Depreciation and exchange value

Depreciation means annual reduction of machine purchase price by the amortisation rate in percent as a result of deterioration. Nowadays the basic capital means are classified in ten groups depending on term of service life in Russia (Tax Code of Russian … 2009). The capital of logging company -meaning is understood as property over 1 year of operation and over 10000 RUR. In the groups 1-7 linear and non-linear methods of depreciation cost calculation can be used. For buildings, roads and bridges of group 8-10 the linear method is only used (Murashkin et al. 2009).

Each logging company makes decision itself that what kind of accounting method needs to be used for depreciation cost calculation. During the period of Soviet planning economy the four different methods were used: linear, non-linear, accelerated depreciation and units of production methods. Usually the calculation was made for the period of 5 years on 20 % of annual amortisation rate, then forest machinery was written off from companies balance.

Nowadays the calculation is made for forest machinery a maximum for 10 years.

Depreciation norms are accepted as annual percentage in equal shares for the whole economically effective period of tractors’ use. The annual depreciation value can be calculated by formula (15) from Oijala et al. (1994a) and Väätäinen et al. (2006) and modified by author.

D = (H – R)/n (15) where , D= Annual depreciation value (EUR)

H= Purchase price (EUR) R = Residual value (EUR) n = Depreciation live (yr)

Depreciation value is widely used as in Soviet/Russia as in western studies, like in Akay and Sessions 2004.

Practical experiences and literature suggest a certain difference between operational times for different kind of machinery. It would be expedient to reduce the use time of Russian skidding caterpillar tractors (TDT-55A, 1MA-15) and forest machines (PL-1G, TB-1M-16) to 3.5 - 4 years (Murashkin 1992). The use time of skidding caterpillar tractors of TLT-100A type, taken for this study, is also about 4 years. As said, the term

“depreciation” means annual reduction of machine purchase price by the certain depreciation rate in percent as a result of deterioration. Depreciation norms are accepted as annual percentage in equal shares for the whole economically effective period of tractors’

use (Table 12). The straight-line method (Jöbstl 1995) for depreciation cost calculation was used in this study for Russian caterpillar machinery and Nordic machinery. Rates for depreciation cost calculation are accepted corresponding to the third category in paragrap 5 of President Degree No 685 (1996) at rate 15-25%.

Table 12. Depreciation cost for Russian and Nordic machinery

The sharp rise in purchase price of the new skidding tractor TLT-100A and traditional two-shift mode of work-place time have caused necessity to increase by one year its depreciation life. During past years the new models of Nordic machinery should be bought and used the different schemes of leasing contracts. The utility period was calculated by method of accelerated depreciation. For example, according to the data from the Table 12 the period of depreciation life for harvester John Deere 1270D and forwarder John Deere 1010D has dropped from 6 years to 4 years when this machine has been used all the year round day and night in 2-3 shifts.

The term “residual value” means the untransformed value after the end of period of service life. Residual value can calculate by formula (16) from Oijala et al. (1994a) and Väätäinen et al. (2006) and modified by author.

R = H × (1 – Vp /100)ⁿ (16)

There are some differences in economic context for residual value calculation between Soviet /Russian theory and Western theory of cost accounting. During the period of planning economy residual value (ostatochnaya stoimost) was written off from accounting balance and also included the costs of major repair, and techniques did not resale.

Nowadays the residual value can be used in form salvage value when forest machinery could be necessary to resale. Residual value is not used for capital cost calculation.

The economic parameter exchange value (Oijala et al. 1994a and Oijala et al. 1994c) for forest machinery (Figure 28) was calculated according to Nordic method and formulas (17-18) .

EV = k / 100 × H (17)

where,

EV= Exchange value (EUR) k = Exchange value factor H= Purchase price (EUR)

Exchange value is used when forest machine is re-selling. The exchange value can be the same as residual value (EV=R), and then the value gets same character as salvage value.

Traditionally in Russia the second-hand market of forest machinery is not well developed, and usually machinery is used as long as residual value is zero (R=0). Then the forest machine is utilized or fully renovated.

k = (1- n / 100) ^ET× 100 (18) where, k = Exchange value factor

n = Depreciation norm ET =Effective time (h)

The depreciable life estimated period of time over which a capital asset is or can lawfully be depreciated. For effective time in this study is used term gross effective time means the actual annual machine working time in main operations. Effective time is always less then depreciable life.

In real activity of logging companies exchange value is not calculated. There is no resale for Russian machinery.

Leased contract Nordic machinery does not change hands in Karelian logging companies.

Figure 30. Annual exchange value for Russian and Nordic machinery in 2000-2005

The annual exchange value calculation depended from purchase price as for Russian as for Nordic machinery. For Russian machinery used for tree-length method the exchange value was 13 - 46% in period from 2000 to 2005. The exchange value for Russian machinery working by cut-to-length technology has constant rate 23-36.5% for calculation period.

In period from 2003 to 2005 an exchange value for Nordic machinery increased tendency from 15-22 % up to 30-35%.

Interest is an important economic indicator for the capital cost calculation. This indicator was known by Soviet theory of cost accounting, but it was seldom used in practice. Soviet LPHs did not need to use the bank credits for new domestic machinery buying. According to Petrov and Morozov (1984) the Soviet bank interest rate was 2 %. In that time the centralised distribution of new domestic machinery was used and LPHs had their own money resources. Since the beginning of 2000 years, when the Nordic machinery entered Russian forests, the logging companies have been needed the extra interest loan for buying new expensive machinery. Nowadays two types of interest, such as bank interest or lease interest have been used. Each logging company makes its own decision which type of loan they are using. The formula (19) (cf. Väätäinen et al. 2006) can be used for interest calculation.

K=(p/100)(H+R)/2 (19) 0

10 20 30 40 50 60 70 80

Annual exchange value, 1000 EUR

2000 2003 2005

where, K = Annual interest (EUR) p = interest rate (%) R= Residual “end” value