Equal Life Group Method of Depreciation: Part II Straight-Line Method of Cost Allocation for Integrated Properties

The Equal Life Group Plan (E.L.G.).is the ultimate refinement of the straight-line method of depreciation-rate determination. The straight-line method is designed to spread the cost of property as equally as possible year by year over its useful life. As usually interpreted, this means that an average depreciation rate is intended to be used throughout the life of a group of property units. The trend has been toward more and more groups, until now a group is often a vintage group, i.e., the property of a given class installed in one year.

If one average rate is applied to a vintage throughout its life span, only a part of the cost of short-lived units will be recovered during their lives. The shortage is made up during the life of the surviving units, but it is not fully made up until the year when the last surviving unit of the vintage is retired. What this means is that the depreciation reserve never reaches a ratio to plant in service as the age-to-life ratio of the plant.

The E.L.G. plan is designed to overcome this difficulty. Basically, it is a procedure which has the effect of charging to operations the cost of short-lived units during their life, and of longer-lived units during their life. In short, the cost of each unit is charged to operations during its expected life. Thus the depreciation reserve at all times should have a ratio to plant investment equal to the age-to-life ratio of existing plant.

In practice, the E.L.G. depreciation rate for a vintage of plant is determined very easily if studies are available which provide a sound basis for estimating the age of distribution of retirements for a vintage of plant. Such a distribution means that the vintage is divided into groups, as many groups as there are years expected for the life of the longest-lived unit in the vintage. This breakdown, of course, is statistical, because no one knows which units will have each of these lives-- but the percentage falling into each age group can be estimated accurately enough for this purpose. The depreciation rate for the vintage is simply the summation of the products of these percentages and their respective component depreciation rates. The rate for each component is the reciprocal of its life, modified, if necessary, by its expected net salvage.