Account for depreciation

Published Tuesday 4 December 2007 at 11:10

When I first signed articles in 1949 to train as a chartered accountant, one of my first lessons was enshrined in a textbook now in front of me. It describes the ‘valuation of fixed assets’ and explains that this should be at ‘cost less depreciation: That is, the original cost subject to depreciation and depreciation reserves to cover estimated wear and tear, obsolescence, effluxion of times, exhaustion or general decline in the usefulness of the asset’.

This somewhat archaic language nevertheless enshrines the basic principles of accountancy and auditing which still prevail today.

The space and time recently given by the media to the problem of the regeneration of London’s finest playhouses raises the problem of the sore need for an injection of public money to secure their future alongside the possibility of a levy on ticket prices, say a £1 restoration levy on each ticket.

The problem lies in the past and in the future. We obviously cannot correct the past mistakes of the limited companies and their boards of directors who have owned the theatres over the past century or more. It is difficult to understand why the auditors allowed these companies to distribute profits to their shareholders without making proper provision for depreciation. Nor can one understand the various sales of these theatres over past decades without this problem being properly addressed.

In all my 30 years as finance director of the Arts Council of Great Britain, I recommended the boards of companies who owned theatres in receipt of subsidy always to ensure that correct depreciation figures were included in budgets and final accounts. After all, the wear and tear of carpets and seats are as much an annual cost as lighting and heating. Further, in cases where the arts council was awarding Housing the Arts grants for capital work, a condition was stipulated that a depreciation reserve had to be made each year so that the funds were to be available for the time when such assets had to be replaced.

Well, the past has gone. What is essential is that if public money is to be made available to ensure the future of our great theatres, there must be an absolute condition registered to ensure that the landlords set aside proper depreciation reserves each year, before there is ever any distribution of profits. This will ensure that this problem never again rears its head in future decades and that the correct level of funds are available for all future renovations and refurbishments of these buildings.

Anthony Field