HF ,DSL35 UC-NRLF in LIBRARY OF THE UNIVERSITY OF CALIFORNIA. Class NERAL nstitute of Directors. Question of Depreciation and tli r easiirement of Expired Outlay o\ ^roductive Plant ; a plea for the stud\ and use of better methods By P. D. LEAKE, ESQ., F.C.A., F.I.D. PAPER READ AT A MEETING OF THE INSTITUTE ON MARCH i sth, 1907 SIR ROBERT A. HAMPSON, J.P., F.I.D. IX THE CHAIR Library & Offices : 4 Corbet Court, Gracechurch St., E.C. if* GtNtlt The Question of Depreciation and the Measurement of Expired Outlay on Productive Plant : A Plea for the Study and Use of Better Methods. Importance of the Subject. The great importance to all interested in industrial undertakings of deter- mining the best method of measuring and providing for depreciation, which I have here called Expired Outlay on Productive Plant, must be my excuse for venturing to invite your attention to the matter as the subject of this paper. Present Common Neglect and Casual Treatment have become intolerable. The fact that the ultimate success or failure of so many productive industries largely depends upon the adequate and proper recognition of this question is not sufficiently realised ; but the urgency of the subject is constantly increasing in importance, and has been gradually accentuated for years past, owing to the great ex- tension of joint stock enterprise, and more recently of municipal trading, the former causing very grave responsibilities to be assumed by directors, while responsibility in the latter case is in a more nebulous state. I do not think it is too much to forecast that the whole question of the measurement of and due provision for depreciation of productive plant is now assuming such vast public importance that in the near future it will be necessary for the A 176362 protection of the community at large, as well as of directors of public companies, to insist upon the use of more advanced and enlightened methods, the present too common happy-go-lucky, do-as-you- please treatment of the subject having become intolerable. No Profit can exist until Expired Outlay on Produc- tive Plant has been provided out of Gross Revenue. One of the most vital matters connected with produc- tive industries and trading concerns is the regular assessment with substantial accuracy of the annual net profit or loss which has resulted from the opera- tions of each year ; and unless a near approximation to the outlay on productive plant which has expired within each year is made and fully provided for out of gross revenue, no correct statement of profit or loss can be obtained. This does not seem to be altogether appreciated if we may judge by some company reports and speeches to company shareholders, as well as by comments in the financial press, for it is often stated that the profit earned for the year is so much, out of which it is proposed to set aside such and such a sum for depreciation of plant and machinery. Definition of Productive Plant. It is startling to find what a very large part of the capital of industrial undertakings of all kinds has been expended upon productive plant, which may be defined as consisting of / all perishable material property owned by an undertaking other than that primarily intended for resale/ It covers therefore all buildings, plant and machinery of manufacturers, all buildings, plant and _ machinery of mining companies, the way, bridges, works, stations, rolling-stock and all equip- ment of railway and tramway companies, other than land in each case. Again, most of the capital of electric lighting and power companies, gas, water and omnibus companies, cable, telegraph and tele- phone companies, shipping and dock companies, is invested in productive plant, as well as that of many other undertakings, whether carried on privately or under the Companies Acts or otherwise. The undertakings least affected are banking, insurance, investment and finance companies. Investment therein is nothing more than Payments in Advance on Revenue Account. All this capital invested in productive plant is invested in nothing more substantial than in payments made in advance on revenue account, which are presumably un- expired. Therefore, the whole of such capital has ultimately to come back out of gross revenue. About this there is no room for doubt ; but where difference of opinion arises is, when is it to come back out of gross revenue ? The extreme efficient economic life period of any class of productive plant scarcely ever exceeds one hundred years, and rarely exceeds fifty years, the most common life period being perhaps between ten and thirty years. Capital Outlay on Perishable Productive Plant in 1905 and 1906. It is remarkable to notice what a large proportion of the enterprises which appealed for capital under the English la\v during even the last two years, 1905 and 1906 which were lean years propose to apply this in the purchase of A 2 perishable productive plant, as the following list shows : Description 1905 1906 British Railways . 2,806,800 6,924,500 Indian and Colonial Railways . i 16,702,500 7,023,500 Foreign Railways . . 22,600,600 15,554,800 Breweries and Distilleries 1,628,700 304,800 Manufacturing. 2,615,300 2,849,200 Iron, Coal, Steel and Engineer- ing .. 3,249,900 3,668,100 Electric Lighting, Power, Tele- graphs, &c. .... 2,837,700 5,316,400 Tramways and Omnibus . 5>595,5oo 2,669,100 Motor Traction and Manufac- turing ..... 4,143,500 Gas and Water 880,500 1,326,500 Docks, Harbours and Shipping 4,371,500 1,212,800 Total . . . . 63,289,000 50,993,200 This is exclusive of the large sums of money lent during these two years for municipal trading purposes. The figures are taken from the supple- ment to ' The Economist ' of February 16, 1907. Other Capital Outlay. Capital invested in the purchase of goodwill or in property of any kind primarily intended for resale does not come within our consideration ; and any alteration in value, either up or down, which may take place in such assets as goodwill including patents, or in the value of bodies of coal, mineral and other ores, we are not now concerned about, as these do not fall within the definition of productive plant ; and although it is customary and prudent to set aside profits to cover actual or possible diminution in the value of property of this kind, it should always be remem- bered that sums so set aside are true profits to the extent that all operative industrial expenditure in- curred in the process of earning them has been duly provided for. That such profits may come from an enterprise of an essentially and admittedly wasting character, possessing unknown capacity, does not divest them of the character of legal profits. On the other hand, no profits can emerge from an under- taking until each year's expired outlay on produc- tive plant, being part of the operative industrial expenditure, has been taken out of gross revenue. Outlay on Productive Plant compared with other Advance Payments. To my mind, money invested in productive plant, being nothing more than a payment made on revenue account in advance, may be compared with a premium paid in advance to cover, say, seven years' fire insurance. Such a pay- ment is, in fact, sometimes made in order to secure better terms than would be obtained by paying an annual premium ; and there is, in such case, no doubt that one seventh of the sum paid would be charged to revenue account each year, until at the end of the seventh year the last instalment of one seventh of the original payment would have come back out of gross revenue. And such outlay should be treated in the same way. Therefore, if an undertaking lays out, say, 6,ooo/. being part of its capital provided for that purpose in the purchase of a certain kind of productive plant which its competent and responsible officers declare, after taking into account the ravages of use and time and the probabilities of obsolescence, is likely to have an efficient economic life of ten years, should not one tenth of 6,ooo/. be taken out of gross revenue every year as a proper charge for the use of that plant ? I cannot follow the argument that because the plant has been well maintained and is working more smoothly at the end, than at the beginning of the first year of its life, no part of the original cost need come back out of the gross revenue of that first year. A man occupying a new house may have spent a large amount of money in making good unsuspected defects, and at the end of the first year of his occupation the house may be much more suitable for occupation than it was at the beginning ; but he has to pay the annual