Accumulated provisions for depreciation belong on the right side of the balance sheet.
John Ferguson, CDP, formerly was a principal with Deloitte & Touche, and now chairs the current issues committee of the Society of Depreciation Professionals. This article reflects the views of the author and not Deloitte or the Society. Email him at johnferg@swbell.net.
Until the late 1940s, the accepted accounting convention was to locate the accumulated provision for depreciation on the right (liability and capital) side of the balance sheet. The convention since has been to locate it on the left (asset) side as a contra-asset. This change was controversial, and has led to some strange accounting for the expenditures incurred to remove or abandon in place property, plant, and equipment (PP&E) at the end of its useful life (referred to here as removal costs or expenditures).
Recent events suggest now is an opportune time to revisit where the accumulated provision belongs. For example, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board are working to harmonize their respective standards. The Securities and Exchange Commission (SEC) announced its intention to allow financial reporting based on international accounting standards without reconciliation to U.S. generally accepted accounting principles (GAAP). And the SEC’s advisory committee on improvements to financial reporting recommended that accounting rules avoid special treatment for specific industries. Finally, financial accounting has moved away from emphasizing the concept of matching to emphasizing fair value.