated with 

this estimate is even greater). To obtain estimates of the equivalent economic life for each separate 

type of instrument, several alternative approximations were made. These included the use of 

several assumed net service flow patterns, as well as the use of the observed overall age-price 

profile for all instruments. These approximations suggest an equivalent economic life for each 

generic instrument type ranging from 7.3 to 19 years if the taxpayer’s loss on disposition is 

considered (and 7 to 17 years if such losses are ignored). 

These results do not support the need for a separate scientific instrument asset class. The 

current five or seven year recovery period class for scientific instruments used in industries owning 

such assets appears reasonable, given the above estimates of economic and useful lives that range 

from about 7 to 19 years. These lives are similar to the class lives of other equipment used in 

*Given the apparent propensity of fms to retain their older scientific instruments, even a considerable 

increase in sample size would be unlikely to provide reliable estimates for equivalent economic lives for 

each separate asset type from resale prices alone. 

2 
such industries. Treasury thus does not recommend the establishment of a separate asset class 

for scientific instruments, which in any case would be extremely difficult to define, and unnecessarily complicate the existing asset classification system.' 

The Depreciation Analysis Division (DAD) is aware of a 1986 study of the depreciation 

of 75 scientific instruments conducted by the accounting firm of Price Waterhouse for the 

Scientific Instruments Makers Association (SAIMA). The equivalent economic life of 6.6 years 

reported in that study is based upon an inappropriate weighting of depreciation rates, rather than 

present values. When the various present values of economic depreciation calculated in that 

study are weighted by the amount invested (as is done in this study), the resulting equivalent 

economic life is approximately 8 years (not allowing for retirements and the resulting tax losses). 

That analysis of leased instruments, which are generally known to have shorter lives than selfowned assets, is therefore in rough agreement with this study. The evidence from the SAMA 

study also corroborates the appropriateness of the current 5 to 7 year recovery period for scientific 

instruments; neither the adjusted (nor the unadjusted) figures reported in the Price Waterhouse 

study support a four year (or shorter) class life.3 

'A draft of this report was furnished to the Scientific Apparatus Makers Association (SAMA) and the 

American Council of Independent Laboratories, Inc. (ACLL) for their review. While SAMA has 

expressed concern about various aspects of the study (which will be noted as appropriate throughout the 

report) it concurs with our recommendation that no separate class life for scientific instruments be established, and with our conclusion that it is highly unlikely that scientific instruments decline in economic 

value at a rate fast enough to make them eligible for depreciation as 3-year recovery property. 

Although SAMA has appropriately expressed concerns about the limited number (37) of resale observations reported, the lives noted in this study are determined by five different methods, including a direct 

estimate by the individual respondents of the useful life of each asset owned. The over one hundred firms 

responding to the study survey (including a number of very large companies) provided data on over one 

thousand four hundred scientifk instrument dispositions, and provided estimates of useful lives for over 

twice that number of scientific instruments. 

The SAMA study is based on the resale prices of under one hundred leased scientific instruments. . 

3 
Chapter II. The Useful Life of Scientific Instruments 

A. The Survey Results 

The information used in this study of the depreciation of scientific instruments was obtained 

through a mail survey of owners and users of scientific instrument^.^ Twelve "workhorse" 

scientific instruments were selected for study after consultations with industry representatives 

and government experts. The instruments surveyed consisted of three types of gas and liquid 

chromatographs, six types of spectrophotometers, two types of electron microscopes, and nuclear 

magnetic resonance spectrometers. These scientific instruments are generally thought to be 

subject to as rapid a rate of technological obsolescence as may be experienced by any scientific 

instrument, and are widely used. A complete list of these 12 instruments is provided in Table 6 

and, in more detail, on page 2 of the instruction sheet sent with the survey form (a copy of which 

is included in Appendix R). 

Surveys were sent to 365 firms. As Table 1 shows, useable responses were received from 

13 1 firms covering over 1,400 dispositions and providing information on over 8,000 instruments 

currently owned by the respondents. A substantial percentage of firms not providing specific 

data did not own scientific instruments at the time of the survey. No response of any kind was 

obtained from another 13 1 firms; although it is possible that some of these firms do not own the 

specified scientific instruments or are no longer in business, this category of firms is conservatively classified in Table 1 as being able to respond. Two percent of the mailing was returned 

as undeliverable, and an additional two percent of firms were out of business. Three percent of 

the firms surveyed indicated that they were unable to participate due to the press of business or 

because the data requested were not available. A further twenty one percent of the sample 

indicated that they did not own the specified scientific instruments, and about three percent of 

the sample provided general information but no data. Of the 131 surveys received with data, 

several could not be used for various reasons, including insufficient completion of tables or 

incompatible scientific instrument classification systems. 

The Depreciation Analysis Division held public meetings with interested parties on October 16 and 4 

November 6, 1987 and on January 22, 1988 to determine the scope of this study and to develop the survey 

design. With the kind assistance of Lancaster Laboratories and Penniman and Browne, DAD conducted a 

pilot study of the survey form used in this study. 

5 
esponse Status of Surveyed Firms 

Survey Status Number Percent 

Surveys Mailed 

Unable to Respond 

No Longer in Business 

365 

103 

7 

100.0 

28.2 

6.8 

Retumed as Undeliverable 8 7.8 

Unable to Participate 11 10.7 

Do Not Own Specified Scientific hstruments 77 74.8 

Able to Respond 

No Response Received 50.0 

262 

131 

Provided General Information 10 3.8 

Provided Specific Information 12i5 46.2 

Survey responses classified by the general industry category of the respondent are given 

in Table 2. ‘The majority of respondents are in the Chemical, Petroleum, or Services sectors. The 

break-down of respondents in the Chemical industry by three digit SIC industry classification is 

noted in Table 3. The drug industry provided 24 responses, or 21 percent of the total detailed 

survey responses. 

Note that all respondents did not answer every question. The number of useful responses varies with the 

question asked. Tables 2 through 5 indicate the number of respondents providing useful answers. 

6 
7 
Scientific instrument owners report depreciation lives for financial accounting purposes 

ranging from 4 to 25 years. The most commonly used depreciation life is 10 years (33 percent), 

and the average reported "book" life is 9.4 years. Most firms (89 percent) report using the 

unaccelerated straight-line depreciation method. A significant minority (20 percent) report using 

a five year book life. Table 4 summarizes the number and percentage distxibution of reported 

book depreciation lives and methods. 

8 
Table 4 

Reported Book Depreciation Lives and Methods 

Lives Number of 

Responses 

23 

23 

38 

6 

4 

3 

0 

2 

99 

(in years) 

4-6 

7-9 

10- 12 

13 - 15 

16- 18 

19 - 21 

22 - 24 

25 + 

Total 

Average Book Life6 

Percentage 

Distribution 

23.2 

23.2 

38.4 

6.1 

4.0 

3 .O 

0.0 

2.0 

100.0 

Straight-line 94 

ACRS 4 

Sum-of-the-ye 1 ars -digits 

125% Declining Balance 3 

Double Declining Balance 4 

Total 106 

88.7 

3.8 

0.9 

2.8 

3.8 

100.0 

The average book life varies somewhat by industry. The average book life is 9.6 years for SIC Code 2, 

9.4 years for SIC Code 3, and 7.4 years for SIC Code 8. This pattern, although not necessarily each life 

noted, agrees with that expected by the American Council of Independent Laboratories, Inc. 

