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Abstract
This study examines how asset values by industry sectors are affected by different depreciation methods. We theoretically show that estimating depreciation rate by the Perpetual Inventory Method (PIM) contains more information than the method by Depreciation Expense as Accounting Item (DEAI), which are equivalent under certain conditions. Using data of 37 industrial sectors in China from 2001 to 2016, we estimate depreciation rates by sectors using both PIM and DEAI methods, which enable us to estimate capital stock and capital efficiency by sectors. By the panel estimation, depreciation rates estimated by both PIM and DEAI methods significantly increase with the enterprise's profits after tax defined by that profits before tax minus tax. Our result is consistent with the prediction of the economic depreciation hypothesis, implying that tax shield of depreciation that raises corporate after-tax cash flows to the firm could improve corporate investments for replacement by scrapping the old equipment.
Acknowledgements
The authors thank Charles Yuji Horioka, Masayo Kani, Tsutomu Miyagawa, Ko Nishihara, Zhaoxin Niu, Kazuo Ogawa, Mitsuo Takase, Takanori Tanaka, Konomi Tonogi, Zaizhe Wang, Xianchun Xu, Junren Yin, Zhongwen Zhang and the participants for their beneficial comments when the paper was presented at Fukuoka University, Kansai University, Tsinghua University (by Xianchun Xu’s arrangement), and 2019 Autumn Meeting of Japanese Economic Association at Kobe University, and give special thanks to two anonymous referees and Hung-Gay Fung (the editor of this journal) as well as Kevin Honglin Zhang (the associate editor of this journal) for the constructive suggestions. Any remaining errors here are the authors’ responsibility.
Notes
1 In China, the 2nd sectoral GDP is divided into two parts. One is industry and the other one is construction, and their shares of GDP in 2016 are 33.3% and 6.7%, respectively.
2 See details from the official website (http://data.stats.gov.cn/).
3 See details from the official website (http://kjs.mof.gov.cn/zhuantilanmu/kuaijizhuanzeshishi/index_1.html).
4 See details from the official website (http://data.stats.gov.cn/english/easyquery.htm?cn=C01).
5 See details from the official website (http://kjs.mof.gov.cn/zhuantilanmu/kuaijizhuanzeshishi/index_1.html). See Article 2 of the Accounting Standards for Business Enterprises No. 8. Supplement: The original regulation covers not only fixed assets but also all assets; Original regulation: Recoverable value of fixed assets is lower than the book value. This standard is from the Accounting Department of the Ministry of Finance of the People's Republic of China.
6 See details from the official website (http://upload.news.esnai.com/news/200611238582211884.pdf). See Appendix to the “Accounting Standards for Business – Application Guide.” Also see p.61 of Item 1 of the Accounting and Main Accounting Processing. Supplement: When a fixed asset is disposed, the enterprise accountant first extracts the original value of the fixed asset, then extracts the accumulated depreciation and asset impairment, then calculates the residual value of the fixed asset, adds the cost of the disposal of the fixed assets, and finally accounts for the pure losses or the pure profits from the disposal of the fixed assets.
7 See details of Question 17 from the official website (http://www.stats.gov.cn/tjzs/cjwtjd/201311/t20131105_455942.html).
8 In this study, the average economic depreciation rates by PIM and DEAI from 2001 to 2016 are 0.0677 and 0.0799, respectively. The average value of these two depreciation is 0.0738 (=(0.0677 + 0.0799)/2).
9 Other terms are omitted because the data are not available.
10 If we use the imputed value in Eq. (4) (1.1491*TVFA) to replace TVFA in Eqs. (7) and (8), the depreciation rate by PIM and DEAI is lowered about 1%, respectively.
11 As profits are generally earned by selling products, profits here are adjusted by the Producer Price Index (PPI, preceding year = 1).
12 In Tables 1, 2, and 4, we use italic and bold characters to indicate the 14 modified estimates obtained by replacing unusually high depreciation rates or outliers.
13 Notably, the imputed value with price change (1.1491*TVFA) can be used in the estimation of depreciation rate by PIM and DEAI, respectively, and we find that all of the depreciation rates by PIM and DEAI will be lowered about 1% compared without using 1.1491*TVFA.
14 TVFA (unit: 100 million Yuan) of Manufacture of Tobacco was 704.65 in 2000, 720.98 in 2001, 707.1 in 2002, 704.44 in 2003, 726.8 in 2004, 751.03 in 2005, 746.52 in 2006, 1014.33 in 2007, 867.34 in 2008, 979.92 in 2009, 1247.87 in 2010, 1415.65 in 2011, 1186.84 in 2012, 1236.24 in 2013, 1288.01 in 2014, 1473.78 in 2015 and 1488.62 in 2016, respectively.
15 Investment is a major component of domestic demand in China (Bibow Citation2012), hence corporate tax deduction is expected to decrease current account surplus by increasing domestic demand to relax the tension of US-China trade war caused by bilateral current account imbalance (Wan Citation2021a, Citation2012b).