Axiomatic analysis of depreciation problems

This paper analyzes axiomatically what is known as “Generally Accepted Accounting Principles (GAAP),” focusing on depreciation. It is widely accepted that a depreciation method should be rational and systematic. There are many possible depreciation methods; however, only a few are used in practice, such as the straight-line method, the declining-balance method, the sum-of-the-years’ digits method, and the fair value measurement. We investigate through the axiomatic approach in what sense these depreciation methods can be considered rational and systematic. We provide a practical interpretation for each axiom examined in this paper and relate the axioms to accounting principles. Interestingly, it turns out that the straight-line method satisfies all but one of the axioms considered in the paper. Since the players are not humans in the model studied in the paper, it is not so clear whether the axiom of core selection is desirable or not in this context. Our analysis provides a positive answer to this question. Specifically, we show that core selection is a direct consequence of three compelling axioms: population monotonicity, the final year reasonableness, and conservatism.