6 

9 
Fifteen percent of scientific instrument users report leasing scientific instruments. A five 

year lease is the most common period reported by those leasing scientific instrument. Only a 

small minority (6 percent) report loans to acquire scientific instruments secured by the instrument. 

Lease and loan periods are shown in Table 5.7 

Period 

(years) 

1 

2 

3 

4 

5 

6 

7 

Table 5 

Reported Lease and Loan 

Lease Loan 

Number Percentage Number Percentage 

Reported Reported 

2 11.8 0 0.0 

0 0.0 0 0.0 

2 11.8 4 66.7 

1 5.9 0 0.0 

11 64.7 1 16.7 

0 0.0 0 0.0 

1 5.9 1 16.7 

Total 17 100.0 

The Depreciation Analysis Division does not believe loan and lease periods shoud be viewed as primary 

indicators for the useful life or economic life of scientific instruments. SAMA would place greater 

emphasis on the results of Table 5. 

6 100.0 

10 
Table 6 

Number and Cost of Scientific Instruments in Survey Inventory 

AA - Atomic Absorption SpectrophotomeGC - Gas Chromatograph 

GCM - Gas Chromatograph/Mass SpecTPM - Inductively Coupled Plasma Spectrophotometer (sequential type) 

IPQ - Tnductively Coupled Plasma Spectrophotometer (simultaneous type) 

IR - Infrared Spectrophotometer 

LC - Liquid Chromatograph 

NMR - Nuclear Magnetic Resonance SpecSEM - Scanning Electron Microscope 

TEM - Transmission Electron Microscope 

UVS - Ultraviolet/Visible SpectrophotomeXRF - X-ray Fluorescence Spectrophotomter 

trometer 

trometer 

ter 

eter 

Total 

Number 

Reported 

21 9 

2,138 

321 

18 

30 

413 

1,570 

159 

148 

40 

65 1 

160 

5,867 

Acquisition 

cost* 

$27,430 

$22,590 

$91,210 

$1 13,727 

$66,616 

$34,609 

$21,23 1 

$1 35,74 1 

$140,919 

$140,007 

$14,407 

$58,226 

Percentage 

Distribution 

Number 

3.7 

36.4 

5.5 

0.3 

0.5 

7.0 

26.8 

2.7 

2.5 

0.7 

11.1 

2.7 

100.0 

Cost 

3 .0 

23.9 

14.5 

1 .0 

1 .0 

7.1 

16.5 

10.7 

10.3 

2.8 

4.6 

4.6 

100.0 

The average cost per instrument is expressed in 1982 constant dollars, and as noted in Table 7, generally 8 

includes transportation and installation charges. 

11 
Virtually all (99 percent) of the scientific instruments were acquired new. Repairs were 

nearly always expensed (99 percent) rather than depreciated for tax purposes. Most firms in the 

survey indicated that they included transportation and installation costs in the reported acquisition 

costs (97 and 72 percent, respectively). Somewhat less than half (42 percent) reported including 

sales tax in the capitalized cost. 

B. Determination of the Useful Life of Scientific Instruments From Retirement Data 

The most commonly reported method of disposing of a scientific instruments is its permanent removal from active service, or its junking or sale as scrap. Seventy one percent of the 

number of instrument dispositions (and 62 percent by cost) are reported to involve such removed 

or junked or scrapped instruments. Donations are the next most commonly reported method of 

disposition, accounting for 12.5 percent of the number of asset dispositions (and 18.4 percent by 

cost). Only eight percent of scientific instruments by number (and 10 percent by cost) are sold 

in working or repairable condition. Trade-ins on new investment are relatively infrequent, arising 

in only 2 to 4 percent of the instrument dispositions. These results are summarized in Table 7. 

I Total 

Table 7 

ispositions by Type 

Disposition 

Type 

Sold as working or repairable asset 

Sold as part of a group of assets 

Donated 

Traded-in on new investment 

Casualty loss 

Permanently taken out of active service, 

junked or sold as scrap 

Percentage Distribution 

Number 

7.9 

5.4 

12.5 

2.4 

0.3 

71.3 

100.0 

cost 

9.8 

5.9 

18.4 

3.8 

0.2 

62.1 

100.0 

12 
The determination of the average useful life for each type of scientific instrument is the 

result of several calculations. First, cumulative retirement percentages as a function of age for 

each type of scientific instrument are fit with a smooth curve. Annual retirement rates are next 

calculated from the cumulative retirement curves. Finally, the average useful life is obtained by 

computing a weighted average of the ages, the weights being the percentage of assets retired at 

each age. 

For each type of instrument, cumulative retirement percentages are derived from the 

reported dispositions and inventory levels. For each of the four years 1984 - 1987 for which 

retirements were requested, the cumulative retirement percentages were calculated from the 

observed scientific instrument retirements at each age relative to the stock of instruments of that 

age? To these four separate "cross sectional" estimates of cumulative retirement percentages, a 

fifth '!time series" estimate of cumulative retirement percentages was obtained by averaging 

four-year sections of the actual survivor probabilities for all vintages. Because no one of these 

five separate cumulative retirement curves clearly provides a more satisfactory result than any 

other, they are collectively fitted with a single fifth degree polynomial in asset age. The resulting 

"bell shaped" retirement probability density function, which is obtained by differentiating the 

fitted cumulative retirement curve, is then normalized to unity." Figure 1 shows the resulting 

normalized retirement probability density for atomic absorption spectrophotometers. The figure 

suggests that the average (unweighted) useful life is between 14 and 15 years; as noted in Table 

8, the more precise value is 14.3 years." 

'An asset was considered disposed of, rather than sold for reuse, when the revenue received was less than 

15 percent of the acquisition cost. The stock of instruments at each age can be calculated at the beginning 

of each year 1984 - 1987 from the stock of instruments at the end of 1987 and acquisitions and dispositions over the previous four years. 

For purposes of this calculation, all 1987 instruments were assumed to be retired after 26 years with no 

salvage value, even though the survey information regarding the end-of-1987 inventory suggested that 

some assets were retained for longer periods. This approach insures that the study does not bias upwards 

the estimated useful life of scientific instruments. 

l1 In obtaining average values for instruments of a given type, differences among the costs of the instruments were ignored (Le., only unweighted averages are shown). However, in obtaining overall average 

values for all instruments, the contributions of the separate types of instruments are weighted by their 

average cost (as noted in Table 6); only this cost-weighted average is shown. 

10 

. 

13 
Table 8 presents average useful lives for each of eight basic types of scientzc instruments 

on which statistically useful amounts of data were received.I2 As noted in the first column, these 

lives ranged from 10.3 to 15.4 years. The overall 12.8 year useful life noted is the weighted 

average, where the weight used is the original cost of the asset, expressed in 1982 dollars. 

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 

Age 

Figure 1. The Retirement Density Curve for Atomic Absorption Spectrophotometers 

l2 Because of insuffkient retirement data, separate results for PM and XRF are not shown, and results for 

SEM and TEM are combined into the single class EM. 

