Guidelines for the

Depreciation of
Library Collections

February 2010
Public Libraries Victoria Network Depreciation of Library Collections - Guidelines

1. Purpose of the Guidelines

1.1 Background and Context

The purpose of the guidelines is to provide a framework, guidance and
assistance for library managers, finance staff and boards in Victoria’s public
libraries in determining their approach to the calculation of depreciation
expense in relation to library collections.
The need for the guidelines has emerged as a result of research that
identified large variations in the methods applied in the determination of
depreciation for collections. Whilst a level of variation methods and rates is
inevitable, this was seen to be compromising the capacity of the financial
reports of library services to convey reliable and consistent messages to
users and stakeholders about financial performance of libraries and the
manner in which resources are being consumed in relation to library
services.
In the process of developing the guidelines, it has also emerged that there is
a need for explanation and information about depreciation in a format that is
more accessible to library professionals and staff, as well as for finance
professionals in local government and regional library corporations. In
particular, the guidelines seek to address the relationship of depreciation
expense to the capital budgeting functions of libraries (commonly known and
the ‘bookvote’). The reason for this is to equip library professionals with
information about the nature of depreciation and how it works to aid them in
the processes of managing the financial affairs of libraries including the
preparation of annual operating and capital budgets.
1.2 Application of the guidelines
The guidelines are for the provision of advisory information and general
guidance to library board members, staff and professionals. The guidelines
provide general information only. They should not be seen as overriding any
specific financial advice provided to libraries.
The guidelines have been prepared to convey to people working in the
Victorian Public Library Sector what is considered to be best practice in
relation to the determination of depreciation rates. In providing the
guidelines, it is acknowledged that the specific business context of each
library takes primacy over any need for industry consistency or adherence to
library sector standards.
In preparing the guidelines, input and advice has been provided by the
Victorian Auditor-General’s Office, the Department of Planning and
Community Development, library finance professions and librarians.

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2. Depreciation
- A ‘Non-Accounting’ Explanation

2.1 A ‘Non-Cash’ Expense

Depreciation is a ‘non-cash’ expense recorded in the financial accounts of
public libraries. It is essentially an artificial accounting mechanism that
adjusts to the simple ‘cash in/cash out view’ of library operations.
The objective of this mechanism is to provide a better ‘resource-
consumption’ and ‘benefit delivered’ view of library operations.
Depreciation adjusts the cash record of the business to align or match when
resources or value is shown in the financial statements as being consumed
to when the benefit is actually delivered.
Depreciation is the accounting mechanism that aims to match a share of the
cost of assets to each year that it will deliver benefits. It spreads the costs
for major expenditure items that are deemed will deliver benefits to the
organisation beyond the current year (assets) over the life of the assets.
In effect, it smooths out bumps (distortions) in the bottom line impact (or
operating result) that major expenditure items would otherwise create (if they
were charged to the operating statement in the year of acquisition), distorting
the view that the financial reports create for readers in a given year.
The rationale for applying this mechanism is to provide members and
stakeholders with a picture of financial performance in any given year where
resources consumed and benefit derived are better ‘matched’.

2.2 ‘Capitalisation’
In public libraries, depreciation was first brought in with the introduction of full
accrual accounting in the early-1990s (Australian Accounting Standard 27).
This accounting standard required ‘assets’ to be ‘capitalised’. Assets
generally include larger physical items that have the potential to deliver
ongoing value or benefit (land, buildings, plant and equipment, etc.).
However, for accounting purposes, assets do not have to be physical or
large: they can include anything where the benefit is expected to last beyond
the current year.
To ‘capitalise’ an item of expenditure means to treat it as an asset in the
accounts. That means recording it in the balance sheet rather than in the
operating statement. The implication of capitalising an item of expenditure
(i.e. treating it as an asset and putting it on the balance sheet) rather than
‘expensing’ it is that it is a recognition that the value and benefit from that
expenditure will flow not only in the current year, but also in future years.
Alternatively, if an expenditure item is ‘expensed’ and recorded in the
operating statement (i.e. not treated as an asset and capitalised), the
underlying assumption is that the value or benefit flowing from the
expenditure will be totally consumed within the current year.

