Summary of the article Essay Example | Topics and Well Written Essays - 500 words

Summary of the article - Essay Example for existing depreciation methods as impairment would occur if they violate the requirement of depreciation charges while reflecting the use of the asset in revenue-generating process. The article then proposes an axiomatic system that is compatible with the recent accounting standards. This system shall also test the compatibility of the any depreciation method with the changed requirements for accounting. The axiomatic system proposed has three requirements. Firstly, the periodic depreciation charge has to be non-negative. Secondly, the depreciation charge is not greater than the cash flow for that period. And lastly, the periodic depreciation charge maintains the essential aspect of matching principle between depreciation and cash flow. The article then highlights how current depreciation methods violate the above axiomatic system. The focus of the article then shifts to proportional depreciation method which directly depends on the cash flow of the asset. Two requirements of consistency are then proposed, namely, Partition Consistency and Dynamic Consistency. The first requirement assures that there is consistency between depreciation charges throughout any sub-period division throughout an asset’s life. The second requirement demands that if there is no change in the economic fundamentals during the asset’s useful life, then the original computation of the depreciation charges will sustain. A detailed description of the axiomatic system is given along with its implications. The three axioms are formulated, their definitions are provided while their respective proofs are provided in the appendix. The proportional depreciation system is described and proof is provided about it sustaining the three axioms. The article then enters into the phase of defining partition consistency and dynamic consistency. They are linked to the axioms and a very solid relationship is established between these two consistencies and proportional depreciation method. The