14 
Table 8 

Variation in Useful Lives and Expected Accuracy 

of Useful Life Estimates 

Scientific Instrument 

(1) (2) (3) 

Average Useful Average Devi- Number of 

Life ation of Useful Observations 

Life 

(Years) (Years) 

AA 14.3 

EM 13.2 

GC 12.6 

GCM 10.3 

IR 13.2 

LC 14.7 

NMR 11.8 

ws 15.4 

5.2 

3.3 

4.2 

4.3 

4.7 

5.2 

3.5 

6.0 

33 

19 

433 

74 

63 

76 

19 

65 

(4) 

Expected Deviation of Average 

'IJseful Life 

(Years) 

0.9 

0.8 

0.2 

0.5 

0.6 

0.6 

0.8 

0.7 

11 Average (or Total) 12.8 4.3 782 0.2 

C. Distribution of Useful Lives 

Not all of the scientific instruments of a given type are retired at the same age. Typically, 

a negligible fraction of instruments are retired during the first four or five years. Retirements 

then rise rapidly, and peak near the average useful life. Beyond the useful life, the fraction of 

retirements drops rapidly, and tends to zero by age 20. The variation in the age at which scientific 

instruments are retired can be summarized by the "standard deviation" of their age at retirement. 

This is a rough measure of the range (in years) about the asset's average useful life for which the 

probability of retirement is fairly high. For example, if the standard deviation for a specific type 

of asset is three years, then on average such asset will be retired during the period beginning three 

years before, and ending three years after, the average useful life for the asset. Assuming a 

"normal" distribution for the average age at retirement, about two-thirds of all assets may be 

expected to be retired within a period represented by one standard deviation of the average life, 

15 
and 95 percent may be expected to be retired within two standard deviations of the average life. 

The average deviation of the useful life for each scientific instrument type is presented in column 

2 of Table 8. The average deviations range from about 3 to 6 years. 

A significant issue is how "representative" are the average lives reported in the table. This 

depends in part on the number of observations upon which each is based. The average deviation 

of the useful life, together with the number of observations of retirements for assets of the given 

type, determines the accuracy of the estimated average useful life for such assets. If only a few 

retirement observations were obtained, a different sample might provide a substantially different 

estimate of the average useful life. The accuracy of the estimated average useful life can be 

determined by dividing the standard deviation of the useful life, given in column 2 of Table 8, 

by the square root of the number of observations noted in column 3. This resulting expected 

standard deviation of the estimate of the average useful life is given in column 4. The average 

useful life of most of the scientific instruments examined has an expected standard deviation of 

less than 0.9 years. This means that there is about a two-thirds probability that the estimated 

average useful life noted in column 1 is within plus or minus 0.9 years of its actual value (and 

about a 95 percent probability that the useful life estimate is within plus or minus 1.8 years of its 

actual value). It is thus highly unlikely that the estimated average useful lives are more than two 

years in error (in either direction). 

The standard deviation of the weighted average useful life for all of the instruments is also 

noted at the bottom of the second column. When this is divided by the square root of the total 

number of observations, it is found that the expected standard deviation of the weighted average 

useful life is approximately 0.2 years. '1% implies that the 12.8 year weighted average useful 

life is very likely to be within plus or minus 0.4 years of the actual value. 

D. Estimated Total Useful Lives 

Because useful life estimates from retirement data, as described in Section B, can only 

reveal the historical pattern of asset use, the Depreciation Analysis Division included questions 

relating to the age of each instrument at hand at the end of 1987 and its estimated remaining 

useful life. Not all respondents chose to estimate the remaining useN life of each instrument, 

and in the case of one respondent all of the several thousand instruments owned were estimated 

to have a 15 year total useful life? Useful life estimates which appear to reflect a variety of 

l3 That respondent is not included in Table 9 because it used a different asset classification system. 

16 
estimated remaining lives for over 3,000 other instruments were obtained, and the mean remaining 

life, together with the corresponding mean total life (end-of-year 1987 age plus estimated 

remaining life) for each of these instrument types is noted in Table 9. 

~~ ~~ 

Table 9 

Estimated Useful Life of Scientific Instruments Inventory 

Scientific 

Instrument 

Number 

Reporting 

Age 

Number 

Reporting 

Estimated 

Remaining 

Life 

Mean 

Estimated 

Remaining 

Life 

(Years) 

Mean 

Estimated 

Total Life 

(years) 

Expected 

Deviation 

of Mean 

Estimated 

Total Life 

(years) 

AA 

GC 

GCM 

Ph4 

IPQ 

IR 

LC 

NMR 

SEM 

TEM 

UVS 

XRF 

219 

2,138 

321 

18 

30 

412 

1,568 

159 

148 

40 

65 1 

160 

5.3 

5.3 

6.5 

2.6 

5.2 

6.1 

4.1 

4.7 

4.6 

6.2 

6.2 

4.6 

128 

1,046 

168 

13 

19 

215 

789 

90 

78 

26 

85 

85 

4.1 

5.3 

7.5 

6.2 

5.5 

5.7 

5.7 

6.0 

5.8 

3.8 

5.4 

5.3 

10.3 

11.0 

12.2 

9.1 

10.4 

10.8 

9.5 

10.7 

11.1 

7.7 

10.0 

9.9 

0.4 

0.1 

0.2 

0.7 

1.3 

0.3 

0.2 

0.3 

0.5 

0.6 

0.2 

0.4 

Total 5,864 6.2 3,015 5.6 10.4 0.1 

The cost-weighted mean age of the instruments in inventory at the end of 1987 is 6.2 years: 

the cost-weighted mean remaining life of such instruments is 5.6 years. The mean estimated total 

17 
life ranges from 7.7 to 12.2 years, with a cost-weighted average life of 10.4 years.14 Based on 

the expected deviation of the mean total life, the "true" estimated cost-weighted average total life 

may be expected to be within plus orminus 0.1 years of this cost-weighted average. By comparing 

the averages in Tables 8 and 9, it would appear that industry estimates (excluding those of amajor 

respondent) are about 2 years shorter than the observed weighted average useful life. 

14The hformation obtained regarding the mean estimated total life also addresses two concerns raised by 

SAMA and ACE that the useful lives observed from the accounting data extend beyond actual economic 

useful lives, and that more recently acquired scientific instruments may have a shorter economic life than 

older instruments. In particular, by subdividing the assets into three groups - those acquired before 1980, 

those acquired from 1980 through 1983, and those acquired after 1983 it is possible to answer the latter 

question (at least with respect to the views of the users of the equipment). For these three groups, the 

unweighted average lives for instrument types AA, GC, GCM, IR, LC, NMR, SEM, UVS and XRF are 

15.4,11.1, and 9.6 years respectively, so that some decline in estimated average life is observed, as 

expected by ACIL and SAMA. Also, the mean estimated total life is about 0.7 years shorter in SIC Code 

8 industries than all industries combined. This confirms the belief expressed by ACIL that the useful 

lives of scientific instruments are shorter in this industry. 

18 
Chapter III. Economic Life of Scientific Instruments 

A. General Approaches to the Measurement of Economic Lives 

As specified in the Explanation of the Tax Reform Act of 1986, the class life of an asset 

may be determined from the decline with age in its value. This life (which for clarity has been 

referred to as the asset’s equivalent economic life) can be either longer or shorter than its useful 

life, depending upon whether the pattem of its decline in value is more or less rapid than 

straight-line depreciation. An asset that declines in value less rapidly than straight-line depreciation has alonger economic life, and an asset that declines more rapidly in value than straight-line 

depreciation has a shorter economic life, than the asset’s useful life. (For a more complete 

discussion see Hulten and Wykoff [ 198 11.) 

