Service lives and depreciation of fixed assets

There are several reasons why empirical knowledge of economic depreciation is important. For instance such information is useful for National Accounts calculations and in conjunction with the shaping of the company tax system when it comes to depreciation rules. In Norway as in many other western countries it has been quite common to use information from countries such as USA, Canada and the Netherlands when considering economic depreciation within a national setting. This is especially the case when it comes to expected lifetimes for different categories of fixed capital assets. Econometric analysis of economic depreciation involves various methodological challenges, and we address some of them in the current report.

 The report documents results based on a survey of Norwegian firm perception of expected economic lifetime of different types of capital assets and their assess¬ments of what is the most realistic depreciation profiles in each case. The data were collected using an Internet survey. For some capital categories information on acquisition prices and second hand market prices were also collected, together with information on the age of capital assets when they are sold in the second hand market. The response rate of the survey was quite high, 78 per cent.

The empirical part of the report consists of different parts. Firstly, of comparative reasons, we have gathered results from foreign investigations. Secondly, we carry out a descriptive analysis of the companies answer about expected life times and most realistic depreciation profiles. The descriptive analysis involves different industries and different types of capital assets. With respect to expected lifetimes we report both measures of location and spread. The data on most realistic depreciation profile show that different depreciation profiles have some relevance for the same capital category. Thirdly, we carry out a simple economic analysis for two types of capital where one has second hand markets. In the estimations the relative depreciation of the capital asset since the point of time of acquisition occurs as the response variable, whereas the time elapsed since acquisition plays the role as explanatory variable. The two capital categories considered are, respectively, (i) Machinery and equipment for mining and manufacturing and (ii) Tools, instruments, furniture etc. For the first mentioned group the expected life time is estimated to between 9 and 10 years, while for the second group it is estimated to about 8 years. According to the descriptive analysis the reported mean expected life times are, respectively, 10.1 and 7.2 years. The econometric analysis is based on the assumption of geometric depreciation. From the descriptive statistic the majority of the respondents who uses these types of capital assets, report that the most realistic depreciation profile is linear.

The econometric results on expected lifetimes deviates are very similar to those obtained from the descriptive analysis. Furthermore, our results are rather equal to those obtained in many foreign studies.