THE YA STATIONS

Evening Post, Volume CXIV, Issue 103, 28 October 1932, Page 8

THE YA STATIONS

COST TO THE STATE

JUDGE'S ASSESSMENT

BASIS OF VALUATION

DEPRECIATION PROBLEM

The text of the award made by Mr. Justice Blair,-who acted as arbitrator, in the dispute between the Government and the Radio Broadcasting Company over the valuation" of the company's assets -which.have been taken over by the State was presented to the House of Representatives to-day by the Post-master-General (the.Hon. A. Hamilton). In a covering memorandum the Minister states that the valuation of the assets of the company mads by the officers of the Post and Telegraph Department amounted to £.27,353, but the "company claimed £ 85,812. The price fixed by the arbitrator was £ 58,646 6s 2d. Incidental to the purchase of the plant and apparatus from the Radio Broadcasting' Co., it was necessary to pay the company the sum of £5000 8s Bd, representing interest on the amount of fees collected on behalf of the company and held by. the Post and Telegraph Department in the Broadcasting Fund. "In accordance with the Broadcasting Act, 1931, I required the Broadcasting Board to pay the sum of £58,646 6s 2d for the stations and plant taken over by the board," stated the Minister. "That amount has been advanced by the Government to the board by of a loan, repayable in quarterly instalments over a period of ten years, with interest at the rate of 6 per centum per annum, reducible to 5 per centum per annum if paid within twenty days of due date. The new agreement with the board provides for payment by the Department of fivesixths (i.e., 25s per annum) of the fees received from listeners. Of the balance of the annual fee (30s), 3s per annum is paid by the Department for patent rights to Amalgamated 'Wireless (Australasia), Ltd." ' FEATURES OF JUDGMENT. Salient features of Mr. Justice Blair's judgment are given below:— "It was contended by the Crown . that the instructions to me to value . the assets 'as part of a going concern' had the effect of requiring me to approach the consideration of the subject .upon the basis of considering what percentage would be allowed in a broadcasting company's balance-sheet each ,year by way.of depreciation," said his Honour. "It was submitted that if reasonably-minded directors would in such a business allow, say, 10, 15, or 20 per cent! for depreciation, then the percentage so allowed was what I should adopt as proper depreciation for the company's plant. It was pointed out that the Commissioner of Taxes, so far as the company was concerned, had for income-tax purposes agreed to accept a certain percentage as reasonable depreciation, and this practice ■was strongly relied upon as affording evidence of the practice of business men. In other words, the Crown contended that'the basis of value was original cost, depreciated by such percentage as reasonable men, in conducting the affairs of that business, would in the company's balance-sheet allow. It appeared to me that such was not the proper basis, because no business- man buying a business would be' content to take mere book values, because such might well be appreciated, nor would any seller of a business who, for abundance of caution, has made drastic provision for depreciation, be content to sell the assets at less than their real value. It was pointed out to counsel for the Crown that the whole of the evidence already taken as to the value of the furniture'and fittings was upon the basis not of original cost, but of cost if bought new on the Ist January last with due allowance for depreciation howsoever caused. In other words, the basis of value claimed in respect of the furniture and fittings ■was its then true value having regard to the current market prices for the same goods, due allowance being made for wear-and-tear or other depreciating factors. The basis claimed by Mr. Currie in respect of the plant was thus an entirely different basis from that already claimed by the Crown in respect of furniture. So far as furniture and .fittings. were concerned, it was not disputed by the company that current prices, as compared with prices ruling some three or four years ago had fallen, but the company further claimed that current prices for plant which had to .be imported from America or Great Britain had depreciated by reason of alterations in duties and the rate of exchange. "For the Crown to adopt one basis disregarding original cost where the market had fallen, and another basis adopting original cost where the market had risen,, involved inconsistency, and Mr. Currie rightly, to my mind, conceded that only one basis could be adopted—namely,-by taking as the starting-point current prices as at the Ist January and deducting, proper depreciation. Mr. Currie also properly admitted that if original cost was not to be taken, then his scheme of annual •writings-off on a balance-sheet basis could not be adopted. QUESTION OF OBSOLESCENCE. "■Upon the question of the factors proper to be considered in the question of depreciation-there was difference between the point of view of the Crown and that of the company as to what ■were to be considered as constituting depreciation. The company did not dispute that -wear and tear, age, or obsoleteness -were factors which, properly came into consideration. The Crown, so far as the broadcasting plant was concerned, claimed that the factor designated as 'obsolescence' must also be considered. The distinction made between the tw^ factors ' obsoleteness' and 'obsolescence' -was that a plant or portion of a plant which was obsolete admittedly had little or no.value as plant, because if usable at all, it had been superseded by something better, and had, in the eyes of a purchaser, possibly only, 'scrap' value. "All radio broadcasting-plant is subject to the_ disability that throughout the world intensive research work is being carried'on, and'it may be that' the plant which to-day is.absolutely perfect, and the best and most efficient that money can' buy will in, say, five or ten years possibly' become obsolete owing to new discoveries in the art of broadcasting. It is .this liability to displacement by possible new discoveries which.is treated as covered by the term 'obsolescence.' The company does not _ dispute that present-day broad-casting-plant may- some day in the future, near or remote, be displaced by something better, just as ' silent' moving ■pictures have been, displaced by 'talking' pictures. But it is claimed, and I think rightly, that this so-called factor in depreciation called by the Crown 'obsolescence,' is not a factor which can in any respect be availed of in depreciating the value of the company's assets. Every new radio instrument, whether it be a receiving or transmitting instrument, is, so to speak, born with the taint of this 'obsolescence' on it. Every one who purchases such an instrument knows when he purchases it that there is a liability that some day, fear or remote, the instrument will be displaced by something newer and better. Yet he pays the market price for