The desired method of ascertaining the pattem of the decline in value of an asset is to 

directly examine the market prices of assets sold in working or repairable condition. Despite 

data on over 1,400 dispositions, an insufficient number of market transactions of working or 

repairable instruments were encountered in this survey to reliably estimate the pattern of value 

decline with age of each specific type of instrument. Instead, two alternative approaches are 

utilized. The first approach assumes a specific service flow pattem from the asset in order to 

impute its market value as a function of age. The market value of an asset at each age is inferred 

from the present value of the expected net future service flow produced over its remaining useful 

life. Each assumed service flow pattem generates a characteristic pattem of decline in the value 

of the asset relative to its initial cost. Canstant service flow assets, with a relatively slow value 

decline, are equivalent in present value to straight line depreciation patterns with relatively long 

lives. In contrast, the rapid value decline associated with a geometric decline in service flow is 

equivalent in present value to straight-line depreciation over a relatively shorter period. The 

equivalent economic life is the recovery period that has the same present value of straight-line 

depreciation deductions as the present value of the decline in value of the asset under consideration. Figure 2 illustrates the relationship between the relative age-value profile and the geometrically declining service flows assumed to apply to two assets having different useful lives. 

For both the 8 and 12 year assets, the relative age-value profile falls somewhat more rapidly than 

the geometric decline in service flow as a result of the increasingly limited remaining service 

period. The equivalent economic life for each type of scientific instrument is calculated as the 

19 
straight-line life with the same present value of decline in value with age as the sum of the present 

values of the declines in value with age forthe observed distribution of useful lives for instruments 

of that type, as illustrated in Figure 1 for atomic absorption spectrophotometers. 

a, 

3 

a 

> 

_. 

b 

i5 

.- 8 

ii 

e 

a, 

cn 

a, 

> 

a, 

[r 

.- 

- ifi 

1 

0.9 

0.8 

0.7 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

0 ,----I- I I I 

C E 

I I I 

2 3 4 5 6 7 8 9 10 11 12 1 

Year 

Figure 2. Comparison of the pattem of decline in relative value resulting from an assumed 

geometric decline in service flow for assets with and 8 and 12 year useful life. 

20 
The second approach is to combine the available information on the resale value of all 

scientific instruments into a single age-value profile, and to use this aggregate profile for each 

separate instrurnent type. The overall age-value profile is the middle curve shown in Figure 3. 

The overall age-price profile was determined statistically by fitting the inflation adjusted relative 

price path for the 37 working or repairable assets for which adequate data were ~btained.'~ 

L 

0 

a, 

- 3 

3 

aJ 

> 

m 

a, 

U 

.- 

CI 

- 

1 

0.9 

0.8 

0.7 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

0 I 

I I I I I I I I 

-.... \ 

Retirement Adjusted Age-Value Profile **..*--..., '\, 

-...* '. 

-I I 

.._. 

I I I I I I I 

E - 

0 12 3 4 5 6 7 8 9 10111213141516 

Figure 3. The fraction of scientific instruments of a given type which remain in use as a function 

of their age (the survivor curve), the relative value of all instruments as a function of their age 

(the age-value profile), and the resulting retirement adjusted age-value profile for instruments of 

the given type. 

l5 Instruments sold at a higher price than the inflation adjusted original cost, and instruments sold at less 

than two percent of adjusted original cost, were excluded. The regression equation is (Normalized Value 

- 1) = a, age + a, age2+ a3 age3, where the normalized value is Unity at age zero. 

21 
The retirement-adjusted age-value profile is given by the product of the percentage of 

unretired assets (the survivor curve) and the average inflation adjusted resale value of the working 

scientific instruments (the age-value profile). The percentage of unretired assets is the upper 

curve shown in Figure 3, and the average value for atomic absorption spectrophotometers is the 

lowest curve shown in Figure 3. In this case, the equivalent overall economic life is that 

straight-line depreciation service life that has the same present value of depreciation as the average 

retirement adjusted value; both discounted at a four percent real rate. It should be noted that this 

approach differs from that used under the service flow assumptions, in that here the pattern of 

decline in value is assumed to be independent of the age at which any given asset was retired. 

That is, an asset with a 4 year useful life is assumed to have a value which is given by the curve 

ABC in Figure 3, while an asset with an 8 year useful life has a value that follows the curve ADE. 

By contrast, in the service flow approach, it is assumed that assets that retire early have an age-price 

path that differs from those that retire at a later age. A listing of the relevant equations is presented 

in Appendix C. 

B. Results 

Table 10 compares the useful life with the retirement adjusted equivalent economic life 

under four alternative assumptions regarding the patten of decline in the net service flow with 

age (assuming a zero salvage value), and with the retirement adjusted equivalent economic life 

derived by applying the aggregate pattern of resale prices for scientific instruments as a whole 

to each instrument type. The economic life associated with a constant value of net services, 

shown in the second column, is about two to three years longer than the observed usefid life. The 

constant value of service flow assumption can be regarded as providing an upper limit estimate 

for the equivalent economic life of scientific instruments. Although the quantity of net service 

flow from a scientific instrument may remain relatively constant, technical obsolescence tends 

to reduce the inflation adjusted value of the service flow over time. Straight line depreciation 

over the distribution of useful lives encountered for each instrument, for which the results are 

given in column 3, provides an aggregate economic life only slightly less than the average useful 

life. 

The results based on the assumption of a 100 percent declining balance service flow (over 

the range of estimated useful lives) are shown in column 4 of Table 10 to yield equivalent economic 

lives about one year shorter than the useful life. A one hundred percent declining balance service 

flow for an asset with a 10 year useful life indicates that the constant dollar value of the service 

flow declines by 10 percent each year. The economic lives associated with the assumption of a 

22 
more rapid double declining balance service flow are presented in the fa column. This 

assumption reduces the equivalent economic lives of scientific instruments by about 4 years 

below their useful lives, with the average retirement adjusted equivalent economic life of 9 years. 

The final column of Table 10 indicates the resulting economic lives obtained when the 

estimated relative age-price decline pattem found for all scientific instruments as a whole is 

adjusted by the separate retirement pattem for each instrument type. The resulting economic 

lives are found to generally lie between the equivalent economic lives associated with the assumed 

100 and 200 percent declining balance service flow patterns. The decline in service flow pattem 

that provides a decline in economic value that most closely matches that obtained using the 

aggregate age-price profile is characterized by rapid depreciation over the first few years, followed 

by a period of slowly declining prices after the asset has lost about seventy percent of its initial 

(real) value, followed by a more rapid decline to a near zero value during the 16th year. The first 

year decline in economic value for all scientific instruments as a group is estimated to be 18.3 

percent. The equivalent geometric rates of decline over the first five and ten years are 16.6 and 

12.4percent, respectively. As shown in the last row of Table 10, the average equivalent economic 

life is 1 1.4 years. Because of the limited number of observed sales of working instruments, some 

reservation should be placed on the certainty associated with this result. Moreover, if only data 

for 1986 and 1987 sales are used, the resulting average equivalent economic life is found to be 

7.6 years (although because this life is based on less than one-half of the already limited data, 

this result should be viewed with even greater reservations). 

The equivalent economic lives presented in Table 10 reflect the prescription of the General 

Explanation that the present values of straight-line depreciation over these lives are the same as 

the present values of the decline in economic value obtained from the assumed patterns. These 

lives take into account the tax loss allowed in the event of early retirement, and thus correspond 

to the use of individual item accounting. The unadjusted equivalent economic lives are up to 

about one year shorter than the unadjusted values;16 the Depreciation Analysis Division believes 

the adjusted values are appropriate in determining class lives. 