rent-charge for his use of the house, which includes a full pro- vision for the year's expired life. Treatment should be similar whether life be one or more years. Then, again, if the productive plant purchased with this 6,ooo/. had been completely used up and exhausted in the business of the under- taking, exactly within an account period of one year, no one would suggest that the profit on the year's working could be ascertained until this 6,ooo/. had come back out of revenue. Is, then, the fact that this outlay incurred on revenue account does not all expire within an exact account period of one year any reason for neglecting to refund out of the year's gross revenue the year's expired portion of the outlay ? There is, of course, no particular virtue in a period of one year, save that it is usual to ascertain trading results at the end of each three hundred and sixty-five days. Depreciation is an Operative Expense as much as Operative Wages. Further, the depreciation of pro- ductive plant occurring each year is an operative expense as much as operative wages ; and productive plant has two very marked characteristics one being that, other things remaining the same, it tends to fall in present value to a willing purchaser, having equal opportunities for employing it, in direct relation to the proportion of its economic life period which has expired, and the other marked characteristic being that the advantages or consideration obtained by the undertaking from the existence of its productive plant are spread with approximate evenness over the whole period of the economic life of the plant. In assessing this operative expense, therefore, the nearest approach to accuracy will be obtained by estimating the life of each class of productive plant with due regard to all known facts as well as to probabilities, and basing the assessment upon this. The narrow view mentioned above, that if productive plant has been well maintained and works as well as ever, depreciation may be omitted from operative expense, or only provided out of surplus revenue when convenient, is a dangerous fallacy. Regular in Place of Irregular Depreciation Pro- vision. Although this may seem rather a startling view, it will be found that it only means the provision out of gross revenue of a fairly regular annual sum, which will amount over a series of years to no more than is now taken out of the gross revenue of any sound enterprise at irregular intervals to pay for renewals of productive plant at or about the time the cost of these is actually incurred, which method often gives good ground for bitter complaint to those who happen to be holders of deferred, ordinary, and lower preference classes of shares at the time when a sudden call of this kind is made upon the balance of revenue account. In the case of holders of preference shares entitled to annual non-cumulative dividends, the inaccurate assessment 8 of annual profits arising out of this want of systematic policy often inflicts serious injury which can never be remedied. Methods in Use : Equal Fraction of Original Cost. I now propose to refer shortly to some of the methods in most general use for ascertaining and providing depreciation, the first being the simple one of charging to revenue account an equal fraction each year of the original cost of the particular kind of productive plant, based on its estimated efficient economic life ; the cost of repairs and partial renewals being also charged to revenue account, as well as the cost of loose tools and utensils, subject to adjustment of stock values at the beginning and end of the year. Percentage off Reducing Balance Method. Another common practice for providing depreciation which I will notice, is that of writing a percentage off the reducing annual balance of cost of the productive plant. This is a confusing method, and leads few know whither. Thus, it may be understood by directors that 10 per cent, is written off the plant, but this often means 10 per cent, off the reducing balance of plant. It certainly leads to the belief in the minds of many that the cost will be written off in ten years, although the fact is it will take many years to write it off. If it was desired to write off the cost of productive plant in ten years by means of a percentage off the reducing balance, the per- centage to be employed would be exceedingly heavy at least 33 J per cent. ; and I think this system of writing a percentage off the reducing balance is in most cases a bad one. Under this method the cost of repairs and partial renewals as incurred each year is of course charged to the revenue account of the year, as well as the adjusted cost of loose tools and utensils. Illustration of this Method. The following figures will give an illustration of the effect of writing a percentage off the reducing balance : 33^%ff Reducing Balance 10 % off Reducing Balance Cost of productive plant . . 6,000 ist year . . . 2,000 6,000 600 4,000 2nd 1,333 5,400 540 2,667 3rd 889 4,860 486 1,778 4th 593 4,374 437 1,185 5th 395 3,937 394 790 6th 263 3,543 354 527 7th ... 176 3,189 3i9 35i 8th ... 117 2,870 287 234 9th 78 2,583 258 156 icth 52 2,325 232 104 2,093 10 The 10 per cent, rate off the reducing balance will take many more than ten years to write down the cost to a nominal amount, a balance of no less than 2,og3/. remaining at the end of the ten years, although the original outlay of 6,ooo/. has wholly expired. This shows, by the way, the ineffectiveness of making an allowance of 5 per cent, off the reducing annual balance, which is often done by surveyors of taxes in assessing income tax, as being an adequate sum to represent the diminishing value by reason of wear and tear of plant and machinery to which Section 12 of the Customs and Inland Revenue Act of 1878 relates. While, however, the measurement of depreciation is in such an unsettled state and receives such varying treatment, it cannot be won- dered that somewhat grudging recognition is given to it by the income tax authorities. Annuity Method. There are two methods which involve the use of interest : one known as the Annuity method, in which revenue is charged with equal annual sums sufficient to provide at the expiration of the estimated life of the productive plant an amount equal to the original cost thereof, plus interest on the capital for the time being remaining invested therein. An amount equal to that part of these annual sums which represents interest is credited in annually diminishing amounts to the revenue account, so that, taking the difference between the constant amount debited for depre- ciation and the diminishing amount credited to revenue each year as interest, the result is really to throw increasing annual burdens upon the revenue account as the productive plant gets nearer to the end of its life which I think is a bad plan, especially in view of the fact that the cost of repairs and partial 1 1 renewals incurred in connection with that produc- tive plant may also increase as time goes on. Illustration of Annuity Method. The effect of this method will be clearer by taking an imaginary case in which productive plant having an estimated life of ten years has cost 6,ooo/., and is to be written off within that period on the annuity system, charging interest at 3 per cent, upon the diminishing balances. In this case the constant annual sums chargeable to profit and loss for expired outlay would amount to a total during the ten years of 7,O33/. 6s. 8d., and the diminishing sums which would be credited to profit and loss in respect of interest amount to a total of 1,0337. 6s. 8d. The figures are shown below : Expired Outlay charged to Profit and Loss I Interest credked to Profit and Loss Actual Burden on the Year g. d. * d. s. d. ist year . 703 6 8 i So o 5 2 3 . 6 8 2nd 73 6 8 i*4 3 4 539 3 4 3 rd 703 6 8 148 6 8 555 o 4th 73 6 8 Ui i3 4 57i 13 4 5th 703 6 8 114 ii 8 588 15 o 6th 7<>3 6 8 96 13 4 606 X 3 4 7 th 703 6 8 78 6 8 625 o 8th 703 6 8 59 3 4 644 3 4 9 th 703 6 8 40 o 663 6 8 ! loth 703 6 8 20 8 4 682 18 4 Total . 7,033 6 8 1,033 6 8 6,000 Should Depreciation Provision be increased by Interest on Capital invested in Productive Plant? It will be noticed that by this method the actual burden upon revenue for the first year of the ten A4 12 is 523^. 