The Straight-Line Depreciation is Wanted, Dead or Alive

Danny Ben-Shahar (), Yoram Margalioth () and Eyal Sulganik ()
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Danny Ben-Shahar: Israel Institute of Technology
Yoram Margalioth: Tel Aviv University
Eyal Sulganik: The Interdisciplinary Center Herzliya

Journal of Real Estate Research, 2009, vol. 31, issue 3, pages 351-370

Abstract: We propose a simple axiomatic system that any depreciation method¡ªcomplying with the core of the accounting of depreciation¡ªmust obey. We show that, while none of the prevalent depreciation methods (e.g., straight-line) ex ante conforms to these principles, the accredited proportional depreciation method not only maintains the axiomatic system, but also, for a plausible family of depreciation methods, is the unique method that complies with the axiomatic system. We further propose two consistency requirements of a depreciation method¡ªpartition consistency and dynamic consistency¡ªand show that, in contrast to the commonly used methods, the proportional depreciation method is the only one to always sustain both. Our analysis may provide further resolution to the arguable evidence on the dominance of Funds From Operations over net income in measuring performance in the real estate industry.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 2009

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