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Most library collection items have a useful life of more than one year. In this
context, collections are required by the Accounting Standards to be
capitalised. To the extent that the value or benefit embodied in those assets
is ‘finite’ (i.e. it has a limited useful life), and it does not increase in value or
retain value (i.e. like land), collection items are regarded as ‘depreciable’
assets. That means the benefit embodied in them is finite and it will, over
time, be consumed and so they are required to be depreciated in the library
accounts.
Depreciation is the artificially calculated expense that represents that part of
the capitalised cost of the asset that is attributable to a particular year.
The definition of the depreciable amount of an asset’s value is its cost, less
its residual value.
In determining the depreciation expense, the estimated useful life of the item
is the key consideration.

2.3 Library Collections are ‘Category Assets’

Most libraries and councils include a ‘capitalisation threshold’ in their
accounting policies. This means that even though certain things (like
staplers, coffee cups etc.) could be regarded as assets in a technical sense
(ie; they have ongoing value that will last more than 1 year), for practical
reasons these are not treated as assets for accounting purposes if they fall
below a defined monetary capitalisation threshold (say $500 or $1000). This
is a practical measure that ensures that accounting energy is not wasted on
keeping accounting records for insignificant items and matters.
Typically, if library collection items were treated individually, most would fall
below such thresholds and not be capitalised. However, together, collection
items do form a significant category item or asset class: they are truly a
core asset of the library service that is significant to the business. Hence,
collections are generally treated as category assets. That means they are
accounted for and depreciated as a group (or sub-groups) rather than
individually.

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3. Guidelines for Depreciation

- A ‘Best Practice’ Approach

3.1 ‘Entity Context’ is Paramount

In defining the depreciation method, rates and useful lives for your library
collection, it is your own local business context that is paramount. In other
words, in determining your approach and rates, the primary consideration
should be what is the impact on your entity.
Accountants and auditors will consider the principal of ‘materiality’ in looking
at depreciation methods and rates and different asset classes. Materiality
generally refers to the significance of an item or issue in your own local
business and operating context. Something regarded as a small or
immaterial item or asset in one library context may in fact be very significant
and material in the context of a smaller library. Similarly, the nature,
collection profiles, number of borrowers and operational/service profiles of
different libraries varies significantly.
For this reason, it is not possible to come up with a single (standard) set of
rules regarding depreciation methods and rates. The guidelines therefore
provide guidance only - all local policies need to be developed to reflect the
operating context of your library.

3.2 Basis of Recognition

In a library context, accounting standards require assets to be recognised ‘at
cost’ or, where donated or acquired at no or nominal cost, at ‘fair value’.
Best practice is to recognise collections at original cost and then continue to
carry them at original cost less accumulated depreciation.
It is recommended that costs associated with acquisition viz cataloguing,
processing, etc. are treated as operational expenses and not capitalised.
The allocation of these costs would be in many cases problematical.
Technically, a library may elect to carry assets after initial recognition by
applying the ‘revaluation model’. This involves revaluing the asset at ‘fair
value’ where that can be reliably determined. The revaluation model is not
considered relevant in a library context.

3.3 Residual Value

The total depreciable amount of an item (or group of collection items) is
defined as the cost less the estimated residual value. Whilst in practical
terms, library items may sometimes be sold in stalls and markets as well as
discarded or destroyed, for accounting purposes this would generally be
regarded as ‘immaterial” (or insignificant in the context of the library
operations).
Therefore, for the purposes of depreciation, the residual value of collection
items would normally be defined as nil.

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A simple worked example of depreciation using a nil residual value is shown

below:

Original Asset Cost: $100 Estimated Useful Life: 5 years

Less: Residual Value: $0
= DEPRECIABLE AMOUNT: $100
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
Depreciation Expense (P & L): $20 $20 $20 $20 $20
Carrying Value (Balance Sheet) $80 $60 $40 $20 $0

The implication of assuming a nil residual value is that the whole of the
original cost of the asset is deemed to be consumed over its defined useful
life through the depreciation expense charged to the profit and loss
statement.