The unadjusted equivalent economic lives average 13.9 years for constant services, 12.6 years for 

straight-line depreciation, 1 1.1 years for declining balance service flow, 8.8 years for double declining 

balances service flow and 10.9 years using all instrument resale prices. 

16 

23 
Table 10 

(Adjusted for Earl - Individual Asset Accounting) 

Straight Line 

Depreciation17 

(3) 

(years) 

Scientific 

Instrument 

100% 

Declining 

Balance 

Services 

(4) 

(Years) 

~~ T Equivalent Economic Lives Under Various Assumptions 

Useful 

Life 

for Service Flows and Prices 

Over the Useful Life Distribution 

AA 

EM 

GC 

GCM 

IR 

LC 

NMR 

UVS 

14.3 17.3 

13.1 15.2 

12.6 14.9 

10.3 12.3 

13.2 15.8 

14.7 18.1 

11.8 13.7 

15.4 19.1 

200% 

Declining 

Balance 

Services 

(5) 

(Yeas) 

10.0 

9.2 

8.8 

7.3 

9.3 

10.5 

8.2 

10.9 

-~ 

using All 

hstrument 

Resale 

Prices 

(6) 

(Yeas) 

11.0 

12.6 

12.3 

11.1 

11.7 

10.3 

10.0 

11.4 __ 

Average 12.8 15.3 13.5 11.6 9.0 11.4 

The adjusted economic life generally exceeds 11 years for all types of instruments for an 

assumed 100 percent declining balance service flow, and 8 years for an assumed double declining 

balance service flow - values that span the boundary between 5 and 7 year recovery period classes. 

To obtain an equivalent economic life of 4 years, which would be required to make scientific 

instruments eligible for depreciation as 3 year recovery period property, the decline in net service 

l7 Straight line depreciation is the result of a specific linear rate of decline in service flow. 

24 
flow would have to approximate a 600 percent declining balance pattern over the useful life. This 

would require a decline in the value of the net service flow of 60 percent per year for an instrument 

with a 10 year useful life. No evidence was found to support such a rapid rate of decline in the 

value of services provided by scientific instruments. The inferred rate of depreciation of scientific 

instruments is instead consistent with that for assets in the 5 to 7 year recovery period classes, 

where most scientific instruments belong under current law. 

25 
Chapter IV. Conclusion and Recommendations 

The useful lives, booklives, and equivalent economic lives of scientific instruments are found 

to be consistent with their treatment as 5 to 7 year recovery period property. As most of the other 

assets used by industries owning scientific instruments are also classified as 5 or 7 year recovery 

period property, it does not appear necessary to establish a separate asset class for scientific 

instruments. While there are benefits to explicitly treating all scientific instruments equally, the 

difficulties of developing a workable definition for a single asset class are formidable, and the 

existence of a separate class could unduly complicate tax compliance and administration. Treasury 

thus recommends that the current treatment of scientific instruments be continued, and a separate 

class not be established. 

27 
References 

Hulten, Charles R. and Frank C. Wykoff, "The Measurement of Economic Depreciation", in 

Depreciation, Inflation, and the Taxation of Income From Capital, ed. by C. Hulten, The Urban 

Institute (Washington, D.C., 1981), pp. 99-103. 

Price Waterhouse, "The Depreciation of Scientific Instruments", 1986. 

29 
Acknowledgments 

This report was prepared by HudsonMilner and edited by Lowell Dworin. David Horowitzprovided 

assistance in supervising the collection of data and Bill Chen contributed programming support. 

Depreciation studies are conducted by the Depreciation Analysis Division, directed by Lowell 

Dworin, of the Office of Tax Analysis. 

31 
Appendix A. The Mandate for Depreciation Studies 

Exhibit 1. Section 168(i)(l)(B) of the Internal Revenue Code as Revised by the Tax 

Reform Act of 1986 

Section 168(i)( l)(B) of the Internal Revenue /Code as Revised by the Tax Reform Act of 1986 

Code Sec. 168 (i) Definitions and Special Rules. 

For purposes of this section-- 

(1) Class Life. 

(B) Secretarial authority. The Secretary, through an office 

established in the Treasury-- 

(i) shall monitor and analyze actual experience with respect to 

all depreciable assets, and 

(ii) except in the case of residential rental property or 

nonresidential real property-- 

(I) may prescribe a new class life for any property, 

(LT) in the case of assigned property, may mod@ any 

assigned item, or 

(Ill) may prescribe a class life for any property which 

does not have a class life within the meaning of 

subparagraph (A). 

Any class life or assigned item prescribed or modified under the preceding sentence 

shall reasonably reflect the anticipated useful life, and the anticipated decline in value 

over time, of the property to the industry or other group. 

33 
Exhibit 2. Section 168(i)(l) of the Internal evenue Code as evised by the Technical 

aneous Revenue Act of 1988 

Code Sec. 168(i) Definitions and Special Rules. 

For purposes of this section-- 

(1) Class Life. Except as provided in this section, the term "class life" means the class 

life (if any) which would be applicable with respect to any property as of January 1, 

1986, under subsection (m) of section 167 (determined without regard to paragraph (4) 

and as if the taxpayer had made an election under such subsection). The Secretary, 

through an office established in the Treasury, shall monitor and analyze zctual experience with respect to all depreciable assets. 

Exhibit 3. Provisions for Changes in Classification from the General Explanation of 

the Tax Reform Act of 1986 

The Secretary, through an office established in the Treasury Department is authorized to monitor 

and analyze actual experience with all tangible depreciable assets, to prescribe a new class life for 

any property or class of property (other than real property) when appropriate, and to prescribe a 

class life for any property that does not have a class life. If the Secretary prescribes a new class 

life for property, such life will be used in determining the classification of property. The prescription 

of a new class life for property will not change the ACKS class structure, but will affect the ACRS 

class in which the property falls. Any classification or reclassification would be prospective. 

Any class life prescribed under the Secretary's authority must reflect the anticipated useful life, 

and the anticipated decline in value over time, of an asset to the industry or other group. Useful 

life means the economic life span of property over all users combined and not, as under prior law, 

the typical period over which a taxpayer holds the property. Evidence indicative of the useful life 

of property, which the Secretary is expected to take into account in prescribing a class life, includes 

the depreciation practices followed by taxpayers for book purposes with respect to the property, 

and useful lives experienced by taxpayers, according to their reports. It further includes independent 

34 
evidence of minimal useful life -- the terms for which new property is leased, used under a service 

contract, or financed -- and independent evidence of the decline in value of an asset over time, such 

as is afforded by resale price data. If resale price data is used to prescribe class lives, such resale 

price data should be adjusted downward to remove the effects of historical inflation. This adjustment 

provides a larger measure of depreciation than in the absence of such an adjustment. Class lives 

using this data would be determined such that the present value of straight-line depreciation 

deductions over the class life, discounted at an appropriate real rate of interest, is equal to the present 

value of what the estimated decline in value of the asset would be in the absence of inflation. 

Initial studies are expected to concentrate on property that now has no ADR midpoint. Additionally, 

clothing held for rental and scientific instruments (especially those used in connection with a 

computer) should be studied to determine whether a change in class life is appropriate. 

