In June, a spokesperson for the Department of Defense announced that the value of equipment transferred to Ukraine, originally valued at $6 billion, was “corrected” to $3 billion. The prior month, the Pentagon had made a similar correction.
Initially, the equipment was valued at replacement cost. That is, the equipment was valued at the cost of acquiring new equipment sufficient to replace the transferred equipment. As corrected, the equipment was transferred at historical cost less depreciation. That is, at the cost of acquisition at the time of acquisition, less an amount determined by the equipment’s expected useful worklife.
The first valuation, replacement cost, supposes the equipment is well-maintained, and thus has the same expected worklife as when it was new. This assumption clearly overstates the value of the equipment. By reason of technological obsolescence as well as physical wear and tear, the value today of equipment acquired in the past is probably lower than its cost at the time of acquisition.
The second valuation, historical cost, supposes the equipment can be replaced today at the same cost as at the time it was acquired. This assumption clearly understates the value of the equipment. By reason of inflation, it probably costs more to replace old equipment now than it cost in the first place.