3.4 Defining ‘Useful Life’

Defining the ‘useful life’ of an asset for the purposes of depreciation is not a
precise science. It is very subjective. The estimated useful life defines the
rate of depreciation.
As a general rule, estimated useful lives defined for the purposes of
depreciation should as close as possible reflect the actual usage profile of
different categories of items in your collection.
As stated, this is library-specific and will vary from library to library. It is
possible that an identical collection item could have a different useful life in 2
different library contextsDifferent types of items (reference, fiction, DVDs
etc.) have very different usage patterns, differing levels of physical durability
and therefore different useful lives.
In Australian Accounting Standards ‘useful life’ is defined in terms of “... the
asset’s expected utility (or usefulness) to the entity.” The standards also
recognise that the useful life of an asset to your library may be different to its
actual or economic life. Accounting Standards therefore recognise that
useful life for depreciation purposes is a matter of judgement based on the
experience of your library rather than an industry standard.
The issues to be considered in defining useful life include:
 The level of usage that typically applies to that type of item;
 The physical wear and tear that results from that use;
 The technical and commercial obsolescence – the currency or
ongoing relevance of the content embodied in the items; and
 The Library’s collection management policy, cull periods that apply to
items in each category and any legal or other limits on usefulness that
might apply.

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3.5 Establish an ‘Evidence-Base’

Given the subjectivity in defining the useful life of collection items, it is
ultimately an assumption-driven process. Therefore, ideally, an evidence
base should be established to support your useful life assumptions. There
are 2 methods that can be applied:
Option 1: Borrowing Profile by Sub-Category
Your library management system provides the best evidence base for your
collection’s actual borrowing and usage profile. Usage profiles for different
collection categories can be used to define your useful life and depreciation
rates. This evidence base also provides a rational basis for discussions with
audit committees and auditors regarding how depreciation rates and
methods have been determined.
Following is a theoretical usage profile for a collection item category (non-
fiction).

USAGE PROFILE
- NON-FICTION

‘USEFUL LIFE’
No.

RANGE
OF
LOANS

1 YO 2 YO 3 YO 4 YO 5 YO 6 YO 7 YO 8 YO
AGE CATEGORY (Years Old) - NON-FICTION

This example shows how the usage level (borrowing rate) ‘tails off’ (for this
collection category) for items when they reach an age of 5 to 6 years.
Assuming it remains on the shelf after that, usage would stay at a low level.
Otherwise, it would cease upon being removed from circulation.
This borrowing profile could be used to support a depreciation policy
assumption that defines the ‘useful life’ at around 5 or 6 years. But, as can
be seen in this example, it is by no means conclusive or definitive.
Similarly, this usage profile could be used to determine the library’s target
discard/cull policy of say 6 years and this, in turn, defines the assumed
useful life for depreciation purposes.
Usage profiles for other collections items may look very different to this
example profile. In any case, the practical ‘usefulness’ of a library item does
not just ‘switch off’ after a given number of years.
In practical terms, actual use may continue on after the theoretical useful life
(assumed for the purposes of depreciation) has expired and the item has
been totally written off in the financial accounts of the library. This of course
assumes it remains in circulation.
There are no hard and fast rules to defining useful life for different types of
collection items. However, it is best practice to apply some logical
evidence-based method. The ability to do this is, of course, depends on
the capability of the library management system. It is such an evidence
base, that reflects the operational reality of the library, that auditors will look
for in considering the appropriateness of the depreciation assumptions you
use.

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Option 2: Discard/Cull Rate Based (by Sub-Category)

As stated, you can use such borrowing profile data to determine your
library’s adopted discard/collection cull rates which in turn becomes the basis
for your depreciation rates. The discard/ cull rate is simply the number of
discarded/culled items in each collection category as a percentage of the
total number of items in each category, as shown below:
Collection Item: No. of
Sub-Category Discarded Total. Discard Implied
Items Items Rate Useful
p.a.: Life
Fiction 1,200 9,000 13.33% 7.5 years

... equates to a depreciation rate of : 13.33%

p.a.
A variation of this approach using discard/collection cull rates is to calculate
a weighted average cull/discard rate and accompanying depreciation rate
across the whole collection.

