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Nexen, Inc. (NYSE:NXY)
Depreciation, Depletion and Amortization
\$1,956 Mil (TTM As of Dec. 2012)

Nexen, Inc.'s depreciation, depletion and amortization for the three months ended in Dec. 2012 was \$645 Mil. Its depreciation, depletion and amortization for the trailing twelve months (TTM) ended in Dec. 2012 was \$1,956 Mil.

Definition

Depreciation is a present expense that accounts for the past cost of an asset that is now providing benefits.

Depletion and amortization are synonyms for depreciation.

Generally:
 The term depreciation is used when discussing man made tangible assets
 The term depletion is used when discussing natural tangible assets
 The term amortization is used when discussing intangible assets

Nexen, Inc. Depreciation, Depletion and Amortization for the trailing twelve months (TTM) ended in Dec. 2012 was 399.39637827 (Mar. 2012 ) + 474.708171206 (Jun. 2012 ) + 436.605316973 (Sep. 2012 ) + 645.454545455 (Dec. 2012 ) = \$1,956 Mil.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Explanation

One of the key tenets of Generally Accepted Accounting Principles (GAAP) is the matching principle. The matching principle states that companies should report associated costs and benefits at the same time.

For example:

If a company buys a \$300 million cruise ship in 1982 and then sells tickets to passengers for the next 30 years, the company should not report a \$300 million expense in 1982 and then ticket sales for 1982 through 2012. Instead, the company should spread the purchase price of the ship (the cost) over the same time period it sells tickets (the benefit).

To create income statements that meet the matching principle, accountants use an expense called depreciation.

So, instead of reporting a \$300 million purchase expense in 1982, the company might:

 Report a \$30 million depreciation expense in 1982, 1983, 1984...and every year after that for the 30 years the company expects to sell tickets to passengers on this cruise ship.

To calculate depreciation, a company must make estimates and choices such as:

 The cost of the asset
 The useful life of the asset
 The salvage value of the asset at the end of its useful life
 And a way of spreading the cost of the asset to match the time when the asset provides benefits

The range of different ways of spreading the cost under GAAP accounting is too long to list. However, public companies in the United States explain their depreciation choices to shareholders in a note to their financial statements. It is critical that investors read this note. Investors can find this note in the companys 10-K.

Past depreciation expenses accumulate on the balance sheet. Most public companies choose not to show this contra asset account on the balance sheet they present to shareholders. Instead, they simply show a single item. This single asset item may be marked Net. Such as Property, Plant, and Equipment - Net. It is actually the asset account netted against the contra asset account.

A contra asset account is an account that offsets an asset account. So, for example a company might have:

 Property, Plant, and Equipment - Gross: \$150 million
 Accumulated Depreciation: \$120 million
 Property, Plant, and Equipment - Net: \$30 million

In this case, the only item likely to be shown on the balance sheet is Property, Plant, and Equipment - Net. This is the cost of the companys property, plant, and equipment (asset account) minus the accumulated depreciation (the contra asset account). It means the companys assets cost \$150 million, the company has reported \$120 million in depreciation expense over the years, and the company is now reporting the assets have a book value of \$30 million.

It is possible for a company to have fully depreciated assets on its balance sheet. This means the companys estimate of the useful life of the asset was shorter than the assets actual useful life. As a result, the asset - although it is still being used - is carried on the balance sheet at its salvage value.

This is a reminder that depreciation involves estimates and choices. It is not an infallible process.

Companies do not have cash layout for depreciation. Therefore, depreciation is added back in the cash flow statement.

Although depreciation is not a cash cost, it is a real business cost because the company has to pay for the fixed assets when it purchases them. Both Warren Buffett and Charlie Munger hate the idea of EDITDA because depreciation is not included as an expense. Warren Buffett even jokingly said We prefer earnings before everything when criticizing the abuse of EDITDA.

Be Aware

Depreciation estimates make the calculation of net income susceptible to managements accounting choices. These choices can be either overly aggressive or overly conservative.

Related Terms

Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Nexen, Inc. Annual Data

 Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 DDA 774 610 906 975 1,763 1,632 1,710 1,649 1,868 1,971

Nexen, Inc. Quarterly Data

 Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 DDA 462 425 379 -120 408 780 399 475 437 645
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