Depreciation in the Context of Pricing in Digital Economy

Abstract

The paper studies the conditions allowing avoid generally recognized formal methods of depreciation in the long term pricing that helps to overcome the conventionality of distribution of capital expenditures by accounting periods. The paper also investigates which formal methods of depreciation have to be preferred from the standpoint of pricing when it is impossible or unreasonable to refrain from using these methods. The research methodology is based on the value-based management concept, implying the use of economic value added and market value added in management accounting. The object of the study is a hypothetical mass production company essentially similar to real companies operating in competitive markets of traditional industrial products during demand stability. Long-term price forecasts are made using double-declining balance method and annuity-based method of depreciation as well as DCF-based method where depreciation is not charged in management accounting, then statistical relations between the obtained price series are analyzed. It is shown that in demand stability, the prices obtained according to the annuity-based depreciation method have a closer relation and are more consistent with the prices based on DCF-models. It is concluded that when the carrying value of fixed assets can be appreciated based on the current market prices, the pricing using DCF-models is preferable. In this case, the formal methods of depreciation in management accounting are not necessary to be used. Otherwise, the pricing problem has to be tackled for every particular planning period and preference should be given to the annuity-based depreciation.