6s. Sd. y and that it increases until for the last year of the ten it is 682^. i8s. 4^. The question in my mind is, why should interest on the capital invested in this productive plant, which is invested in the ordinary way of carrying on the business of the undertaking, be added to the provision for depreciation ? I think the method complicates and obscures the actual facts, and is by no means to be commended. The locking" up of the capital for a time in productive plant is one of the incidents of the undertaking, and is one of the purposes for which the capital is provided, and the whole profit resulting from the various incidents of the business is the reward of the capital invested therein ; and it appears that between the two methods, interest or no interest, for this particular purpose, the latter has much to commend it. If interest is to be calculated on portions of capital locked up from time to time in the course of carrying on the business, it would follow that it should be com- puted on an overdue debt, for instance, the amount so computed being debited to the profit and loss account as a loss on sales, while on the credit side of the profit and loss account' would appear the fictitious interest so charged upon the overdue debt. Indeed, to carry the matter to its logical conclusion, and having regard to the fact that the amount of capital locked up in productive plant averages itself as closely as capital locked up in debts, interest should be computed on all debts outstanding, whether due or not, less perhaps the amounts payable to creditors, profit and loss ac- count being credited with this interest and at the same time debited with a similar sum under the head of Loss on Sales. I fully appreciate the great importance of interest on capital as a factor in OF THE UNIVERSITY OF ascertaining cost of production, but I do not think it should as a rule be added to the provision for depreciation, as is involved by the Annuity method. Sinking Fund Method. The only other method of providing for depreciation which need be noticed is that known as the Sinking Fund method ; and to make the effect of this clearer we will assume again a purchase of productive plant which cost 6,ooo/. and has a life of ten years in a case where the Sinking Fund method is to be applied, involving yearly instalments being taken out of the business and invested in outside securities yielding, say, 3 per cent. Here the equal annual sums charged to the profit and loss account amount to 5237. 6s. Sd. or a total for the ten years of 5,233^. 6s. 8d., and the total interest earned on the investments in securities outside the business amounts to 766/. 135. ^d. y being altogether 6,ooo/. Illustration of Sinking Fund Method. The figures are as follows : _ Expired Outlay charged to Profit and Loss Interest from Investments Actual Burden on the Year /, * d. * d. * d. ist year 523 6 8 523 6 8 2nd 523 6 8 15 16 8 539 3 4 3 r <* 523 6 8 3t *3 4 555 4th 523 6 8 48 6 8 57i 13 4 5th 523 6 8 65 8 4 588 15 o 6th 523 6 8 83 6 8 606 13 4 7 th 523 6 8 101 13 4 625 o o 8th 523 6 8 120 16 8 644 3 4 9 th 523 6 8 140 o o 663 6 8 loth 523 6 8 159 ii 8 682 18 4 Total . 5.233 6 8 766 13 4 6,003 O O u Subtilty of Sinking Fund Method. By this method 766/. 135. 4^. the total of the annually increasing interest from the investment of the money gradually released from the original cost of the productive plant is diverted from the credit of the revenue account, where it ought to appear, and is applied direct to the purpose of helping to accumulate by the end of the economic life of the productive plant the sum of 6,ooo/. (original cost), revenue account having in the meantime been charged with a less sum by j66l. 135. 4^. than the actual provision which has been made by the aid of this method ; so that the true effect is an omission from both sides of the revenue account, under the heads of Depre- ciation on the one side and of Interest on the other side, of annually increasing sums amounting during the ten years to 766^. 135. 4^. Comparison of Actual Results of Annuity and Sinking Fund Methods. If we introduce a record of these so omitted annually increasing sums to- both sides of the revenue account we shall find that the Sinking Fund method has exactly the same effect as the Annuity method, for in both cases the actual burden upon revenue for the first year of the ten is 523^. 6s. 8d. y and that it increases until for the last year of the ten it is 682/. i8s. 4^. It must be remembered that in the Sinking Fund method the interest from investments is really received, whereas in the Annuity method it is a mere fictitious entry, and therefore, in order to get back to facts,, must be cancelled by deducting it each year from the amount charged as depreciation on the debit side of the revenue account. ^Comparison of Apparent Results of Annuity and Sinking Fund Methods. If we ignore the actual results and compare the total sum of 7,033^. 6s. Sd. charged as depreciation during the ten years to the revenue account under the Annuity method with the total sum of 5,233/. 6s. Sd. charged in like manner during the same period under the Sinking Fund method, we shall find that the difference of i,8oo/. represents a sum equal to 3 per cent, for the whole period of ten years on the 6,ooo/. originally paid for the productive plant ; for the first-named method operates to add i,O33/. 6s. Sd. to the true amount of depreciation or expired outlay, and the last-named method operates to deduct 766^. 135. 4^. from the true amount of this. In condemning both these methods as being unsuitable for common use in measuring expired outlay on productive plant, I may mention that the employment of the Sinking Fund method in suitable cases as, for instance, to arrive at the annual value of certain undertakings for rating purposes, when interest on tenants' capital is allowed to be charged in addition to the depre- ciation allowance is of course quite necessary and proper, as also is the use of the Annuity method in dealing with the cost of leasehold premises when, as usually happens, it is desirable to charge the revenue account with the full annual value of premises occupied for trade, this being the common condition or basis of comparison. Methods involving Interest or Discount are equally unsuitable. In selecting the basis of a proper annual charge to revenue for depreciation, the main consideration is that the existence of produc- tive plant, with a strong tendency to fall in present value in direct relation to that proportion of its limited economic life which has expired, constitutes a continuous offer or opportunity of advantage i6 which must be paid for because it expires whether it is used or not, and in practice the advantage obtained by the undertaking from the existence of its productive plant is spread with approximate even- ness over the whole period of the economic life of the plant. The fact that annual instalments of the original cost are taken back out of each year's gross revenue does not diminish the extent of the pro- ductive plant offered for the use of the undertaking. In all probability the instalments taken out of revenue each year are re-invested in renewing productive plant ] but whether this is so or not, con- siderations of interest involved in the Annuity method, or of discount involved in the Sinking Fund method, should not be allowed to increase or decrease the annual amount taken back out of revenue in consideration of continuous offer of service on the part of that which has a limited and, in a very marked degree, regularly expiring economic life. Importance of Classified Record of Capital Outlay on Productive Plant. It will appear from what has .been said above that I believe the best method of ^measuring expired outlay on productive plant is to *base this upon the estimated efficient economic life of each class of such productive plant ; and in order to enable this to be done, the first require- ment is to secure the systematic record under suitable heads of all outlay on productive plant, .showing the year of purchase and the original .cost. This is too often neglected, outlay on pro- ductive plant of a varying nature and varying length of life being all recorded and mixed up together in the books of many undertakings. Factors in estimating Economic Life. The factors to be taken into^account in estimating the efficient economic life of each class of productive plant and in a large concern such classes may extend to hundreds are use, time, and the likelihood of supersession by improved inventions and appliances of a similar nature. Careful regard must be had to the question of residual value, which would occasionally be very considerable, as, for instance, in the case of telegraph cables. The most important factor is time, because, whether productive plant be used much or little, it is apt to decrease in value year by