Calculating the average rate of depreciation

[BargainInvest]

Hello!

Can you please help me out with guessing the average rate of depreciation and amortization for this company?

Acquisition cost at the beginning of the year: ca 2,5 bln, additions and transfers roughly 460 mln, current depreciation 225 mln.

Is it suitable to guess, that the company writes down its machinery over average of 12 years? I would take half of the additions during the year, so 2730 mln/225mln = 12,x years.

Is that meaningful?

[exIFRS]

I am not sure whether your use of “ca” is a currency signifier or stands for carrying amount (ie cost less accumulated depreciation). To calculate average useful life I would have used cost (not carrying amount) plus half the purchases less disposals during the year. Carrying amount (etc) divided by annual depreciation gives me the expected average remaining useful life. Which can also be a useful number but it is different.

[BargainInvest]

Ca means „circa“ or „roughly“

I used acquisition cost, which meant the historical cost without accumulated depreciation

[BargainInvest]

So my way of thinking was roughly correct?

[exIFRS]

Then yes that’s how I would have done it.

[BargainInvest]

Thank you!

[Marek Muc]

What will you use this average rate for?

[BargainInvest]

It is a public semiconductor business which is discussed by some friends. I was wondering if they use a reasonable rate for writing down their machinery, since 12 years looks quite long to me. So I wanted to know if my way of looking at it is flawed.

[Marek Muc]

I believe it's too high-level of an exercise to yield any meaningful results. For instance, there could be a significant number of fully depreciated assets still in use. While these are included in the 'at cost' amount, they don't contribute to the depreciation charge.

[BargainInvest]

Oh ok thats an issue

[BargainInvest]

Maybe one could make a guess by comparing the amount of additions during the year to the increase in the depreciation rate?

[BargainInvest]

And my point is: a lot of fully written down assets also suggest, that the depreciation rate is too low and they will have to invest even more in the near future. Is that right?

[BargainInvest]

As I said it is a semiconductor and IC manufacturing which claims to have leading technology. And I have doubt about their reported earnings since the depreciation rate is what it is.

[JRSB]

How do you have access to those cost and depreciation figures, but not the accounts themselves?

[BargainInvest]

Its a public company (listed on the stock market). So I dont have access to more than their financial reports. They break it down only to the level of buildings, machinery in aggregate. It is not neccessary to come up with exact calculations.

[BargainInvest]

So I dont have more than the information that is publicly available.

[JRSB]

The accounting policy disclosure is deficient then.... or is this an immaterial element of the business?

[BargainInvest]

I am not quite sure if I understand you correctly. What should they disclose on an individual basis (to the public)?

[Marek Muc]

Check their accounting policy disclosures and see if they disclose the typical useful lives of fixed assets.

[BargainInvest]

Ok now I understand. Yes, they disclose ranges of useful lives. But these go from 7 to 15 years or so.

[JRSB]

12 years may be a reasonable bet then....

[BargainInvest]

Okay.

Are there any inofficial recommendations or guidelines on how long a rate of depreciation/the useful life should be, splitted up through different types of businesses?

[JRSB]

no but you could benchmark against similar companies

[BargainInvest]

Thats what I already did. Basically they used similar rates. But a lot of them face the same problem which is that they have a lot more Capex than they have depreciation.

[Marek Muc]

Recent economic turmoil has driven up the prices of high-tech equipment, so it's not surprising to see capex at levels exceeding depreciation (the latter being based on historical costs).