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Book chapter

The historical aspects of the theories of amortization accounting from XVI-th century until the Present Time

P. 1400-1419.
Eremenko T., Sokolova N. A.

Research was undertaken in order to study the development of the amortization accounting methodology over the period of time from 1588 to the present day. The objects of the research were  scholarly works concerned with the key issues of the amortization accounting methodology by such Russian and foreign authors as S.M. Barats,  N.A. Blatov, R.Y.Veitsman, P. Gerstner, J.B. Dumarchey, А. Calmes,  N. А. Kiparisov,  W. le Coutre,  F. Leitner, G. Mellis, G.Meiron,  P.I. Reinbot, W. Riger, А.К. Roschakhovsky, А.P. Rudanovsky,  Е.Е. Sivers,  and E. Schmalenbach, as well as relevant regulatory acts and professional accounting standards.          

It is believed that the Englishman G.Melis was the first to offer his definition of amortization in 1588 as the direct decreasing value of real assets (Littleton, 1933). In 1675 Jacques Savary referred to amortization as depreciation   within the context of the reduction of current assets - the goods that went out of fashion. (Savary, 1675).  Many years had passed since then, before a noted German accountant Richard Maatz concluded that “in the beginning amortization was understood as a reduction in estimated cost to be included in the balance sheet” (Maatz, 1902). During the railway construction boom in the middle of the nineteenth century, which demanded huge investment, this interpretation was set against its understanding as a reserve created for the purpose of acquiring new   fixed assets instead of depreciated ones. Amortization was deemed to be reimbursed by proceeds. Since at the very beginning this factor was not given proper attention, amortization was not practiced as an accounting method.  With no amortization charges made, the balance sheets of enterprises showed increased profits, and so shareholders demanded high dividends. However, some prudent business owners considered it necessary to keep part of the proceeds back to create the so called renewal fund (the renovation fund). “It was assumed that when the rolling stock, railway lines, buildings and facilities were depreciated, the railway administration would have available funds for the renewal of liquidated facilities.” (Sokolov Y.V. 2005).

Since then amortization has been understood as a notion of a dual nature: on the one hand “it represents the value by which the real fixed assets have decreased over a certain period of time”, while on the other hand “it expresses the real value amount accumulated in the asset for the reimbursement of the lost asset” (Roschakhovsky, 1910). The distinction between these two interpretations of amortization (depreciation and an asset renewal fund) was influenced dramatically by the balance sheet theories (static and dynamic) based on different kinds of the valuation of balance sheet accounts.

The discussions centered around the dynamic and the static balance sheet concepts revealed the differences between the notions ‘depreciation” and “amortization fund” (E. Schmalenbach , H. Niklisch,  I.F.Shär). They showed that in the  theory and practice  of  accounting depreciation and the amortization fund are the categories, which are not identical  by their  information function and  are oriented at different costs (historical and replacement costs respectively). Consequently, they may be equal in value only in theory in the case of constant prices.

Summarizing, it should be emphasized that both concepts of the amortization theory are valid, each having its own aim and tasks even in our days. Accordingly, for every  user of financial statements only one of them will provide a trustworthy valuation required for taking a specific task-oriented management decision.

That said, in recent domestic publications amortization has been mainly considered as just a mechanism allowing to reduce the tax base. Only a few publications by modern national authors have touched upon the issues of the valuation of the companies’ resources intended for fixed assets reproduction. However, in modern economy amortization performs not only the role of an accounting distributive procedure, but also becomes the instrument of financial management, which enables to direct cash flows for the effective reproduction of long-term assets.