3.6 Depreciation Methods

Straight-Line Method:
The above example applies the ‘straight-line’ method of depreciation. This
means a collection category is depreciated by a fixed $ amount each year
calculated by dividing the total depreciable amount by the estimated useful
life. This method is regarded as an appropriate method for libraries where
‘value’ is consumed is a generally consistent manner over the asset’s life.
Diminishing Value Method:
An alternative to the ‘straight-line’ method of depreciation is the ‘diminishing
value’ method. This means a collection category is depreciated by fixed
percentage of the remaining book value each year. Under this approach,
the percentage still needs to reflect an underlying useful life estimate over
which the asset will be written off. This method is also regarded as an
appropriate method for a library situation.
A comparison of these 2 methods is illustrated below:

$100
‘Straight-Line’ Method:
Written Down Value
$ Book Value
(WDV)

‘Diminishing
Value’ Method:
Written Down Value
$0
Year 1 Year 2 Year 3 Year 4 Year 5

This graph shows how, under the diminishing value method, higher levels of
depreciation expense are incurred in the earlier years of an asset’s life
compared to if the straight-line method were applied.

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3.7 Cultural/Heritage/History Items

In a library collection context, some items, having gone through their normal
utility cycle (and presumably having survived culling), can eventually take on
a different ‘value’ to the collection which bears no relationship to its original
use or its utility. Many library collections include items deemed as having
cultural or heritage significance and local history collections.
Generally, cultural or heritage items, whilst treated as assets and included as
part of the collection on the balance sheet, would not be regarded as
depreciable and therefore not depreciated. In the case of these assets, a fair
book (or carrying) value in monetary terms still needs to be determined. This
can be difficult and is very subjective given the ‘non-utility’ nature of heritage
and cultural assets. In these cases, items can sometimes (and often do)
appreciate, in which case it becomes appropriate to revalue the assets. In
these cases, specialist expert advice is necessary to determine appropriate
and fair values for cultural and heritage collection items.
Collection items that fall into this category are generally those that are
deemed to have significant ongoing value that is not going to be consumed
or exhausted through use or over time.

3.8 Indicative Collection Sub-Categories and Useful Lives

The table on the following page provides indicative categories/classes for a
library collection. Also shown is an indicative useful life range for each
collection sub-category which may be used.
Actual useful life of a collection category deemed to apply in your library
context may be outside the indicative ranges shown. Similarly, you should
apply categories that reflect your own collection profile and management
system.

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Collection Item: Indicative Depreciation

Sub-Category Useful Life (% p.a.)
Range

Capitalise and Depreciate:

1. Fiction 5-8 years 20% to 12%
2. Non-Fiction 5-8 years 20% to 12%
3. Paperbacks 5-8 years 20% to 12%
4. Picture books/junior 5-8 years 20% to 12%
5. Reference 6-10 years 18% to 10%
6. Talking books 5-7 years 20% to 14%
7. DVDs/Videos/CDs /Cassettes 3-5 years 33% to 20%
8. Periodicals (Note 1) 2-3 years 50% to 33%
Capitalise and Non-Depreciable:
9. Local history/cultural/ heritage (Note Indefinite No
2)
Expense:
10. Newspapers/magazines 1 year No
11. Annual subscriptions - data-bases, 1 year No
resources & E-books (Note 3)

Notes:
1. Some periodicals may be retained & deemed to have a useful life beyond 1 year.
2. Cultural and heritage collection items – see section 3.7 above.
3. Where subscriptions to web-based and electronic resources, data-bases, E-books and
similar items provide rights of usage for up to 1 year, these would generally be expensed.
This includes situations where a subscription fee is paid annually even if it is as part of a
longer-term agreement or contract that the library is party to. In the event that a subscription
payment provides usage rights for a period of longer than 1 year, these may be capitalised.

