The retirement method of depreciation involves waiting until a fixed asset is retired from service before charging its cost to depreciation. When depreciation is eventually recognized, the amount is net of any salvage value of the asset. The method was once used by public utilities and railroads, but the practice has fallen into disuse. The justification for this method was that it reduced the amount of accounting effort associated with smaller-value assets. There are several problems with the retirement method, which are as follows:
- The fixed assets of a business are routinely overstated, since they are not being reduced by ongoing depreciation charges.
- Expenses are being deferred, so the reported level of income is overstated.
- Any financial performance metrics calculated for the business will be incorrect, since expenses are being deferred.