Thursday, June 11, 2009

Follow up: GAAP Depreciation and Paying Higher Taxes Makes You More Bankable?

My immediate previous post discussed how the bank of one of my clients was asking to know what accumulated depreciation would be on a GAAP basis. The Company reports using income tax basis depreciation, and the bank was especially confused because of a huge increase in depreciation resulting from the results of a cost segregation study.

Just when I thought I was done, the bank calls again, and says the number provided by the Company wasn't what they wanted. Ultimately, the bank asked to speak with the accounting firm that performs the monthly bookkeeping work and maintains the depreciation records to resolve this.

So what did the bank ultimately request? They had to know what accumulated depreciation would be on a straight-line basis in order to properly analyze the Company! I've been in accounting for almost 25 years and this is a first for me.

Let's think about what is wrong with this:
  1. The bank is now dictating accounting methods to their customer. And they appear to be doing this because all of their loans must fit into a nice neat box, otherwise their analysts get confused.
  2. Why straight-line?? In case you don't know, straight-line means depreciation is recognized evenly (or on a straight-line basis) over the life of the asset; a $6,000 asset with a 5 year estimate life would be depreciated at the rate of $100 a month over 5 years. But the collateral on this loan doesn't depreciate on a straight-line basis. Most of the value is gone from the equipment and other assets in the early years of their life. The Company is using double-declining balance methods, which assigns greater depreciation in the early years of the asset's life. Which should be more meaningful to the bank!
  3. This is a waste of time and money. The Company and I have had to revise and reissue the financial statements because of this request. I'm not getting paid extra for this. Neither is the accounting firm that keeps the depreciation records. We've all had to waste time on the phone and through email resolving this. Time that especially for the Company could have been put to better use building their business so they can repay the bank.

I hope this is the last time I ever get this request from a bank.

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