Depreciation Methods and Life-cycle Costing (LCC) Methodology

AbstractFixed assets are tangible assets that are used by a business to produce income. Accounting fairness refers mostly to the fair presentation and, therefore, to the measurement or valuation of an element recognized in the entity's financial statements. Depreciation is the process of allocating costs to an asset over its entire life. This allocation is done in a way that the cost of the asset (depreciation expense) is charged to the accounting periods during the economic life of the asset and decreases the net value of fixed assets. Applying different depreciation accounting and valuation methods across firms or countries makes financial statements incomparable to each other. The research objective of the paper is a presentation of depreciation methods in comparison with life-cycle costing (LCC) methodology. Both LCC and depreciation methods are applied to: i) a typical commercial property asset – an office building, as part of a real property developer's fixed assets portfolio – and ii) a vessel – a Handymax, as part of the fixed assets of a shipping company – in order to explore the relationship between these methods when applied to the valuation of fixed assets and how these methods correlate with each other. Following the above mentioned procedure, our aim is to provide answers to the following questions: i) ‘which depreciation method is more appropriate to be used as the accounting method for fixed assets?’ and ii) ‘in what way the LCC methodology is associated with depreciation methods and more broadly with accounting methods and practices?’