year, and some- times this decrease is even more marked when it is not used or is only partially used than when it is fully employed. The question of probable super- session owing to improvements, sometimes called obsolescence, is much more difficult to determine and applies more to some industries, especially new industries, than others thus, in the case of electrical undertakings and motor industries it would be a most serious item, and should be substantially provided for in estimating the length of life of pro- ductive plant engaged in these and the like indus- tries ; whereas in other undertakings, as, for instance,, waterworks, there seems no great danger to be apprehended from this cause. Suggested Statutory Register of Plant. Having regard to the enormous interests and responsibilities involved, I suggest that every joint stock or municipal trading undertaking should be required by statute to keep a Register of Plant, in which the year of purchase and cost of each of the various classes of productive plant in which capital is invested should be recorded under proper heads. There would be no difficulty in this from the clerical point of view, even if there are hundreds of different classes of produc- A5 iS live plant owned by one undertaking. It simply requires the provision of proper equipment. Check upon Doubtful Methods. Such a register would be a most valuable check upon doubtful financial methods where doubtful methods exist. Each undertaking for I propose that this should apply only to companies registered under the Joint Stock Companies Acts, and to municipal trading concerns might be called upon to show that it had provided in its revenue account each year a sum for renewals amounting to not less than that necessary, according to the declared length of life appearing in this Statutory Register of Plant, in addition to charging revenue with all repairs and partial renewals which would be settled by standard schedules. Responsibility for Declaration of Economic Life Period. A company or municipality might declare the economic life of each of its various classes of plant as being any period it pleased, from two years to one hundred years ; but if a motor omnibus company, for instance, declared the life of the chassis of its motor omnibuses to be one hundred years, and so had to provide out of revenue only T per cent, of the original outlay on these, it would of course stand self-condemned, and certainly no engineer or other official of the company responsible for declaring the efficient economic life period would be found to certify such a statement. If some such system came into use a kind of standard for each sort of undertaking would speedily be established, and we should get rid of the extraordinary state of affairs which at present allows profits to be computed and -dealt with without making any provision whatever 19 for depreciation or expired outlay on productive plant. Contents of Register of Plant. It would be compulsory to record in the Statutory Register of Plant, under suitably classified heads, the date of purchase and original cost of all that productive plant the natural or customary units of which (or group of minor units where the annual value of the class is not ascertained by stocktaking) cost more than a certain sum to be fixed by statute, and the efficient economic life of which is declared to be more than a certain period, also to be fixed by statute. These units of productive plant would, if movable, bear an identification number, or if fixed they would be so described in the Statutory Register of Plant that identification would always be easy, and it would be possible at any time to say how much of the original outlay thereon had then expired as measured by the declared length of life. What are natural or customary units of productive plant I propose to discuss later on in this paper. Register of Plant open to Inspection of Shareholders and Ratepayers. I would have this Register of Plant open to the inspection of bona fide shareholders holding shares of the nominal value of ioo/. and upwards, whose names had been on the register of shareholders for three months and upwards, and in the case of municipal trading concerns I would have it open to any ratepayer. Companies and municipal bodies might, of course, if they wished, extend the principle of the Register of Plant to the keeping of the records of productive plant of a denomination below the statutory value and length of -economic life ; but this would be optional. Any of the various A6 20 methods of providing for depreciation might still be employed by companies and municipal bodies, but it would lie upon them to show the reasonable sufficiency of their provision as measured by their own declared standard. Convenient Form for Register of Plant. A con- venient form for a Register of Plant is a loose-leaf book of suitable size having pages allotted to each class of productive plant, each page ruled with twelve separate cash columns, one for each year, each page being headed with a description of the pro- ductive plant, and the declared length of life in years, and having a space for the signatures of the officials responsible for declaring that length of life. In making up the financial accounts at the end of each year, the original or renewal outlay during the year on each class of productive plant as shown by the ordinary financial ledgers is transferred in total to the appropriate page and column for the particular year in the Register of Plant. A half-year's depre- ciation is then deducted therefrom, which, added to the one year's depreciation deducted from each of the still unexpired amounts appearing in the previous columns, enables the total provision for depreciation on that particular class of plant for the year to be ascertained and transferred to a summary sheet. The totals of (a) Capital Outlay, (6) Depreciation, and (c) Balance, increasing or decreasing the unexpired capital outlay for each class of productive plant, will be ultimately ab- stracted from each of the current class summary sheets to a general summary for the year, the depreciation column of this general summary show- ing the arnount necessary to be charged to revenue account for the year before any profit can result, 21 Many years' history of hundreds of different classes of productive plant can be recorded in a register of this kind without any confusion ; and if, during the life of any class of productive plant, it is found in the. light of subsequently acquired knowledge the original estimate was either over or under the mark, this can be adjusted, and effect given to it so as to provide for the then unexpired balance appearing in the register being written off over any altered remaining period. Thus an effective review or survey of the financial position of an under- taking, keeping a systematic record of this kind, could be carried out periodically with considerable precision, and effect given to any altered conditions of some of the classes of productive plant by suitably modifying the economic life period in the Register of Plant to meet the new circumstances, and, further, there would be a permanent record of this always available. Specimen sheets of the Register of Plant and entries therein will be found in the Appendix. Loose Tools and Utensils. Productive plant, which I have defined as comprising all perishable material property owned by an undertaking, other than that primarily intended for resale, includes loose tools and utensils, and precisely what these are should be defined by schedule to be settled according to the circumstances of each case. The existing value at any time of these loose tools and utensils can best be ascertained by an annual count and inventory on the same lines as the annual stocktaking of goods which are intended for resale. All outlay both for renewal and repair of loose tools and utensils should therefore be charged to the revenue account of the year in which it is incurred, subject to adjustment of stock values at the beginning and 22 end of the year. This should be shown as a separate item or items in the revenue account. ! u* Other Productive Plant. All productive plant, save that which is dealt with as loose tools and utensils, should be classified and recorded in the Register of Plant, showing the year of purchase and the original cost. The characteristic common to this productive plant is that the original cost will be found to be a payment made in order to secure future advantages in revenue earning, and therefore, to the extent that it is a payment in advance, is