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Author Topic: [-] Review depreciation calculation method  (Read 421 times)

Offline wilian.souza2

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[-] Review depreciation calculation method
« on: July 07, 2018, 10:13:49 PM »
The aircraft market behavior is heavily influenced on player's actions, but the current depreciation calculation seems not to be influenced at all by the behavior of the market.

In real life, the depreciation is influenced by the market behavior, which means if nobody is buying something, the value of that something will really drop. But in AWS, we often see a situation which nobody is willing to buy a certain aircraft whose value was depreciated according to the formula and instead want to but it at half that value or even less - or even worse, not wanting to buy or lease at all - , which is an indication that the actual depreciation suffered by aircraft in AWS is much higher. This is a serious issue, as what we see about depreciation in our income statements is misleading information that directly influences our decisions about buying or leasing aircraft, storing it to sell later or scrapping it.

I'm telling it because I've seen lots of airlines going bankrupt because they couldn't get rid of their old crap, perhaps afraid of having a loss on their income statements, and I can also count on my fingers the times I scrapped an aircraft at a profit, even though I've been playing this game for almost one year and having scrapped perhaps some hundreds of aircraft. Oh, and I scrap my aircraft as soon as I feel nobody's going to get them!

Plus - I wonder why depreciation is considered "operational cost" since it's not related to money spent on operations, but instead on the valuation/devaluation of your current assets.
« Last Edit: September 20, 2018, 08:47:18 PM by Sami »

Offline JumboShrimp

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Re: Review depreciation calculation method
« Reply #1 on: July 07, 2018, 10:57:44 PM »
The one thing that I would be for changing is reducing the depreciation period, from 25 years (?) to perhaps 20 years.

Everything else works fine, IMO.

Offline wilian.souza2

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Re: Review depreciation calculation method
« Reply #2 on: July 08, 2018, 12:55:11 AM »
But depreciation should be totally dependent on the player's willingness to buy a certain model of aircraft. Applying a linear depreciation from day 0 to year 20 is completely unreal as many factors are decisive for a player be willing to buy a certain model of aircraft.

Consider GW2, for example. A DC9-51 costs $ 23M minimum. But we know the DC9 is very outdated in the early 2000s and nobody would be willing to buy a used DC9 in 10 years (as almost nobody is willing to buy them now). So the depreciation of this model should hit hard as soon as someone bought it, unless more people buy it.

Now, take the real life's used cars market. There are people specialized in calculating the depreciation of certain models and the depreciation figures for each model are even published. If the depreciation model was reviewed in the way I propose and the depreciation figures for each model were published in the aircraft market lists, it would be a great help for airlines that buy aircraft for brokering purposes. The current system makes aircraft brokering a complete lottery.

Offline schro

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Re: Review depreciation calculation method
« Reply #3 on: July 08, 2018, 01:22:09 AM »
Yet, the proposed method for depreciation in this thread is nowhere near the GAAP (generally accepted accounting principles) or USA tax methods for depreciation. For GAAP, straight line depreciation is done as follows -

Annual Depreciation = (Cost of Asset - Expected Scrap value of asset) / Number of years of expected life of asset

For purposes of this game, the number of years of service has been set to 25 years (which is lower if you acquire the aircraft used rather than new). From there, the game knows the "scrap" value that will be offered, so the only variable remaining is what you pay for the asset.  At a basic game mechanic level this is all correctly considered and simulates the real world in an adequate manner. When the plane is ultimately scrapped or disposed of, the difference between book value at that time and the disposal price is recorded as a gain or loss. it simply represents how accurate your initial estimate in the depreciation formula was. Depreciation, book value and scrap value have NOTHING to do with the market value of an asset.

The concept that you bring up to add is known as "mark to market" which typically does not apply for assets like planes. The market value has no impact on depreciation expense or book value of these types of assets. Mark to market is usually used for securities and investments, not operational assets.

The other variable you can play with is the number of years of expected life. GAAP requires you to modify your book value (through a write down or write up) if the number of expected years of use changes (i.e. you depreciate some 757s for 6 years but decide to store them for scrap after 3, your depreciation schedule changes). US tax law keeps you on the straight line for whatever their number is for that asset. Since this is not AccountingSim(tm), I don't think this is a reasonable adjustment to make, as your gains/losses in this case would be inferred from intent, which would be difficult to program into the simulation. 

Depreciation is an operational cost as it represents the overall "cost" of using that asset during that period of time.


Offline wilian.souza2

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Re: Review depreciation calculation method
« Reply #4 on: July 08, 2018, 02:04:15 AM »
Yet, the proposed method for depreciation in this thread is nowhere near the GAAP (generally accepted accounting principles) or USA tax methods for depreciation. For GAAP, straight line depreciation is done as follows -

Annual Depreciation = (Cost of Asset - Expected Scrap value of asset) / Number of years of expected life of asset

... Depreciation, book value and scrap value have NOTHING to do with the market value of an asset.

The concept that you bring up to add is known as "mark to market" which typically does not apply for assets like planes. The market value has no impact on depreciation expense or book value of these types of assets. Mark to market is usually used for securities and investments, not operational assets.

That's an interesting point, thanks for the explanation. In this case, I'm in for JS's proposal of reducing depreciation period to 20 years, since the players usually use their aircraft for in between 16 and 24 years. (and perhaps even less for 50s-60s-70s aircraft)

Depreciation is an operational cost as it represents the overall "cost" of using that asset during that period of time.

Understood.

Offline Sami

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Re: Review depreciation calculation method
« Reply #5 on: September 20, 2018, 08:47:09 PM »
No changes planned to this one.

 

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