Decline in the current value of fixed assets from physical deterioration, normal obsolescence, aging, and expected accidental damage during production.
Capital consumption, formally consumption of fixed capital (CFC), is the decline during an accounting period in the current value of fixed assets used in production because of physical deterioration, aging, normal obsolescence, and normal accidental damage. It is an imputed economic cost, not necessarily a cash payment or the same amount as company-reported depreciation.
Consumption of fixed capital reflects expected declines in value from:
It applies to produced fixed assets such as structures, machinery, equipment, and qualifying intellectual-property products. It does not measure depletion of non-produced natural resources such as oil deposits or land degradation under the ordinary fixed-capital definition.
War losses, rare catastrophic disasters, and unexpectedly rapid technological obsolescence are not normal production costs in the System of National Accounts. They are generally recorded in an other-changes-in-volume account. Holding gains and losses caused only by price changes are also distinct from capital consumption.
This separation matters. A building destroyed by an exceptional earthquake reduces the capital stock, but treating the entire loss as ordinary annual CFC would distort current production cost.
| Consumption of fixed capital | Company accounting depreciation |
|---|---|
| National-accounts economic measure | Financial-reporting allocation and measurement |
| Based on current value of fixed assets | Often based on recorded cost and accounting estimates |
| Uses modeled service lives and depreciation profiles | Uses policies required or permitted by accounting standards |
| Supports gross-to-net macro measures | Affects entity profit and carrying amount |
| Not a direct cash outflow | Also a noncash expense, but tax and cash effects can differ |
The two may be related, especially in U.S. BEA terminology, but they should not be assumed equal for a company, industry, or period.
Suppose an economy begins the year with 500 billion of net fixed capital. During the year it records:
80 billion;45 billion; andNet fixed capital formation is 35 billion. Gross investment exceeded the value consumed, so the net stock increased. If CFC had been 90 billion, net fixed formation would have been negative 10 billion even though gross investment remained positive.
Subtracting CFC converts certain gross national-accounts measures into net measures. For example, net domestic product is gross domestic product less consumption of fixed capital. The net measure recognizes that some current output is needed to replace value used up in producing that output.
Net does not automatically mean better for every analytical purpose. Gross measures are often more timely or internationally available, while net measures depend heavily on asset-life and depreciation assumptions.
CFC helps analysts distinguish investment that merely offsets aging assets from investment that expands net productive capacity. It can provide context for infrastructure replacement, equipment demand, potential output, and the sustainability of public or private capital stocks.
At company level, analysts often make a related comparison between capital expenditures and depreciation. That shortcut can be useful but is not a direct substitute for national-accounts CFC or a detailed review of maintenance and expansion spending.