EFFECTS OF DEPRECIATION.
Depreciation clearly affects the distributable profit. The mode and time of dealing with it has also a consider- able bearing on the theoretical rate of interest earned. If profits are applied to writing off depreciation, the value of the investments is apparently reduced though the interest produced remains unchanged. Averaged over the written down value the interest earnings appear to be at an increased rate. In point of fact, the profits appropriated for depreciation will themselves be invested and produce interest, so that the total interest earnings will be larger, tending to increase further the apparent rate of interest.
On the other hand, if depreciation be dealt with by setting up an investment reserve, though the total interest earnings would be the same as by the writing down method their ratio of yield would, by comparison, be less. This seemingly lower rate of interest, as coin- pared with the written down method, would produce a seemingly smaller margin of profit. We have already seen that the interest profit margin is disproportionately affected by a decline in the net interest rate and this disproportion would be intensified by providing fm depreciation by an investment reserve. The profits reserved will produce interest, and this additional interest will tend to raise the apparent profit margin. These complications --revolve round the value of the investments, and this value turns on the date of valuation. So important is the date that one Office. at least in this country last December postponed its valuation to a more favourable time, mhile in America official permission was granted to insurance companies to value their securities on a date different frOm• the normal.' British life offices do not all value on the same- date, and, consequently, the book value of their assets relative to current quota- tions exhibit great variations. Offices which have written their securities down to the end of 1981 level now find that these show a great appreciation.
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