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To. Carriers:

Interstate Commerce Commission,
Division of Statistics and Accounts,
Washington, June 3, 1907.

The first revised issue of the Classification of Operating Expenses took effect July 1, 1894, and the second revised issue became effective July 1, 1901. The Classification herewith submitted will become effective July 1, 1907, and is issued in accordance with an order of the Interstate Commerce Commission, a copy of which will be found immediately preceding this letter.

It is eminently appropriate that public acknowledgment should be made to the Association of American Railway Accounting Officers, and to the standing and special committees appointed by that association, for their hearty cooperation in working out the details of this Classification. In no other way would it have been possible for. the Commission to avail itself of that special knowledge and expert experience necessary for the successful accomplishment of the task undertaken. With one exception, the Classification of Operating Expenses herewith promulgated conforms to the recommendations of that association. This exception refers to the treatment of per diem and mileage payments between carriers on interchanged or loaned equipment, and, in view of the great variety of opinions expressed by railway accounting officers, as well as by certified accountants and others, relative to this point, it seems proper to submit an explanation of the reasons for the rules here promulgated. Before submitting [9 that explanation, however, it may be proper to say a word relative to a new feature of this Classification, namely, the establishment of formal depreciation charges.

Consideration of Depreciation:

A number of points have been raised by correspondents relative to depreciation that call for the following general statements, all of which bear upon the manner in which depreciation accounts should be treated:

1. The question of depreciation is fundamentally a question of values, and not a question of maintaining the original capacity, or a standard of operating efficiency, or of keeping full the numbers in equipment series.

2. The depreciation rules may be worked either on the basis of the value of individual cars and locomotives, or on the basis of the value of series of cars and locomotives. On this point, accounting officers are at liberty, until advised to the contrary, to follow whichever method seems to them the more appropriate.

3. The basis of accumulation-that is to say, the amount to which the percentage rate is applied—ought, in strict theory, to be the original cost. For the current year, however, accounting officers are at liberty to accept original cost (estimated, if not known), record value, or purchase price. The term "record value" should not be interpreted to mean the value of the equipment as it stands in the capital account (unless that account represents the original value of the equipment on hand), but the actual cost or value of all equipment, regardless of where charged when purchased; and in case purchase price be accepted as the basis of the percentage charge to depreciation, the percentage rate should be limited to the rate required to replace the price paid. A second-hand locomotive, for example, is not called upon to provide for its replacement, when abandoned, by a new locomotive. As stated above, it is [10 values and not locomotives with which depreciation charges deal.

4. The application of depreciation charges for the current year and subsequent years must not be influenced by the practice of years past. In case property has been appreciated by excessive charges to operating expenses in years past, the value thus placed in the property must be regarded as a permanent undivided asset to the stock

holders. On the other hand, in case property has depreciated on account of insuf ficient charges to operating expenses in years past, this fact must not be permitted to influence the determination of the depreciation rate for the current year.

5. The monthly charges to operating expenses for " depreciation' on the several classes of equipment, will, of necessity, create or require corresponding liability accounts to which such depreciation may be credited. To that end, carriers will be required, beginning July 1, 1907, to set up an appropriate liability depreciation account for each of the several classes of equipment upon which depreciation is charged. These accounts should be designated as follows:

(a) Locomotives-Replacement (including both steam and electric);
(b) Passenger-Train Cars-Replacement;

(c) Freight-Train Cars-Replacement;

(d) Electric Equipment of Cars-Replacement; (e) Floating Equipment-Replacement;

(f) Work Equipment-Replacement (except locomotives).

To these replacement accounts should be credited monthly the amount of accrued depreciation on each class of equipment, respectively. Such credits should invariably equal the gross charges to maintenance for depreciation. [11 To these several replacement accounts under their appropriate heads should be charged, at cost, all equipment purchased, built, or otherwise acquired for the purpose of maintaining the value of a carrier's equipment.

The monthly charges to operating expenses for "renewals" of the several classes of equipment will be similarly treated.

It is not intended that these accounts should be restricted to individual cars or locomotives, or that carriers are not at liberty to renew or replace equipment upon which depreciation has accrued prior to the retirement of such equipment. On the other hand, the several amounts standing to the credit of those replacement accounts should be available to carriers for the purpose of replacement of equipment to the extent of such credits; however, all replacements in excess of such credits must be considered as Betterments or Additions, and charged either to Income or to Capital.

Per Diem and Mileage Payments Between Carriers:

In the second revised issue of the Classification of Operating Expenses, "Car mileage-balance" and "Hire of equipment-balance'' were charged directly to operating expenses under the general account "Conducting Transportation." The propriety of including such items in operating expense accounts has been questioned by many railway accountants, it being claimed that the amount paid by one carrier for the use of cars and locomotives of another carrier is in its nature a rent and not an operating expense.