not properly chargeable to the revenue account of the year in which it is incurred. For this reason it demands careful record and suitable subsequent treatment. Depreciation, not Cost, is chargeable to Revenue Account. The original cost of all productive plant whenever purchased should always be kept out of revenue account, which will, however, in lieu thereof, be inexorably charged each year with a sum to cover the part expiring within the year of all such advance payments. This charge should be shown separately in the books of the undertaking, and in the revenue account presented for the consideration of the directors. Personally, I think it should be shown separately on the published accounts, but this is a matter to be settled according to the circumstances of each particular case. Repairs and Partial Renewals are chargeable to Revenue A ccount. Besides the annual charges to revenue account represented by the adjusted expense of loose tools and utensils, and the expired outlay on other productive plant, as measured, there will be the cost of repairs and partial renewals of this other productive plant to be charged to revenue account, and this should also be shown separately, for the information of the directors, and I think it should -be shown in the published accounts. Schedules of Renewals and Partial Renewals. That most difficult question which is common, how- ever, to all methods of accounting as to what are renewals, the cost of which must not be charged to the year's revenue account, and what, on the other hand, are partial renewals, the cost of which will come out of the revenue of the year in which it is incurred, depends upon the particular class of undertaking, and can best be settled by means of standard schedules prepared after careful considera- tion with the co-operation of the engineers' and accountants' departments. Natural or Customary Unit of Productive Plant. What is a unit of productive plant or, as I have called it, a natural or customary unit must be de- termined in each case by the nature of the particular undertaking ; thus, the original cost of construction of a railway station would be one unit, but railway stations would be divided into different classes according to the nature of their construction and consequent probable economic life. A steamship would seem to be a natural unit, but the efficient economic life of the engines, boilers, and hull may all differ, so that for the purpose of record in the Register of Plant this property would, probably by custom, be divided under not less than three heads or classes ; similarly with the motor omnibus, if the chassis has a shorter economic life than the coach body it would be an easy matter to record the cost under two heads instead of one. 24 Renewal or Reconstruction of Railway Stations. Supposing the cost of a railway station, which was recorded with others of the group having an esti- mated economic life of fifty years, to have been originally 5,ooo/., and that at the end of thirty years the station is partially pulled down and a new one built, the new expenditure being double the cost of the original station, or io,ooo/., it would be possible to say definitely that 3,ooo/. had been taken out of revenue during the thirty years for expired outlay on the original station, the life of which had been estimated at fifty years, and it might then be determined either to write off the re- maining 2,ooo/. in whole or in part over the next few years, or to add it to the io,ooo/. new expenditure, and immediately thereafter revenue account would begin to contribute annually to the reduction of the new total of I2,ooo/. Again, if a railway company decided to reconstruct and greatly enlarge a ter- minal station, and the total reconstruction and enlargement cost a million pounds, it might be determined that, taking all known facts and pro- babilities into consideration, the efficient economic life of the station should be fixed at one hundred years, and this would involve, in addition to dealing with any balance of cost of the original station, the charging to revenue account of an annual sum of io,ooo/. ; or if it was determined that the efficient economic life should be declared at fifty years, then 2o,oo67. per annum would be charged to revenue account, and would become part of the operative expense under the head of Depreciation, the opera- tive expense also including the cost of all structural and other repairs which would be charged under thejiead of Repairs and partial renewals in the years they were incurred, except in the case of extensive 25 repairs like repainting of the ironwork, which might, if desired, be recorded in the Register of Plant and spread over the ten or twelve years or other period during which the benefit was expected to extend. Depreciation Charge is not Annual Value, but a Charge against Inevitable Decay. The charging of io,ooo/. or 2o,ooo/. per annum to revenue is, of course, not intended to represent the annual value of the station, but stands only for the inevitable decay of the structure, which forms part of the operative expenses of the undertaking, whether it be so recorded or not. The habit of considering new ventures in the light of the probable length of the economic life of the productive plant repre- sented by the capital outlay is a good one, as it often shows that the future prospects are by no means so sound as they otherwise may appear to be ; and if it should be found, in looking at the matter in this way, that revenue account cannot take the necessary annual burden, the inevitable conclusion is that the undertaking is not really on profit-earning lines. Present Practice of Railway Companies. The prac- tice largely adopted by railway companies of charging the cost of renewals to the revenue account of the year when the outlay is incurred depends for its efficiency upon the strictness with which it is carried out, and an examination of the accounts of English railway companies in recent years shows that very large sums have been charged to revenue in respect of renewals, so that substantial provision has been made, although, I venture to think, by a wrong method. Again, under this method it is 26 always possible for a sanguine temperament, espe- cially in years when the revenue account shows a lean result, to regard too large a proportion of outlay on productive plant as in the nature of extensions and improvements, and so as being properly chargeable to capital ; and directors are of necessity largely dependent upon the advice of officials in these matters, having no independent gauge or measure to enable them to form an opinion as to whether a well-settled and sound policy is being pursued with the same strictness whether the results of the year be good or bad. The statutory form of railway accounts makes no distinction between the cost of actual renewals of productive plant and the cost of repairs and partial renewals, both being grouped together under such heads as * Maintenance and Renewal ' or ' Repairs and Re- newals/ and it is impossible to judge whether sufficient provision is made or to compare the amount of depreciation with the amount remaining invested in productive plant. Offsets to increase in Cost of Repairs in later years. It may be objected that the charging to revenue account of an equal instalment of the original cost of plant each year, as well as of the cost of repairs and partial renewals as paid, will unduly burden the revenue accounts of the later years of the productive life of the plant ; but it should not be overlooked that against this there is to be set the fact that money originally locked up in the purchase of this productive plant is being gradually released and will find profitable employment either in the undertaking or by investment in outside securities, and the income resulting will come to the revenue account. 