- By Dr. P. Ernest Parker, Jr.
For some time now, the Government of Liberia (GoL) has implemented a three-year depreciation policy for its vehicles. This policy has influenced the prices at which vehicles are sold to former public servants—including those who previously used these identical vehicles—and has underpinned the legislature’s three-year vehicle replacement practice.
“The practice of valuing a car that has depreciated over three years to zero value violates government accounting standards, is tantamount to institutional corruption and should be discontinued.”
The goal of this article is to clarify the common misconception that depreciation is a reliable method for valuing assets. It urges integrity institutions to correct this systemic mistake and adopt fair value accounting instead. This action could save the government millions of dollars lost to fraud, waste, and abuse.
Depreciation is an accounting method that systematically and methodically allocates the cost of a fixed asset over its useful life. It reflects how an asset’s ability to provide service gradually decreases over time due to wear and tear, obsolescence, or other factors that diminish its value.
However, depreciation is not intended to represent the market or fair value of an asset. The net book value (cost less accumulated depreciation) indicates the remaining unallocated cost, not the price at which the asset could reasonably be sold.
When an organization acquires a fixed asset, such as a vehicle, the cost is recorded as an asset on the balance sheet. Because the asset will provide benefits over time, its price is spread out through depreciation, rather than being expensed all at once.
This allocation follows the matching principle, which states that expenses should be recorded at the same time as the income they help generate. This ensures that financial statements accurately reflect the true and fair view of the transactions they represent.
Most assets remain usable long after their “useful life” has ended. For instance, a car with a useful life of three years might still work perfectly for five to ten more years. Furniture and fixtures usually depreciate over eight to ten years but can last for decades. The depreciated book value, therefore, rarely reflects an asset’s actual market value or utility.
Consider a vehicle purchased for USD 45,000 with a three-year useful life. Using straight-line depreciation, USD15,000 would be expensed each year. After three years, the asset’s book value would be zero. However, the vehicle still has substantial market value and utility. Depreciation merely reflects how the asset’s cost was allocated for accounting purposes, not its actual value.
NGOs and UN agencies operating in Liberia frequently sell used vehicles based on market conditions and fair value, not on net book value. This is a more logical and transparent practice. Fair value accounting, unlike depreciation, assesses assets based on their actual market price or replacement cost—essentially, what a willing buyer would pay in an open market.
Public policy officials must understand that depreciation is not a valuation tool. It is simply an internal cost allocation mechanism. Fair value, on the other hand, reflects the asset’s real benefit and worth, based on objective market benchmarks.
International Public Sector Accounting Standards (IPSAS) already incorporate fair value accounting. IPSAS 44: Non-current Assets Held for Sale and Discontinued Operations states that companies must measure assets they intend to sell at the lower of their carrying amount and their fair value, less the costs of selling them.
Therefore, IPSAS 44 provides a more accurate and realistic approach to determining the carrying value of government assets when their fair value will be recovered through a sale transaction.
By transitioning to fair-value-based pricing for government vehicles, the Government can capture the actual economic value of its assets. The practice of valuing a car that has depreciated over three years to zero value violates government accounting standards, is tantamount to institutional corruption and should be discontinued.
The fair value method can help prevent corruption, reduce the likelihood of undervaluation, and ensure that public resources aren’t compromised through sales at below-market value.
The General Auditing Commission, the Internal Audit Agency, and the Liberia Anti-Corruption Commission should advocate for solutions to this accounting issue and promote the use of fair value for the sale and recognition of government vehicles and assets. This would encourage honesty, openness, and sound public financial management of assets.
The Author
Dr. P. Ernest Parker, Jr., is an Observer contributor dedicated to promoting ethical leadership in organizations worldwide. He is an author and an assistant professor of accounting, leadership, and business analytics at the University System of Maryland.
