Recognising reality

Press, 29 February 1984, Page 30

Recognising reality

Third, when accountants reject historical cost in favour of market values they recognise reality. And reality means that there is no essential difference between current assets and long term or fixed assets. Monetary resources are put into non-monetary form if managers believe they will not lose by doing so. Managers liquidate their assets, whether current or fixed, when they believe the market value has reached its peak or when they are in need of cash. And if current assets and fixed assets are essentially the same there can be no logical reason for valuing one at market value and the other at historical cost. Market value should be used for all assets. It has been argued in the

past that because fixed assets are held for use and not for resale it is appropriate to state them at historical cost. This is a false argument. Not only does the use of historical cost produce a meaningless statement of financial position, but managers can and do sell so-called fixed assets if their market price is high enough. In doing so they may not necessarily lose the use of the assets. It is simple to lease back the assets and so have the best of both worlds — improved liquidity plus the continued use of the assets. The 1983 annual report from Firestone shows this clearly. The managing director reports that &nce date the company has solaiand leased back 13

of its 15 company-owned stores. A tax free capital profit of about $2 million will be recorded in the 1984 financial statements. The annual rental charges under the arrangement are less than the equivalent interest cost on the value of the assets. Finally, if a balance sheet is prepared using market values, so that it truly shows financial position in contemporary terms, it will be possible to prepare a meaningful statement of changes in financial position. At present that statement fails more often than it succeeds in its task of supplementing the income statement and balance sheet. But that is the subject of the next article in ihis series.