27 Again, in a large undertaking the annual expendi- ture on repairs and partial renewals averages itself in a remarkable way. I am not sure, however, that it would not be an advantage that the burden of extensive repairs, which may be necessary when a particular class of plant is becoming decrepid or obsolete, should tend to fall heavily on revenue at that time, thus forcibly calling attention to the need of replacing this by modern and up-to-date plant. Employment of Money set aside. In the case of some undertakings it will be urged that to con- stantly set aside sums out of the gross revenue each year to meet expenditure on renewals which will not have to be met for perhaps a number of years, would be most inconvenient and would embarrass the undertaking with surplus money, which could not be properly employed, and which shareholders would be clamouring for as dividend. This would not happen in the case of most large undertakings, because considerable sums of money are required every few years for actual renewals of the different classes of plant ; or, again, in the case of an increasing undertaking requiring additional plant, the money so detached from revenue would be very usefully employed in the purchase of this additional plant, but otherwise it w r ould be necessary to invest the surplus moneys in safe securities and to be content with the interest earned thereon. Electric Tramway Undertaking. I have prepared particulars of the outlay on productive plant of an electric tramway undertaking covering a period of twelve years, and these transactions, as worked out 28 in detail in the Register of Plant, are summarised below : - Capital Outlay Annual Depreciation Provision Year's Increase Year's Decrease in Balance in Balance of Unexpired of Unexpired Capital Outlay , Capital Outlay 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 s. d. 88,000 o o 34,500 o o 19,500 o o 8,500 o o 7,375 o o 1,850 o o 7,350 o o 3,450 o o 2,690 o o 7,650 o o 29,500 o o 14,040 6 o s. d. 3,097 I II 7,705 10 8 9,891 13 10 10,928 4 i 11,564 4 5 11,913 18 2 12,297 8 3 12,743 9 3 10,930 17 7 9,732 3 9 10,918 8 ii 12,682 5 2 s. d. 84,902 i 8 i 26,794 9 4 9,608 6 2 s. d. 2,428 4 i 4,189 4 5 10,063 l8 2 4,947 8 3 9,293 9 3 i 8,240 17 7 2,082 3 9 121,305 13 7 18,581 ii i 1,358 o 10 41,245 5 6 100,000 o o 224,405 6 o 124,405 6 o Balance of unexpired capital outlay 141,245 5 6 141,245 5 6 This shows that the undertaking was started in the year 1895, by the end of which year the outlay on productive plant amounts to 88 } oool. and the depreciation provision amounts to 3,097^., being one half of a full year's allowance. For the next two years there was a further outlay on productive plant, and at the end of the year 1897 the balance of unexpired outlay on productive plant amounted to i2i,3O5/. 135. yd. For the next seven years, to the end of 1904, the yearly outlay on renewals of productive plant amounts to considerably less than the depreciation provision ; so that upwards of 40,000^. of the original outlay, for which a capital 2 9 of about i2O,ooo/. was required, becomes gradually liquidated, and would have accumulated in hand in the form of cash or securities. In the year 1905, however, 2g,5oo/. was spent on renewals, consisting principally of 2i,ooo/. for renewal of track, and in the year 1906 14,040^. 6s. was spent, consisting again principally of I3,ooo/. for renewal of track ; so that by the end of 1906 the balance of unexpired capi- tal outlay on productive plant had increased from about 8o,ooo/., at which it would have stood at the end of 1904, to ioo,ooo/. It will be noticed, on examining the depreciation column above, that the annual depreciation for the years 1903, 1904, and 1905 has fallen somewhat, and this is caused by the fact that the track work, the life of which was estimated as being only 7*7 years^ turned out to have a life of ten years , for it was. not until the year 1905 that I have supposed it had to be renewed. In practice this might have been easily adjusted as soon as it was seen by the engineers that the track was likely to be efficient for more than 7*7 years. The rates of depreciation I have used are taken from ' Electric Railways and Tramways/ published by Mr. Philip Dawson, in which he gives, as the results of extended study of street railway conditions in America, the following table of allow- ances for depreciation : Per cent. Boilers . ... 8 10 Turbines Transformers Cars Track Work . Buildings Overhead System 7 9 5-6 4- 6 I - 2 3-8 I have taken the heaviest figure of depreciation in each case. 30 Municipal Trading and Depreciation. Some re- ference has been made above to the need of providing depreciation in the case of municipal trading as well as in the case of other trading enterprises, and I propose to examine the results of the tramway undertaking mentioned above, and to consider the difference involved in the method of dealing with the profits if carried on by a limited company and by a municipal authority respectively. Case of Company. ELECTRIC TRAMWAY UNDERTAKING. To Share Capital 120,000 Shares of i each , , > Creditors , BALANCE SHEET, DECEMBER 31, 1906. By Way and Equip- ment 120,000 o o Balance of Unex- 5,000 o o pired Capital Outlay . . ,, Land . . . ,, Investments ,, Stores, Tools, Debts and Cash 125,000 o o 100,000 O O 2,000 O O 20,000 O O 3,000 o o 125,000 o o REVENUE ACCOUNT FOR YEAR 1906. To Depreciation or Expired Outlay on Productive Plant (say) 3 Balance of Profit . s. d. \ 12,682 o o 7,200 o o 19,882 o o By Credit Balance for the Year after charg- ing Cost of Repairs and Partial Re- newals J. d. 19,882 o o 19,882 o o Case of Company. This will allow of a dividend of 5 per cent, being paid on the share capital, and the sum of i,2OO/. being either carried forward or placed to the credit of a general reserve' account, against possible diminution of profits in subsequent years. 3* Case of {Municipality. If this had been a municipal undertaking and the money had been raised by a municipal loan at 3 per cent., repayable in thirty years, then, in order to provide for the repayment of the loan out of profits at the end of that time, it would have been necessary to deal with the annual profits as under : ** Sinking fund provision for repayment of loan, assuming investment at 3^ per cent, compounded yearly. . 2,325 Interest on loan at 3 per cent. ..... 3,6co Balance of profit available for the relief of rates . . 1,275 Sinking Fund Controversy. There is much con- troversy as to whether the annual sinking fund provision for repayment of loan is payable out of true profits (that is, after providing for depreciation or expired outlay on productive plant) or out of the balance of revenue account before providing for depre- ciation, and under the difficult circumstances, the view of the Local Government Board is believed to be that the repayment period should be fixed well within the economic life of the productive plant ; that is to say, should involve the annual setting aside of a sum rather more than sufficient to renew the plant at the end of its economic life, that being apparently, in the present state of the law, the utmost limit to which they can extend their control. Efforts of Local Government Board. By this means the Local Government Board are endeavouring to ensure that the annual sinking fund instalments shall at least provide a sum sufficient to repay the loans by the end of the economic life of the pro- ductive plant ; for under the present state of the law there is no guarantee whatever that municipalities will set aside out of gross revenue a sufficient, or any, sum to meet that part of the operating expense which consists of depreciation or expired outlay, and the Local Government Board have been striving to shorten the loan periods with this object, at the same time having to acquiesce in the view that a setting aside to repay the loan on this basis suffi- ciently complies with the requirements of the law. Undesirable Duties for a Government Department. It seems undesirable that a Government Department should be compelled, or indeed permitted, to take the responsibility of endeavouring to fix the length of the economic life of these numberless different classes of productive plant, upon which so many millions sterling are expended. This responsibility ought to be assumed by means of statutory declara- tions by qualified engineer officers of the munici- pality, who with the people's elected representatives will be responsible to the ratepayers ; or if there is no qualified engineer employed by a particular municipality, then the declarations should be made by some professional engineer of repute. The Local Government Board would then be in pos- session of some data upon which to fix the amount of the annual sinking fund instalments if it was desired that these should mature before the end of the economic life of the productive plant, so that they may at least equal the necessary provision for depreciation. The Local Government Board does not sanction all loans connected with municipal trading ; tramway loans being sanctioned by the Board of Trade, and loans connected with electric undertakings in London being settled between the Treasury and the London County Council. This 33 lack of central control must often be very incon- venient, and it cannot