The sum-of-years’ digits depreciation method: use by SEC filers

The sum-of-years’ digits depreciation method is an accelerated depreciation and amortization technique that is acceptable for financial reporting under U.S. and IASB accounting rules. Until 1981, it was an acceptable method for tax reporting in the U.S., and the aggressive nature of the method was an appealing characteristic for tax returns. Since 1981, little attention has been paid to its continued use in financial reporting. Academic research tends to group all accelerated depreciation methods together. However, declining balance depreciation methods are more appealing because they are more flexible, are easier to apply to partial periods, and have common characteristics with current U.S. tax depreciation law. This paper reports how SEC filers over the past four years have used the sum-of-years’ digits method. It shows what type of companies use this method, what types of assets it is applied to, and what length of asset life is typically chosen. Sum-of-years’ digits sees its most frequent use in the banking and regulated industries. It is primarily applied to intangible assets, such as acquired customer relationships. What is surprising for the non-regulated companies is that they are amortizing the assets more aggressively for financial reporting than they are for tax reporting. Possible motivations are discussed.