Progressive Depreciation in Housing Cooperative Associations –A case study on norm setters’ and practitioners’ arguments in a debate

Abstract

Background and Problem: The question of whether or not progressive depreciation on buildings in housing cooperative associations (HCAs) should be allowed is something that has been discussed for years. Assuming that the progressive method will not be allowed and hence will be replaced by the straight-line method, the costs will be brought forward. This would entail currently higher costs. Consequently the fee paid by the members of the HCA would probably need to be increased to avoid a negative result. Aim of thesis: This thesis aims to illustrate a situation where it is difficult to unite norms and practice. We will investigate why the norm setters intend to exclude the progressive depreciation method on buildings from Swedish GAAP as well as why HCAs have the ambition to apply the method on their buildings. Further we will clarify what the consequences of prohibition of the progressive method of depreciation would be. Methodology: This thesis has investigated the arguments for and against the progressive depreciation method on buildings through a case study of an ongoing debate. Structured interviews in combination with collected documents in the form of newspaper and discussion articles have been used to form the empirical chapter. Discussion and conclusion: Eight arguments have been identified for applying progressive depreciation on buildings. These are: the deterioration pattern of the building, difficulties in explaining the concept of depreciation to members of the HCA, minimization of present costs, the inflation factor, the fact that the writing in ÅRL does not clearly forbid progressive depreciation, the fact that too many negative consequences would occur if the progressive method must not be applied, the fact that the straight-line method could imply that the annual fee probably must be increased in order to avoid a negative result in the income statement, which further would imply large amounts of piled up cash, which is undesirable, and lastly that the characteristics of HCAs, mainly concerning the external fund, imply that the purpose of depreciation is different in HCAs compared to other organizations. Four arguments have been identified against applying progressive depreciation on buildings. These are: that the method is not in line with ÅRL, that the method contradicts to the equality principle, that the deterioration does not follow a progressive pattern and finally the fact that the method does not take the matching principle into account. We further have concluded that a change from progressive depreciation to straight-line depreciation would entail a greater impact on the net income and counteractions to this are either to make a loss or to increase the fees.