conduce to uniformity of practice in these important matters. Danger of Present State of Affairs. Notwith- standing the efforts of the Local Government Board, it is, I think, admitted that the repayment period of loans is in many cases much longer than the economic life of the productive plant for which the money was borrowed ; and in these cases I would urge that municipal authorities should charge their revenue account with a sufficient provision for depreciation to pay for ultimate renewals, keeping the record of this in the books quite distinct from sinking fund transactions, the money required annually for which could then always be taken out of the larger sums so retained out of gross revenue to meet the cost of renewal of the plant. The result of such action would be that at the termination of the life of the productive plant a sufficient sum would have been taken out of gross revenue to replace this productive plant, but a portion of this sum \vould have been invested in outside securities to meet the smaller sinking fund requirements against the ultimate payment off of the original loan. It would then probably be necessary, in order to renew the productive plant, to go to the Local Government Board or other authority to obtain leave to use the sum so invested in outside securities, and add it to the balance of the sums set aside for depreciation, which balance would exist in the form of cash in hand or liquid investments. This would mean a new arrangement of the old loan with a readjustment of the period for repayment, but it would not mean the borrowing of any further money, as would have been the case if revenue 34 account had only been debited each year with the amount of the sinking fund instalment, and the whole of the remaining balance of the revenue account disposed of as net profit,, for the loan repay- ments extend to thirty years, but the productive plant has, in the case assumed which is the result of extended study by an eminent English engineer an average life of only about ten years, and at the end of that ten years the sinking fund would have reached a sum of only 27,274^, leaving therefore a further amount of 92,726^. to be borrowed in order to renew the original plant, and thus loan may be, and I fear often is, unintentionally heaped upon loan. Low Interest payable by Municipalities. We have seen, then, how the Local Government Board are endeavouring to make the best of a very difficult position ; but it seems to me that even if they gradu- ally succeed in attaining nearer to their object of fixing the date of repayment of loans well within the period of the efficient economic life of the plant, we are still far from being on sound and businesslike lines. A municipal trading enterprise should be able, out of its true profits, to provide the low interest at which municipalities are or were able to borrow, as well as the sum necessary to effect repayment of the loan if the period is anything like thirty years, for these two charges together actually amount to less than is required to pay interest at the rate of 5 per cent., which is the lowest interest an ordinary well-managed trading concern would have to pay ; and so at the end of thirty years, by applying actually the same sum of annual profits, the municipal under- taking finds itself free of debt, and therefore with no 35 further annual payments to make either for sinking fund or interest, while the other concern still owes i20,ooo/. to debenture holders or share holders, and has to go on paying the full annual interest at the rate of 5 per cent. Should enable Sinking Fund Contributions to be set aside out of True Profits. There seems nothing unreasonable in supposing that the intention of the Legislature was that, in the case of municipal trading concerns, the sinking fund contributions should be set aside out of profits ; and in such a case there would be at the end of the thirty years sup- posing the undertaking mentioned above had been maintained and was of exactly the same extent at that time a sum of i2O,ooo/. accumulated in outside securities (out of annual interest saved through exceptionally favourable borrowing facilities) available to pay off the whole of the loan, and in addition, of course, there would be the still existing tramway and equipment remaining, of the value of i2O,ooo/. It is, however, this contention that has caused a good deal of indignation among some people, although it merely means that the muni- cipality would be the owners free of debt of a valuable undertaking or property, just as they would be the owners free of debt of a public park had that been the subject-matter of the purchase instead of an electric tramway undertaking. In either case the gradually acquired possession by the municipality of so valuable an asset would be a factor constantly tending to increase the value of property in the district as the period of final repayment approached ; so that it is scarcely a question of burdening one generation for the benefit of another. 3 Proposed Register involves no Liability upon Directors. I do not suggest that any liability should attach to directors or others in connection with the proposed Statutory Register of Plant, except that a company or municipal body making default in keeping the statutory records would be subject to a sufficient penalty during the continuance of the default. Present Neglect is becoming a National Danger. The assessment with substantial accuracy of annual net profit or loss is now a matter of vast public importance, and all the necessary factors to which regard must be had, except this one of provision for depreciation, have received careful attention. The factor of depreciation constitutes a very large part of the operative expense of most industrial under- takings, and the hopeless state of chaos into which it has drifted constitutes a grave public danger, which is even assuming the dimensions of a national danger in these days of municipal enterprises. More Information should be available. The pro- posed Statutory Register of Plant is suggested as being in the nature of a much needed guide and source of information, and not as a cramp or check to freedom of action. It would form a basis for discussion between partners (shareholders or rate- payers, as the case may be), who ought to be able to obtain some definite information as to the policy pursued on this matter. I believe it would tend to relieve directors of much anxious responsibility. At the end of the first year of a new undertaking, for instance, the Register of Plant might show that the depreciation (or expired outlay on productive plant) amounted to io,ooo/. for the year ; but the 37 directors might, perhaps, for good reasons under certain circumstances, determine to provide nothing at all out of the gross revenue of the first year. Shareholders would have access to the Register of Plant, and, assuming the directors' policy was not notoriously unwise, the directors would have the support of the body of shareholders behind them. More information would be available for both directors and shareholders than at present, and that is what I am anxious to secure by means of a Statu- tory Register of Plant. If it is not compulsory it will be neglected in the very cases where it is most needed. Register might be Compulsory on New Under- takings only. Such a Register of Plant, if made obligatory on all new joint stock and municipal industrial undertakings, would not, I think, be objectionable to the great body of able and honest directors, who might even welcome it as a help to them, and it would certainly be of assistance to those who are now unaware of the importance of this matter. In the case of existing undertakings, the use of a Register of Plant might be left as a voluntary question, as there would be great difficulty in obtaining a basis to start upon, besides many more serious objections which may exist in the case of old undertakings. Present Methods may be improved. It will, I think, doubtless be felt by many that my suggestions are impracticable ; but I am convinced that this is not so, and that much may be done to improve present methods, consisting as they often do partly of spasmodic allocations of revenue account balances to reserve accounts to meet requirements of really 38 unknown extent, and partly of the rough-and-ready apportionment between capital and revenue accounts of large outlays on combined renewals and exten- sions which must be allotted in some way, partly to revenue, as representing maintenance, and partly to capital expenditure, as being for