This suggestion, that the per diem and mileage for cars, for example, should be treated as a rental proposition, while in the main correct, involves a result which from the statistical point of view cannot be wholly approved, for the reason that [12 under the regulations for depreciation operating expenses are charged with the depreciation upon the total equipment of the carrier, while, as a matter of fact, some or all of that equipment may at some time or other during the year be in operation on the line of another carrier. Such a method of treating per diem and mileage payments would burden the general account "Maintenance of Equipment" of a lessor road with an expense not traceable to the traffic of the lessor road. From the statistical point of view, operating expenses are a measure of the cost of transportation, and no expense should be included in the operating accounts of one carrier that is occasioned by the traffic of another carrier, from which it follows that the Maintenance of Equipment accounts of a lessor road should not be burdened with Repairs, Renewals, or Depreciation occasioned by the use of its cars by a lessee road, for not only would this make the account in question too high when assigned to the traffic of an individual carrier, but it would destroy comparison between the Maintenance of Equipment accounts of lessor and of lessee roads.

A complete analysis of the situation discloses the fact that the gross rental charge is in part an operating expense and in part a rent proper, and the Classification herewith promulgated provides for the separation of the gross rental charge accordingly.


To that end it is held that while the operating expenses of a carrier should include charges on account of

(a) Repairs incident to operation,

(b) Premature retirement of equipment, and

(c) A proper depreciation on equipment,

they should also include, under an appropriate account, a proper charge for wear and tear of another company's equipment while in use on the lines of the carrier company. At the same time the carrier's operating expenses should receive credit through [13 an appropriate account for a proper proportion of wear and tear on its equipment while in service on the lines of other companies, and these debits and credits should be made against the rents paid and received for the use of such equipment.

The chief difficulty in arriving at an accurate measure of wear and tear of equip ment under the foregoing conditions arises from the fact that shop accounts do not readily furnish the necessary information for an accurate division. Until a more accurate measure of this class of repairs can be determined from the experience of carriers, it is necessary to lay down an arbitrary rule for that measure, and, for the current year, in the case of freight cars interchanged, 12 cents per car per day will be charged and credited to operating expenses under "Maintenance of Equipment,'' and the remainder of the rental charge will be carried to the income account through an appropriate clearing account as representing approximately the measure of net rental paid or received.

To the end that the payments made and the revenue earned on account of interchanged equipment may be properly taken care of through the income account, and that operating expenses may finally include a proper proportion of the wear and tear on equipment owned by other carriers, companies, or individuals, and used upon the line of a particular carrier, from July 1, 1907, carriers will be required to open a clearing account, to be designated as

Clearing Account-Hire of Equipment.

To this account should be charged monthly:

(1) The gross accruals for the use of equipment of all classes belonging to another carrier or company on a basis of Per Diem, Mileage, or Rental. [14 To it should be credited monthly:

(2) The gross accruals for the use of a carrier's equipment while on the lines of other carriers, companies, or individuals ("car service" excepted), either on a basis of Per Diem, Mileage, or Rental.

To it should also be charged monthly:

(3a) An amount equal to 12 cents per car per day for the number of car-days a carrier's freight-train cars are on the lines of other carriers or in use by other companies or individuals.

(3b) A percentage proportion of the depreciation charge for each class of equipment other than freight train cars, based upon the equipment-days a carrier's equipment of that class is on the lines of other carriers or in use by other companies or individuals.

Note. These two debits should invariably equal the monthly credit to Maintenance of Equipment under the primary account "Equipment Loaned-Cr.'' To it should also be credited monthly:

(4) An amount equal to 12 cents per car per day for the number of car-days freight-train cars of other carriers, companies, or individuals are on the line of the carrier company.

Note.-This credit should invariably equal the debit to Maintenance of Equipment under the primary account "Equipment Borrowed-Dr.''

This account should be balanced at the close of each fiscal year, or periodically, at the option of the carrier, and the balance thereof carried as a debit or a credit, as the case may be, to Income Account as "Hire of Equipment.'

Attention is called to the fact that by means of the adjustment of per diem [15 and mileage payments between carriers herewith prescribed, operating expenses are made to serve the double purpose of disclosing the true measure of the cost of traffic,

notwithstanding the fact that one road owns more and another road owns fewer cars than it operates, and, further, of disclosing the full cost of maintaining equipment, whether such equipment is used by its owner or by another carrier.

To the end that uniformity of operating accounts may be maintained from year to year, carriers will be required to submit all questions of doubtful interpretation to this office for consideration and decision.

Henry C. Adams,

In charge of Statistics and Accounts. [16

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Other Expenses..

Maintaining Joint Tracks, Yards, and Other Facilities-Dr.

Maintaining Joint Tracks, Yards, and Other Facilities-Cr..

II. Maintenance of Equipment


Steam Locomotives-Repairs...
Steam Locomotives-Renewals.
Steam Locomotives-Depreciation.
Electric Locomotives-Repairs..
Electric Locomotives-Renewals.

Electric Locomotives-Depreciation.

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*Numbers refer to folios in brackets on right-hand side of pages, which are inserted to preserve page numbers of original issue.

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