Certain other assets specifically assigned a recovery period (including horses in the three-year 

class, qualified technological equipment, computer-based central office switching equipment, 

research and experimentation property, certain renewable energy and biomass properties, semiconductor manufacturing equipment, railroad track, single-purpose agricultural or horticultural 

structures, telephone distribution plant and comparable equipment, municipal waste-water treatment 

plants, and municipal sewers) may not be assigned a longer class life by the Treasury Department 

if placed in service before January 1,1992. Additionally, automobiles and light trucks may not be 

reclassified by the Treasury Department during this five-year period. Such property placed in 

service after December 3 1, 199 1, and before July 1, 1992, may be prescribed a different class life 

if the Secretary has notified the Committee on Ways and Means of the House of Representatives 

and the Committee on Finance of the Senate of the proposed change at least 6 months before the 

date on which such change is to take effect. 
Appendix E. The Survey 

37 
OMB Approval No. 1505-01 11 

Expires July 31, 198' 

PAPERWORK REDUCTION ACT NOTICE 

This fonn is in accordance with the Paperwork Reduction Act of 1980. Its 

purpose is to collect data that will allow the Treasury Department to 

estimate the class life for scientific instruments. Authority for information 

collection is contained in Section 168(i)(l) of the Internal Revenue Code. 

Survey of Depreciation of 

SCIENTIFIC INSTRUMENTS 

Instructions 

The estimated average burden associated with this collection of information is 6 

hours per respondent or recordkeeper, depending on individual circumstances. 

Comments concernin the accuracy of this burden estimate and su gestions for reducing the burden 8ould be directed to Hudson Milner at the adiess listed 

above, and the Office of Management and Budget, Paperwork Reduction Project 

(1505-0116), Washington, DC 20503. 

U.S. Department of the Treasury 

Office of Tax Policy 

Office of Tax Analysis 

Depreciation Analysis Division 

Please Return Completed Form 

In The Enclosed Large Postage 

Paid Envelope To: 

Scientific Instruments Survey 

Depreciation Analysis Division 

Room 421 7, Main Treasury 

Bu i Id i ng 

1500 Pennsylvania Avenue, NW 

Washington, D.C. 20220 

Please Return By: April 30,1989 

NOTE This survey is authorized by law (Internal Revenue Code, section 168(i)(l). While you 

are not required to respond, your cooperation is needed to make the results of this 

survey both accurate and comprehensive. All data collected concerning individual firms 

will be considered confidential, and no firm-specific information will be contained in any 

report based on the results of this survey. Your participation is sincerely appreciated. 

Please read both the general and specific instructions before completing the questionnaire. If you have any questions, contact the following persons responsible for administering the survey: 

H. Hudson Milner 

Financial Economist Financial Economist 

Depreciation Analysis Division 

Room 421 7, Main Treasury Building 

1500 Pennsylvania Avenue, NW 

Washington, D.C. 20220 

William J. Strang 

Depreciation Analysis Division 

Room 421 7, Main Treasury Building 

1500 Pennsylvania Avenue, NW 

Washington, D.C. 20220 

(202) 566-6350 (202) 535-9390 

General Instructions 

1. Intended Respondents. We have asked your parent firm to distribute this survey to three of 

its affiliated establishments that own and make the greatest use of analytical and related scientific instruments (as listed on page 2 of these instructions). Please complete the survey items by 

reference to your property and other records and return the Response Form to your parent firm 

so that they can mail all completed surveys to our office by April 30, 1989. The information 

obtained from this survey will enable Treasury to recommend a depreciation class life for scientific instruments. Thank you for your effort. 

TD F 90-21.4 (8-88) Page 1 of 6, Instructions Scientific instruments Survey 
ist of Scientific 

Code 

A Atomic Absorption Spectrophotometer 

GC 

GC Gas Chromatograph/ ass Spectrometer 

IPQ 

IP 

Gas Chromatograph (including auto samplers) 

Inductively Coupled Plasma Spectrophotometer (sequential type) 

Inductively Coupled Plasma Spectrophotometer (simultaneous type) 

IR Infrared Spectrophotometer, including FTIR (Fourier Transform Infrared 

Spectrophotometer) 

LC Liquid Chromatograph, including HPLC (High Performance Liquid Chromatograph), IC (Ion Chromatograph), auto analyzers, auto samplers, and 

flow injection analysis 

R agnetic Resonance Spectrometer 

3E Scanning Electron 

TE Transmission Elec 

UVS Ultraviolet / Visible Spectrophotometer 

XRF X-ray Fluorescence Spectrophotometer 

3. Survey Overview. Responses to this survey should be based on information from your 

accounting and physical property records. Table I asks you to classify your establishment 

according to the appropriate 1 987 Standard Industrial Classification (SIC) industry code from 

the list provided. Table I asks for company and establishment summary information. In 

particular, it asks for the date on which your fiscal year ends. All dates in the remainder of the 

survey refer to the fiscal year ending in the stated calendar year. Table I also asks for 

information concerning financial accounting depreciation methods used by your establishment. 

Finally, Table I asks for information on various measures that may be indicative of asset lives, 

such as lease and loan periods. Representative values may be entered for assets of the type 

listed above. 

Table II asks for acquisition, major repair, and disposition information for the specified scientific 

instruments that were disposed of between 1984 and 1987. Finally, Table 111 asks for more 

detailed information about your 1 987 inventory of the listed scientific instruments. 

TD F 90-21.4 (8-88) Page 2 of 6, instructions Scientific instruments Survey 
Specific Instructions 

Table 1. Summary Information 

1. Establishment and Company Name and Address. Please enter your establishment's 

name and address in the spaces provided. If these are the same as the company name and 

address, write "SAME" in the company space. If different, enter the name and address of both 

the parent company and your establishment. 

2. Contact Person. Please enter the name, title and telephone number of the person responsible for the completion of the survey. This person will only be contacted in the unlikely event 

any responses on the questionnaire require clarification. 

3. Standard Industrial Classification Code. Please enter your establishment's Standard 

Industrial Classification (SIC) Code. This entry should reflect the new 1987 industry definitions 

as presented in the Office of Management and Budget's Standard lndustrial Classification Manual - 1987. A selected list of 3 and 4-digit codes is attached at the end of the instructions. 

4. Number of Employees. Please enter the approximate number of employees at your establishment as of the end of the 1987 fiscal year. 

5. Initial Year of Operations. Please enter the year in which your establishment commenced 

operat ions. 

6. Fiscal Year. Please enter the month and day on which your firm's fiscal year ends. As 

mentioned in the General Instructions, all dates in the remainder of the survey refer to the fiscal 

year ending in the stated calendar year. Thus, data for a fiscal year ending on June 30, 1987 

should be reported under "1 987". 

7. Major Products. Please enter descriptions of the major products and services produced by 

your establishment. indicate the value of shipments (question 8) of each listed product or service for the fiscal year 1987. 

9. Book Depreciation. Please enter the depreciation period and method used in your financial 

accounts for the scientific instruments listed on page two of these instructions. Examples of 

desired abbreviation methods are: SL (straight line), 200DB (200 percent declining balance), 

150DB/SL (150 percent declining balance switching to straight line), SYD (sum of the years 

digits). First year conventions (e.g., a mid-year convention) need not be indicated. If more 

than one depreciation method or period is used you may report the average or most common 

values. 

10. Typical Period of Lease or Loan for Scientific Instruments. Please enter the other 

requested financial measures of scientific instrument lives (e.g. lease, loan periods). These 

measures may be shown as average or representative values in cases where several such 

measures are applicable to instruments of the type listed on page two of these instructions. 

