It is generally accepted that depreciation refers to physical assets while amor- tization refers to intangible assets. However, these terms can be used inter- changeably and represent that same process, although for the purpose of this study, the convention will be kept.
2.5.1
Intangible Assets
Knowing how an organization’s assets lose their value is often just as important as knowing how they generate value. Thus being able to determine the amor- tization rate of intangible assets is a vital tool for organizations of all types. This sentiment is matched by Høegh-Krohn and Knivsflå (2000) who state that to properly match future benefits, intangible assets need to be capitalized then amortized over their useful lives. By doing so, the value relevance and informativeness of financial statements and reports are improved, irrespective of their type. Penman (2009) however affirms that even when historical costs are identifiable, the amortization schedules of intangible assets is typically quite speculative. This creates a problem where there are significant bene- fits to be gained from amortization, yet great difficulty in determining how to accurately amortize. In addition, Penman (2009) highlights the fact that reporting on fuzzy and speculative numbers can damage the informativeness of financial reports. This would also reduce their strategic value to organizations. Schenk (1966) states that specific criterion for the depression of intangi- ble assists has not been given to tax payers by governments or courts. Schenk (1966) gives an example of how intangibles fit the mould of amortization where patents and copyrights for instance are only valid for a certain period of time after which they lose their value. These forms of intangible asset fit the mould of amortization ideally. However, to amortize intangible assets, the organiza- tion is required to prove that it has a determinable useful life and that the intangible assets exhaust or undergo some form of wear. This can be seen as one of the key factors in determining if and how an intangible asset should be
amortized.
Choi et al. (2000) suggests that the amortization be based off the assessed uncertainty of the value and timing of future benefits derived from each intan- gible asset. This is a completely different approach to amortization. Choi et al. (2000) reasons that this method would be better suited to financial reporting as markets insignificantly regard amortization expenses and that amortization expenses of intangible assets are not significantly related to stock returns of or- ganizations. This lack of correlation adds more uncertainty to financial reports. Being able to determine an amortization schedule for an intangible asset is a vital aspect for it to be financially accountable and represented on financial statements. This means that part of making information financially account- able is being able to amortize it reliably and according to Generally Accepted Accounting Practices (GAAP). This requires an understanding of the various GAAP depreciation methods available to tax payers.
The three most widely used and accepted depreciation methods will be in- vestigated to evaluate their applicability. Wakeman (1980) affirms that acceler- ated methods – Sum of Years Digits and Double Declining Balance – dominate the straight line method in terms of positive discount rate. In fact, in most cases it is generally accepted that accelerated methods theoretically outper- form the straight line method. However, while Berg et al. (2001) accepts that theoretically, accelerated methods are superior, there are cases where straight line depreciation is favourable. According to Berg et al. (2001) the straight line method favours scenarios where there is a stable and growing future cash-flow as well as where there are high probabilities of negative reported income. This means that it could be the favourable method with the uncertainty behind income derived from information.
2.5.2
Information Technology
Technology and computer assets are the backbone to information systems and even more so to Big Data systems. These assets form a large portion of the costs associated with data and information systems and thus should be repre- sented on financial statements. Furthermore, their costs should be depreciated as is the case with typical assets.
Tam (1998) mentions the fact that computer assets have a steeper than average depreciation curve in comparison to typical assets. Furthermore, ac- cording to Bott (2000), software both purchased and developed internally can and should be regarded as intangible assets and depreciated accordingly. Bott (2000) further states that the useful life of software is often short, using two years in his example. Together with the steep depreciation of technology as-
sets, the data and information systems will have a rapid depreciation schedule. This view is mirrored by Antonopoulos and Sakellaris (2011) where he argues that even though the physical deterioration of computers is low, the economic depreciation is massive. He also mentions that the rate of depreciation is of- ten linked to the release of newer technology and the performance leap of the newer generation. He highlights this fact by showing that there is statistical significance in processor speed where it is always positive in regression analysis. Stating that for personal computers, the CPU speed has the largest influence on pricing among all other characteristics. Therefore, the rate of technology progress influences the rate of depreciation of technology and computer assets.