betterments, involving an anxious responsibility being placed upon the shoulders of officials who have no very definite rules to guide them ; whereas if a settled and methodical policy be laid down it will, I think, be found that although the efficient economic life of any class of productive plant is a matter upon which opinions differ widely, yet there is an outside limit in all cases beyond which no one would be found to go, and if even this outside limit were admitted and provided for out of revenue a great improvement over the present condition of affairs would ensue. Recognition of Necessity for Reforms. The ' Statist' of February 16, 1907, in an article reviewing the condition of trade, says : ' Lastly, we would re- mind the reader that during the past seven or eight years there has been a great awakening in this country. Manufacturers, railway directors, even bankers, all recognise the necessity for far-reaching reforms, the obtaining of assistance from science, and greater energy and enterprise which unques- tionably is of happy augury for the future/ LONDON : March 5, 1907. APPENDIX. REGISTER OF PRODUCTIVE PLANT. Description of Productive Plant : Track Work. Section Length of Efficient Economic Life : 77 years (equal to 13 per cent). Sheet.... Date of Declaration Declared by.. .. .. Certified by Capital Outlay during the Years ending December 31 and subsequent Annual Depreciation deducted therefrom ** * n ,0 %; o M'O Ol Q * 10 s?|oS-;? ** O five ^ "> 2 ^"^ *" M" M <> cT vo" *00| - --- ---- -- -- -- ^ O G OOOOOOOOOOOOOO C Z ^^ Ow tN,m win iom Osm mm t**mwi/"i in in JB; uon -9j*d SD ol v &S; < o\8;8oSo:S-o' v P 0000030000 000000\0 , Q M MMMMH REGISTER OF PRODUCTIVE PLANT SUMMARY. Description of Productive Plant : Track Work. Length of Efficient Economic Life : 7*7 years (equal to 13 per cent.). Section,.. Sheet Capital Outlay Depreciation Balance of Unexpired Capital Outlay 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 20,000 s. d. 1,298 s. 14 d. o + 18,701 s. 6 d. 20,000 1 1,000 1,298 3,3u 14 13 8 18,701 + 7,688 6 6 4 31,000 3,000 o 4,610 4,220 7 i5 8 6 26,389 1,220 12 15 4 6 34,000 200 o 8,831 o 4,428 3 ii 2 4 25,168 - 4 ,228 16 ii 10 4 34,200 500 o !3, 2 59 4,474 14 o 6 5 20,940 - 3,974 5 6 5 34,7oo 350 o o 17,733 o 4,5 2 9 14 4 ii 3 16,966 4,i79 5 4 i 3 35,050 400 o 22,262 4,577 19 18 2 4 12,787 - 4,i77 18 10 4 35,450 600 o , 26,840 4,642 17 16 6 8,609 i I 4,042 2 16 6 i 36,050 440 o o 31,4^3 o 2,632 J 3 8 7 4,5 66 9 2,192 6 8 5 9 36,490 900 34,n6 i,o57 2 2 4 2,373 - 157 17 2 8 \ 37,390 21,000 o 35, J 73 1,882 4 15 4 2,216 9 +19,117 15 4 8 3 58,390 13,000 o o 37>5 6 o 3,99i 17 i 21,333 i + 9,008 19 2 IT ii 71,390 o 41,047 17 2 3 ,342 2 10 ANNUAL SUMMARIES. Section Sheet + or Capital Outlay ; Depreciation Balance of Unex- pired Capital Outlay 1895 * d - * d. * <*. Boilers . 5,000 o o 250 o o + 4,750 o o Turbines . 3,000 o o 135 2 8 + 2,864 17 4 Transformers . 2,000 o o 60 4 10 + 1,939 15 2 Cars 25,000 o o 753 o 5 + 24,246 19 7 Track Work . 20,000 1,298 14 o + 18,701 6 o Buildings 24,000 o o 240 o o + 23,760 o o Overhead System . 9,000 o o 360 o o + 8,640 o o 88,000 o o 3,097 i ii + 84,902 18 i '' i 1896 Boilers . 2,500 oo 625 o o + 1,875 o Turbines . 270 5 5 - 270 5 5 Transformers . 1,000 150 12 I + 849 7 ii Cars 1 6,OOO O O 1,987 19 6 + 14,012 o 6 Track Work . 11,000 3,3U 13 8 + 7,688 6 4 Buildings 480 o o 480 o o Overhead System . 4,000 o o 880 o o + 3,120 o o 34,500 o o 7,705 10 8 -f 26,794 9 4 1897 Boilers . 250 o o 762 10 o 512 10 o Turbines . 1,250 o o 326 ii 6 + 923 8 6 Transformers . i 80 14 6 - 180 14 6 Cars 10,000 2,771 2 4 + 7,228 17 8 Track Work . . 1 3,000 o o 4,220 15 6 1,220 15 6 Buildings . . 3,000 o o 510 o o + 2,490 o o ! Overhead System . 2,000 1,120 + 880 o o 19,500 o o 9,891 13 10 + 9,608 6 2 ANNUAL SUMMARIES continued. Section Sheet -f or Capital Outlay Depreciation Balance of Unex- pired Capital Outlay 1898 s - d - s. d. > s - d- Boilers . 1,250 o o 837 10 c + 412 10 o Turbines . 4,750 o 596 16 ii + 4,153 3 i Transformers . 2,000 o o 240 19 4 + i,759 o 8 Cars 3,072 6 6 - 3,072 6 6 Track Work . 200 4,428 ii 4 - 4,228 ii 4 Buildings 540 o o - 540 o o Overhead System . 300 o o 1,212 912 o o 1899 Boilers . Turbines . . Transformers . Cars . . Track Work . Buildings j Overhead System 1900 Boilers . Turbines . Transformers . Cars . v Track Work . Buildings I Overhead System 8,500 o o 10,928 4 i - 2,428 4 i 1,625 5,000 o o 500 o o 250 o o 981 5 o Sio 16 3 301 4 2 3,222 18 7 4,474 o 5 540 o o 1,234 o o + 643 15 o 810 16 3 301 4 2 + 1,777 i 5 - 3,974 o 5 540 o o 984 o o 7,375 o 11,564 4 5 - 4,189 4 5 500 o o 1,000 350 o o 1,062 10 o 833 6 8 301 4 2 3,403 13 i 4,529 4 3 540 o o 1,244 o o - 1,062 10 o - 333 6 8 - 301 4 2 - 2,403 13 i - 4,179 4 3 - 540 o o - 1,244 o o 1,850 o o 11,913 IS 2 -10,063 1 8 2 43 ANNUAL SUMMARIES continued. . Section Sheet 1901 Boilers . Turbines . Transformers . Cars Track Work . Buildings Overhead System . 1902 Capital Outlay + or Depreciation Balance of Unex- pired Capital Outlay * d. 500 o o 3,750 o o 2,OOD 400 o o 700 o o i s - d - 4 J - d - 1,087 10 o - 587 10 o 1,024 15 5 +2,725 4 7 301 4 2 - 301 4 2 3,494 o 4 -i,494 o 4 4,577 18 4 -4,177 18 4 540 o o 540 o o 1,272 oo - 572 o o 7,350 o o 12,297 S 3 4,947 8 3 Boilers Turbines . Transformers . Cars Track Work . Buildings Overhead System . 1903 1,500 o o 600 o o 1,000 o o 350 o o 1,187 10 o + 312 10 o 1,193 13 10 -1,193 13 10 301 4 2 - 301 4 2 3,554 5 2 -3,554 5 2 4,642 16 i -4,042 16 i 550 o o + 450 o o 1,314 o o 964 o c 3,450 o o 12,743 9 3 -9,293 9 3 Boilers Turbines . Transformers . Cars Track \Vork . Buildings Overhead System . 500 o o 750 o o 440 o o I,OOO 1,287 10 o 787 10 o 1,227 96 477 9 6 301 4 2 - 301 4 2 3,554 5 2 -3,554 5 2 2,632 89 -2,192 8 9 560 o o 560 o o 1,368 oo - 368 o o 2,690 o o 10,930 17 7 -8,240 17 7 44 ANNUAL SUMMARIES-^w///. Section Sheet -f or Capital Outlay Depreciation Balance of Unex- pired Capital Outlay 1904 / S. d. * d. * d. Boilers . . . 3,750 o o 1,500 o o + 2,250 o o Turbines . . . 1,261 5 2 - 1,261 5 2 Transformers . 301 4 2 - 301 4 2 Cars . . . 3,ooo o o 3,644 12 5 - 644 12 5 Track Work . 900 o o 1,057 2 - 157 2 Buildings 560 o o 560 o o Overhead System . 1,408 o o - 1,408 o o 7,650 o o 9,732 3 9 - 2,082 3 9 1905 " Boilers . . 1,750 o o 1,520 o o + 230 o o Turbines . 5,000 o o 1,486 9 4 + 3,513 10 8 Transformers . i 301 4 2 - 301 4 2 Cars i v v>, . Track Work . , 21,000 3,734 19 8 1,882 15 9 - 3,734 19 8 + 19,1 17 4 3 Buildings - . . 1,500 o o i 575 o o + 925 o o Overhead System . 250 o o 1,418 o o - 1,168 o o 29,500 o o 10,918 8 ii + 18,581 ii i 1906 Boilers . . . 250 o o 1,250 o o 1,000 o o Turbines . . . i,378 7 i - i,378 7 i Transformers . . 301 4 2 301 4 2 Cars 3,734 19 8 - 3,734 19 8 Track Work . . 13,000 o o 3,99i 17 i + 9,008 2 ii Buildings . . 790 6 o 597 17 2 + 192 8 10 Overhead System . 1,428 o o - 1,428 o o 14,040 6 o 12,682 5 2 + 1,358 o 10 ff OF THE ^\ f UNIVERSITY I \ OF / Institute of Directors. Incorporated by Royal Charter, 16th July, 1906. President : His Grace The DUKE OF ARGYLL, K.T. fast President: The Right Honourable LORD AVEBURY. \rfce-Tres1dentj : ALFRED BALDWIN, Esq., M.P. FRANCIS A. BEVAN, Esq., J.P., D.L. Sir GEORGE - HAYTER CHUBB, Bart., J.P. Sir DOUGLAS Fox, M.Inst.C.E., J.P. The Lord GREVILLE. Sir ALFRED HICKMAN, Bart. E. H. HOLDEN, Esq., M.P. Sir ALFRED JONES, K.C.M.G. Sir HENRY KIMBER, Bart., M.P. The Earl of KINNOULL. J. SPENCER PHILLIPS, Esq. The Right Hon. LORD PIRRIE, LL.D. Sir FELIX SCHUSTER, Bart. Sir WM. E. M. TOMLINSON, Bart. Sir JAMES WOODHOUSE, J.P., D.L. Council : His Honour Judge BOMPAS, K.C. (Chairman, WALTER BIRD, Esq. W. M. BORRADAILE, Esq. CLIFFORD J. CORY, Esq., M.P., J.P. S. L. DORE, Esq., J.P. H. CUTHBERT HALL, Esq. Sir ROBT. A. HAMPSON, J.P. SirH. H.JOHNSTON, G.C.M.G., K.C.B. Maj.-Gen. R. OWEN JONES, C.B., J.P. G. WALTER KNOX. Esq., B. Sc., F.C.A. Sir RALPH LITTLER, K.C., C.B, J. NEWTON MAPPIN, Esq. J. A. MATTHEWS, Esq., J.P. H. W. MAYNARD, Esq. ARTHUR F. PEASE, Esq., J.P. J. T. W r ooLRYCH PEROWNE, Esq The Hon. EVELYN PIERREPONT. MACKWORTH B. PRAED, Esq. ERNEST J. READ, Esq. HAROLD J. RECKirr-rEsq., M.P. C. RUBE, Esq. The Hon. CHARLES HEDLEY STRUTT. Dr. A. COTTERELL TUPP, I.C.S. "BanKers : THE BANK OF ENGLAND. Solicitors ; ASHURST, MORRIS, CRISP & Co. Auditors : DELOITTE, PLENDER, GRIFFITHS & Co. Library & Offices: 4 CORBET COURT, GRACECHURCH ST., E.G. Secretary : W. ARTHUR ADDINSELL, F.C.A. QUALIFICATION FOR MEMBERSHIP. ersons who are Directors or Trustees of Companies. Annual Subscription: ONE GUINEA. Forms of application for membership may be obtained from the Secretary.