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4. Depreciation and
Collection Re-Investment
- The ‘Bookvote’

4.1 Is there a link?

In technical or accounting terms, there is no direct link between depreciation
expense and the level of the bookvote. Links can be drawn between the two
whereby there is a relationship between the level of capital funds allocated
for collection revitalisation (ie; the ‘bookvote’). Such comparisons are
generally made at a ‘macro’ level in relation to overall financial sustainability
where the level of depreciation can be seen as an indicator of the asset re-
investment effort by the library. The Victorian Auditor-General’s Office has
included such indicator data (‘collection investment gap’) in reporting on the
financial sustainability of regional library corporations in recent annual
reports on Local Government audits.
Depreciation is a retrospective accounting mechanism that relates to the
costs of past asset use and activities. ‘Bookvote’, on the other hand, is a
forward-looking capital budgeting activity – it should be primarily governed by
strategic planning, collection development planning and identified needs,
rather than accounting issues such as depreciation.
The relationship is described below:

Depreciation ‘Bookvote’
– Accounting/reporting: - Capital budgeting/planning:

 Retrospective accounting  Capital budgeting process - forward-

mechanism – technical process
driven by accounting
standards/regulations.
 The non-cash expense associated
with the using up of value in existing
collection items.
 Method of depreciation and useful
life should be determined based on
evidence-base around actual use.
 Should be apolitical.
 Reflecting the entity is the focus, not
the sector.
looking budgeting function. Not
governed by accounting standards
and regulations.
 The amount of funds that may or
may not be allocated to replace
collection items or revitalise/add to
the collection.
 Political process – RLC
boards/councils may set aside funds
as they see fit.
 Method of determination should be
based on need, strategic directions
and priorities and funds available.
 Can be influenced by sector
benchmarks (i.e. 2 collections items
per capita, collection capital
investment per capital etc.)
 Processes applied may be subject of
attention through audit processes.

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So, while there is no direct technical link, in practical terms, some

councils/RLCs may look to the amount of depreciation expense in a given
year to provide some guidance in determining an appropriate amount of
funds to be set aside through the ‘bookvote’.
It is sometimes used by councils/RLCs as a ‘floor amount’ in defining
bookvote or as a prima-facie indication of an amount that is at least
required to be invested in collection rejuvenation to maintain existing service
levels. However, caution needs to exercised with such an approach so as to
ensure that it does not inadvertently contribute to or aggravate
misunderstandings about the relationship between these two separate
processes.
Further, given that depreciation expense is calculated on the actual historical
cost of existing collection items (rather than estimates of future costs), it
could reasonably be considered that even where a level of ‘bookvote’ is
equal to 100% of depreciation expense, this is tantamount to a decline in
collection quality and service levels in real terms.
The amount of depreciation expense does not necessarily reflect the real
needs of the collection in the library’s overall strategic context. Nor will it
provide an accurate indication of the likely cost of rejuvenating the collection
or responding to changing community demand and information needs. This
is especially the case where here depreciation rates are based on historical
costs of old items rather than replacement costs of future items.
Best practice is to apply a range of indicators to a forward-looking, needs
based ‘bookvote’ process. This includes:
 library sector benchmarks (such as the number of collection of items per
capita, the level of revitalisation investment per capita);
 the strategic outlook for your library, its chosen product offering and the
service level priorities of your council/RLC;
 community views and consultation outcomes in relation to your library
and its services; and
 total capital funds available.
Similarly, the relationship between collection investment levels and
depreciation levels (the collection investment ‘gap’) can also be used as an
indicator for capital budgeting/planning purposes but should not be viewed in
isolation.
4.2 Summary
An overriding principle that should apply in the whole depreciation
consideration is that of common sense. Everything about depreciation
relates to estimating and assumptions and it needs to be seen in this rather
than a precise context.
In the interests of public accountability, there needs to some rational
evidence bases to support depreciation assumptions.
It is important to identify an approach to depreciation that meets the technical
accounting requirements, offers a reasonable basis to attribute cost to where
and when benefits flow and is reasonably simple for library professionals to
administer and understand.

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