11. Treatment of Trade-in Receipts. Please check the method used in accounting for "tradeins". Suppose, e.g., that $1,000 is offered as a trade-in on a new scientific instrument priced at 

$1 0,000. If your accounting method is such that the cost of the new asset would be noted as 

$9,000 (or $9,000 plus the book value or basis of the old asset), check the line titled "Reduction 

in Cost of Acquired Asset". if your accounting method regards the $1,000 as proceeds from 

the sale of the old asset and values the instrument acquired at $1 0,000 check the line titled 

"Retired Asset Value". This information will assist us in interpreting the acquisition costs and 

disposal prices recorded in Table II. 

- - 

TD F 90-21.4 (8-88) Page 3 of 6, Instructions Scientific Instruments Survey 
. Table II asks for specific data on depreciable assets which your establishment disposed of during fiscal years ending in 1984, 1985, 1986, and 1987. It requests acquisition and 

disposition dates and values, and information concerning the method of disposal. It also 

requests data on any repairs performed on the assets which were capitalized for tax purposes 

while they were held by your firm. Finally, if the asset was purchased "used" Table II asks for 

the age of the asset when it was acquired. These data are critical for determining changes in 

asset values with age. Note: Scientific instruments reported in Table II as being disposed 

of during 1984 ., 1987 should not appear as inventory in Table 111. Instruments should be 

reported in either Table II or Table 111, but not in both. 

ispositions. For the purpose of this survey, a "disposition" means the permanent 

withdrawal of property from use. A disposition may take any of several forms, including sale, 

exchange, retirement, donation, abandonment, and destruction or other loss. It may mean that 

an asset has been taken permanently out of active service, although it is still physically 

retained by the firm. Assets converted to stand-by use or transferred to affiliated establishments within the firm are not considered dispositions. 

ggregation. Your responses for Table II should report individual asset dispositions 

not aggregates of assets. 

Please enter the scientific instrument type code from page two of these instructions and the 

date on which the instrument was acquired in the first three columns of Item (1). This should 

be the year in which the asset was acquired bv the firm (if different from the year it was 

acquired by your establishment). 

The reported values for initial cost should reflect the original cost basis for tax purposes on 

which depreciation was allowable. Ignore any reductions in basis related to the investment tax 

credit which may be shown on the tax records. For an asset transferred from an affiliated 

establishment, include its initial cost when first acquired by the firm. 

The applicable codes from the list below which are included in the acquisition cost should be 

noted in the "initial cost code" column. For example, TSN would reflect that the reported acquisition cost included transportation and sales tax, but excluded installation costs and was net of 

the value of a trade-in. 

Initial Determination 

Cost of Initial 

Code Cost 

T Transportation 

S Sales Tax 

N 

I Installation 

U Not known 

Net of value of trade-in allowance 

TD F 90-21.4 (6-86) Page 4 of 6, Instructions Scientifc Instruments Survey 
Specific Instructions (continued) 

Table II. Scientific Instrument Dispositions 1984 - 1987 (continued) 

Item (2). Age When Acquired. If a scientific instrument disposed of during this period was 

acquired "used" by your establishment, please enter its aae as of the date of acquisition. Do 

not include a scientific instrument transferred from an affiliated establishment unless the asset 

was acquired "used" by the firm. In such case, include its cost when first acquired by the firm 

in item (1). 

Item (3). Cost and Date of Repairs Depreciated. Please enter the amount or amounts of any 

major repair or overhaul expenditures made to either upgrade or otherwise appreciably 

increase the value of the scientific instrument. Include only those expenditures that were capitalized for tax accounting purposes. Do not include incidental repair or maintenance costs that 

were deducted as period costs. Please enter the date or dates on which major repairs or 

overhauls were performed on the scientific instrument in question. If more than one such 

repair was made over the life of the instrument, associate the date with the expenditure amount 

shown. If no such repairs were made enter "N" for none in the cost column. 

Item (4). Dispositions. Please enter the month and year of disposition for each asset entry. 

Please note the year should be 1984, 1985, 1986 or 1987. Enter the revenue received, if any, 

upon disposition of the asset. If sold, either as a working or repairable asset or as scrap, 

please enter the sales price. Do not include any disposal costs incurred as a result of the sale. 

If the asset was sold as part of a group of assets, enter the value allocated to the particular 

asset. If traded-in for a new asset, enter the trade-in value. If exchanged for other property, 

donated, junked with no scrap value, permanently taken out of active service but retained by 

the establishment, or if the asset suffered a casualty, then enter an estimated market value 

(which may be zero). Enter the appropriate code from the list below for the type of disposition. 

A casualty loss includes asset destruction and other "involuntary conversions," such as theft, 

seizure, requisition, and condemnation. 

Disposal Type of Disposition 

Type Code 

W 

J 

A 

T Trade-in on new investment 

D Donated 

C Casualty loss 

N Not known 

Sold as working or repairable asset 

Permanently taken out of active service, junked or sold as scrap 

Sold as part of a group of assets 

TD F 90-21.4 (8-88) Page 5 of 6. Instructions Scientific Instruments Survey 
e f 1987 

verview. Table Ill asks for your inventory of the scientific instruments identified on page two of 

ese instructions as of the end of the 1987 fiscal year. It asks for the age at the time of acquisition for instruments purchased "used", the date and amount acquired for new and used assets, 

and major repair dates and amounts. Finally, estimates of the actual remaining useful life to the 

establishment and the value of the instrument at the time of disposition are requested. Note: ?he 

inventory of listed scientific instruments should not include instruments indicated as disposed of in Table !I. 

ggregation. The responses for Table Ill should aggregate costs and revenues as long as the 

information sought in item (1) on the asset type code, item (2) on the age at acquisition, item (3) 

for the date of acquisition and item (6) on the estimated useful life, is the same for all instruments 

included in a single response. 

Item (1). Asset Type Code. Please enter the scientific instrument type code from page two of 

these instructions. 

Item (2). Age When Acquired. Please enter the age at the time of acquisition for scientific 

instruments purchased "used". This should be the age of the scientific instrument when acquired 

by the firm if different from the age when it was acquired by the establishment. Please enter an 'I' for new in the "yrs." column if acquired new. 

ate of Acquisition. Please enter the date on which the scientific instrument was 

acquired. This should be the date on which the asset was acquired by the firm (if different from 

the date it was acquired by the establishment). 

Item (4). Amount Acquired. Please enter the number of instruments that are aggregated in the 

figures reported on in each row. Enter the initial cost of the scientific instrument or instruments 

reported. The reported values for initial cost should reflect the original cost basis for tax purposes 

on which depreciation was allowable. Ignore any reductions in basis shown on tax records 

related to the investment tax credit. For an asset transferred from an affiliated establishment, 

include its initial cost when first acquired by the firm. The applicable item codes included in the 

original cost (from the list given on page 4 of these instructions) should be shown in the "initial 

cost codes" column. For example, TSN would reflect that the depreciable cost included transportation and sales tax, but excluded installation costs and was the value net of a trade-in allowance. 

ltem (5). Repairs Depreciated. Please enter the amount or amounts of any major repair or overhaul expenditures made to either upgrade or otherwise appreciably increase the value of the 

scientific instrument. Include only those expenditures that were capitalized for tax accounting 

purposes. Do not include incidental repair or maintenance costs that were deducted as period 

costs. Please enter the date or dates on which major repairs or overhauls were performed on the 

scientific instrument in question. If more than one such repair was made over the life of the 

instrument associate the date with the expenditure amount shown. If no such repairs were 

Item (6). Remaining Life. Please enter the estimated remaining useful life of the instrument if a 

reasonable estimate can be obtained from persons familiar with the instrument. 

