NAREIT Submission to AcSEC Cost Capitalization Task Force - Comments on Composite/Group Method of Depreciation
August 21, 2000
Mr. Mark Simon
AICPA - Accounting Standards
1211 Avenue of the Americas, 6th Floor
New York, New York 10036
Re: Proposed Statement of Position - Capitalization of Certain Costs Related to Property, Plant and Equipment
Subsequent to our August 15, 2000 letter, we have discussed with you and certain other members of the AICPA's Task Force, NAREIT's position that the July draft of the SOP implicitly eliminates the composite or group method of depreciation as it is defined in a number of references (listed below) and applied in practice. The specific issue is the accounting for replacements. Many companies use the composite/group method of depreciation for major portions of an investment property and do not recognize gains and losses on retirement of components within the major categories.
Under the July draft of the SOP (paragraph 38), the original cost and accumulated depreciation of a replaced component would be estimated and any remaining net book value would be recorded as an expense. Requiring such recognition would result in a significant change in practice and represent a clear inconsistency with the widely accepted definition of the composite/group method of depreciation.
We have reviewed the discussion of the composite/group method of depreciation in the following texts:
- Accounting Principles; Fess & Warren; Seventeenth Edition, 1993, page 389.
- Intermediate Accounting; Keiso and Weygandt; Seventh Edition, 1992, pages 550 - 552.
- Intermediate Accounting; Welsch and Zlatkovch; Eighth Edition, 1989, pages 490 - 493.
- Intermediate Accounting; Smith & Skousen; Eighth Edition, 1984, pages 396 - 398.
Intermediate Accounting; Meigs, Johnson and Keller; McGraw Hill, 1963, pages 556 - 557.
George L. Yungmann
Vice President, Financial Standards