Accounting for Obsolescence in Providing Company Capital Preservation

Abstract

<p>Theoretical background: The dynamic development of modern-day economies causes a rapid obsolescence of economic resources that leads to a reduction in companies’ total capital. Current accounting methodology does not provide clear procedures for relevant measurements and reflections on obsolescence in financial reporting.</p><p>Purpose of the article: The purpose of the paper is to develop a relevant accounting methodology for objective representation of a company’s assets and capital value in financial reporting as well as preventing the loss of capital due to obsolescence.</p><p>Research methods: This paper critically reviews the extant literature and international accounting standards. The proposed methodology is based on the concepts of capital maintenance (physical and financial) and the approach of replacement assets value, originally formulated by Schmidt (1921) in their organic balance theory.</p><p>Main findings: The main result of the paper is substantiated reasonableness of relevant reflection of obsolescence in accounting and financial reporting through a specially created account – reserve for capital stock obsolescence with retained earnings as a main source of its formation. The application of the proposed <em>ex-ante</em> approach ensures the preservation of productive energy of capital and the possibility of its reproduction in a qualitatively new (innovative) technical and technological form.</p>