Item (7). Estimated Receipts. Please enter the receipts expected at the end of the useful life of 

the instrument estimated above if a reasonable estimate can be obtained. If the instrument is 

expected to be traded-in use the retirement convention indicated at the bottom of Table I. 

. made enter "N" for none in the cost column. 

TD F 90-21.4 (8-88) Page 6 of 6, Instructions Scientific Instruments Survey 
Survey of Depreciation of 

SCIENTIFIC INSTRUMENTS 

II 

Response Form 

Table 1. Summary Information 

1. Establishment Company Name: 

Address: 

Name: 

Address : 

2. Contact Person: 

Title: 

Telephone: f 2 

3. Establishment’s 1987 SIC 4. Number of Employees: 

Code: - 

5. Initial Year of Operations: 6. End of Fiscal Year: Month 

I 

Day 

7. Major Products: 8. Value of 1987 Shipments 

(in dollars): 

9. Book Depreciation Used for Scientific 

Instruments (page 3 instructions): 

10. Typical Period of Lease or Loan for 

Scientific Instruments: 

Life Period (mos.1yrs.) I Lease (mos.1yrs.) I 

Method 

11. Treatment of Trade-in Receipts 

(see page 3 of instructions): 

Loan (mos.1yrs) I 

Reduction in Cost of Acquired Asset 

Retired Asset Value 

TD F 90-21.4a(8-88) Page 1 of 3, Response Form Control No 
is 

ispositions 

Item (4) 

Purchase information About 

item (1) 

Than Expensed 

ed? for Tax Purposes 

Item (2) Item (3) 

Asset 

Code 

Type 

Date 

uired 

AcqAcquisition Cost 

cost 

:in dollars) 

Date of 

Disp. 

Gross 

Revenue 

Received 

(if any) 

Disp. 

Type 

Code 

nitial 

cost 

Code 

Date 

Repair 

Completed 

- 

yrs. 

- 

mo. 

(See p.4 of instr.) 

(See p.5 

of instr.) 

(See 

instr.) 

p.2 of (in dollars) 

+ 

I + I + I 

TD F 90-21 Aa(B-88) Page 2 of 3, Response Form Control No. 
I 

Table 111. Inventory of Listed Scientific Instruments in Use at End of 1987 

Asset 

Code 

Type 

Item 

(1) 

Estimated 

Remaining 

Useful Life 

to Establishment 

Item (6) 

Age When 

Acquired? 

Estimated 

Receipts 

at Retirement 

Item (2) Item (7) 

mos mo yr 

I 

Number of 

ASsets 

+ 

Initial 

Cost Cost 

Code 

(in $) (p.4 

inst.) 

-I-- 

cost 

(in $) 

mo 

+ 

yr 

Date of 

Acquisition 

Item (3) 

Amount Acquired 

Item (4) 

I I 

Repairs Depreciated Rather 

Than Expensed 

for Tax Purposes 

Item (5) 

TD F 90-21.4a(8-@8) Page 3 of 3, Response Form Control No. 
Appendix C. Determination of Equivalent Economic Lives from the Assumed Pattern of Service Flow and Pattern of Retirements 

This appendix lists the equations used to calculate the equivalent economic life for specific 

types of instruments from the assumed service flow and patterns of retirements. The computation of the adjusted equivalent economic life to allow for the retirement of assets before the 

equivalent economic life is reached is then discussed. 

The calculation of the equivalent economic life requires four steps to obtain the present 

value of economic depreciation for a group of assets from their service flow. A final calculation 

then finds the straight-line life with the same present value as calculated for the group of assets. 

The first step involves obtaining the value of an asset with a given useful life from its service flow pattern. The value of the asset as a function of age is obtained by calculating the discounted value of the future service flow over the remaining life. This value is then differentiated 

with respect to age to obtain the asset’s economic depreciation. Next, the present value of this 

economic depreciation is found. Finally, the aggregate present value for assets having the 

observed distribution of useful lives is obtained by weighting the present value of economic 

depreciation for assets of a given useful life by the proportion of assets with that life. 

The value of an asset with a constant service flow, c, over a useful life of L years, at age t 

is the present value (at rate r) of the discounted service flow from year t to the end of the useful 

life. Thus: 

and the value at age t, relative to the initial value, is given by: 

49 
Economic depreciation is the negative of the change in value:" 

dv(t) re'"-') 

dt 1 - eqL --- - (3) 

The present value of economic depreciation, PVED(L), is the total discounted value of economic 

depreciation: 

For a group of assets that differ in useful life, the average present value of economic depreciation is given by the product of the retirement density function, R(L), and the present value of 

an asset with useful life L: 

R (L)dL rLeqL 

where y and z represent the lower and upper useful life limits of the assets under consideration. 

This equation may be solved by numerical methods. Given an average present value of economic depreciation as calculated above, the straight-line life with the same present value can be 

determined numerically. 

A similar analysis applies when service flow diminishes exponentially at a rate inversely 

proportional to the useful life (Le., in a declining balance manner). The value of an asset at age t 

that provides an initial service flow c which declines at rate Q is given by: 

As before, the relative price can be obtained by dividing by the initial value V(0): 

Economic depreciation and the present value of economic depreciation are expressed as positive quanti- ties, in accord with common usage. 

50 
Replacing the rate of exponential service decline, Q, by the ratio of the equivalent declining balance rate, b, to the useful life, L, the economic depreciation may be obtained by taking the 

negative derivative with age: 

For a double declining balance service flow b = 2, while for (simple) declining balance service 

flow b = 1. The present value of economic depreciation for an asset with useful life L is 

obtained by discounting the decline in value over the remaining life: 

L ;e b @b L b Lre I:++ 

++$ PVED (I,) = e"dt = + 

1-e r =o 1-e -@++ ,+r 

(9) 

The average present value for a group of assets that differ in useful life is given by the 

integral of the product of the present value function of equation (9) and the retirement density 

function, R(L). This expression is solved by numerical methods, as noted above in the discussion of equation (5). 

The present value of straight-line depreciation over a useful life L is given by: 

Current law allows the taxpayer to claim a loss equal to the difference between the basis of 

the asset and its retirement value. Eq. I1 corrects Eq. 10 to include the tax loss claimed when 

assets are retired before the end of their adjusted equivalent economic life, E: 

PV(E) = E 1-e4r dt +LER(t)e*r(l -;)it 

R(t)- Y rE 

where y is the shortest and z is the longest useful life in the distribution of useful lives characterized by R(t). 

The first term of Eq. 11 reflects the weighted sum of the present values of straight-line 

depreciation up to the time of retirement, where the weight is the proportion of assets retired at 

each age. The second term reflects the present value of economic depreciation for the portion of 

51 
assets retired after the adjusted equivalent economic life, E. The third term of Eq. 11 adds the 

additional present value associated with the tax loss claimed upon retirement without salvage 

value before the end of the equivalent economic life. ‘he equation is solved numerically for that 

life, E, that provides the same present value as determined from the service flow or price pattem 

associated with the group of assets. 

52