Economically, consumption of fixed capital, (depreciation), is best described as a deduction from income to account for the loss in capital value owing to the use of capital goods in production. Its primary importance in an accounting sense is in its use as the "netting" component in estimates of net domestic product, etc., as described in earlier sections, and, so, in its ability to permit analyses that are closer to a welfare perspective than gross measures. It also constitutes one part of the costs of capital services and so plays a role in productivity measurement. Moreover it has a direct impact on GDP because estimates of non-market value-added explicitly include a component for depreciation.

Depreciation in business accounts is typically measured differently from depreciation in the national accounts. The latter measures depreciation by applying a "depreciation coefficient" to the current value of each capital asset whereas company accountants typically apply a depreciation coefficient to the value of the capital good at its original purchase price ( "historic cost" ). When the prices of capital goods rise, the difference can therefore be significant.

With the increasing importance of high-tech capital goods that undergo rapid technical change, there has been renewed discussion about the measurement of depreciation. In particular, some have argued that depreciation should incorporate expected real holding losses on the grounds that this is the appropriate way of capturing expected obsolescence. Others have come to a different conclusion, and draw a distinction between value changes of an asset due to ageing (which they identify with depreciation) and value changes due to overall price changes of the group of capital goods; which corresponds to the position of the SNA and, indeed, the practice of statistical offices.

Comparability

Like estimates of net capital stock, the international comparability of estimates of depreciation are dependent on: i) the coverage of fixed assets; ii) the assumptions used for service lives and rates of depreciation; and iii) the time series of GFCF estimates. Although the comparability of points i) and iii) are generally good across countries (see also Indicator 12), the assumptions on service lives and depreciation rates differ across countries, although as described in Indicator 23, there are often sound reasons for such differences, reflecting an economic reality.

Source

• OECD (2011), National Accounts of OECD Countries, Vol. 2011/1, OECD Publishing http://dx.doi.org/10.1787/na-v2011-1-en.

Online database

• OECD (2011), "Aggregate National Accounts: Gross domestic product" , OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/data-00001-en.

Further reading

• OECD (2009), Measuring Capital - OECD Manual 2009: Second edition, OECD Publishing, http://dx.doi.org/10.1787/9789264068476-en.
• Lequiller, F. and D. Blades (2007), Understanding National Accounts, OECD Publishing, http://dx.doi.org/10.1787/9789264027657-en.
• OECD (2000), System of National Accounts, 1993 - Glossary, OECD Publishing, http://dx.doi.org/10.1787/9789264180871-en.
• UN, OECD, IMF and Eurostat (eds.) (1993), System of National Accounts 1993, United Nations, Geneva, http://unstats.un.org/unsd/sna1993.