New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1917-02-11

Quirement 90 not accrue anu '"0'N
due TO obsolescence may or may not
accrue.
The problem Of determining the
amount Of reserve which should be
set up to take care Of these losses is
4 rather difficult one. There are two
main theories as to the proper meth
cd of determination:
First-The reserve should equal at
all times the actual deterioration or
accrued depreciation in the assets;
Second-The reserve should equal
at all times that portion Of the first
cost of the assets less probable sal
wage at time of retirement) repre-
sen.ed by the ratio Of the past life IN
service to the total probable life IN
service.
We must bear in mind the fact
that a reserve is set up in order to
safeguard the capital investment.
If we employ the first theory as the
basis of "set-up" we do not provide
against factors which result in an
immediate total loss-we only pro-
vide against factors which result in
a gradual loss. Under these condi-
tions losses due TO accidents, storms
or other factors, which act suddenly,
might impair the capital or even
necessitate the appointment of re-
ceiver. This method is therefore not
safe from a financial point of view.
It is also impracticablc. The ex'
pense of securing careful estimates
Of accrued depreciation from COM
petent engineers as frequently as
would be necessary to keep the re-
serve at a proper figure would be
prohibitive.
Spreading Cost Over
Life Of Assets
A reserve set up in accordance
with the second theory would pro-
vide against the factors which result
in a gradual loss and those that re-
suit in an immediate total loss. 1t
would be created by equal charges
against earnings at equal intervals,
during the life of units of plant, Of
such amounts that at the end of the
useful life of those units the re-
serve would equal the first cost less
salvage. In order to accomplish this
result it is necessary to know the
length of life of the units now in ser
vice. The actual life is not known,
of course, but it can be approx
mated in the light Of past expert
ence. From data regarding the
length of life of large number Of
units of q certain class an average
life can be determined which will
represent fairly closely the average
life in the future of that class of
units.
The second theory, then, possesses
at least two distinct advantages over
the first:
% It's acceptance as the basis OF
the "set-up" results in the cost Of
the physical assets being spread even
" over the useful life Of those assets.
This seems more reasonable than to
charge the whole OF a major portion
of their cost against the earnings Of
the year in which they go out of SER
vice and cease to earn revenue, as
would be done in many cases under
the first theory.
(2) The reserve resulting therefrom
would be adequate to Offset all losses
sustained through the destruction or
retirement of plant from any cause, to
the extent that such losses could be
intelligently forecast without impair
ment of the capital assets.
These two advantages of the sec
ond theory make it, in my opinion, q
more correct theory-certainly a
safer one TO adopt as a basis of "set-
Up" for the reserve.
The revenues received during the
year in which plant is destroyed by
fire or storm are not increased by
that loss. They have no more con-
nection with the loss than the reve-
nues Of other years. The loss, how
ever, must be made up from revenue.
Is il not more correct TO take an
equal amount from the revenue of all
the years during which the plant
was in service than to take the whole
amount of the loss from the revenues
of the year in which the loss oc-
Cured? Such losses are as apt to
occur in one year as in another, and
so each year should contribute tow
ard a reserve from which to meet
them.
Reserve Affords
Investor Insurance
By using the average life of plant
units. determined from past expert