such instruments, and cannot, by reason of this, taint of 'obsolescence' inherent in all such instruments, buy them at less than the ordinary market price. If this 'obsolescence' must be taken into account in fixing the price of a" secondhand instrument, then it follows that the same rule should apply to a perfectly up-to-date and unused instrument. If at the moment the Crown took possession of the Wellington Statiou_ the company had just completed the installation of the newest and most up-to-date instrument procurable in the world, at a cost of, say, £10,000, the market price of such equipment would be the figure at which it had just been bought. But if the Crown's contention as to 'obsolescence' is to prevail, it could not be disputed that that perfectly new plant was subject to the risk of being displaced by something newer or more efficient, according as thff art of broadcasting or something in its place progressed." Mr. Justice Blair said he rejected the contention of the Crown that special depreciation had to be assessed in respect of the quality of obsolescence inherent in all broadcasting equipment.

"In dealing with the question of depreciation I have not overlooked the fact that owing to certain advances made in the manufacture of broadcasting equipment, the equipment of to-day is in certain respects more efficient than the equipment at \ the company's stations," states the judgment. "A person proposing to equip a broadcasting station to-day, and having the means of buying the very latest equipment, would not pay the same price for something made three or four years ago, even if the latter had never been used, if the earlier model were less efficient than the later model. And if, in addition, the old model had been subjected to a certain amount of use, a buyer -mould offer a less'price on this account. CROWN'S POSITION. "The Crown in the present case is not an untrammelled buyer free to search the world for the latest in transmitting equipment. It has, on the contrary, agreed to buy the very plant that the company is using in its business. This plant to-day is worth the market price of such an equipment if purchased new to-day in .competition with later, better designed, and more efficient plants, but subject to the additional deduction due to the fact that the company's plant is not new, but is second-hand. Although the company's plant has been in use for four years or so, it is to-day, just as efficient as when it was new. And given reasonable maintenance and renewals for certain wearing parts such as valves generator bearings, commutators, and the like, the, plant has a more or less indefinite life because the majority of its parts are stationary, and are not subject to any wear.

"The experts for the .Department were handicapped by the fact that they had had little experience in the practical work of broadcasting, and their evidence was in. the main theoretical and. derived from study rather than practice. The expert for the company,! J»lr- Bmgharn,, in addition to theoretical knowledge, had .behind him the valuable practical, experience, of supervising the company's operations for about five years. . This officer is being taken over by the Department, and there is this much to be said for his evidence that I am satisfied it was given with the utmost frankness and sincerity, and, his engagement with the company being terminated, he has no possible interest in being other than fair to the Department, which is now his employer. Indeed, it might be said that as he will be in charge of the plant and responsible for its satisfactory functioning, his interest would be to point rather to its weaknesses than to its strength, seeing that any failures in the future due to weaknesses in the plant would, if he unfairly denies their present existence, be attributed to his personal neglect or inefficiency, if later disclosed. He would indeed be handicapped in serving the Department if, having now designated as efficient a plant which he knows to be inefficient, this same plant in use disclosed weaknesses the existence of which he now denies. "Mr. Bingham did not dispute that all the company's plants were not equipped with, all the improvements mentioned by the Department's officers as standard in the newest designed plants, but he said that these improvements were in thp nature of refinements, the advantages of which would be perceptible only to experts; but, from the point of view of practical and efficient broadcasting, the listeners, who are the customers of the business, would be quite unable to distinguish the 'difference. "UNDULY PESSIMISTIC." "I translate his opinion as being that, for all practical purposes, the present plants would accordingly to their capacity render to the listeners just as good service as the very latest plants. I think that the Department's officers, in the opinions they have expressed as to the life and usefulness of the plants, have been unduly pessimistic. No experts unconnected with the Department were called on behalf of- the Crown. I have no doubt on the evidence that, given reasonable care, these plants will for the next twenty years Tender as good service as that which they are to-day rendering. Some of the latest improvements can be added if later it Bhould be deemed desirable, but I think that Mr. Bingham's opinion is sound that to do so would be going to unnecessary expense without any perceptible result so far as listeners are concerned. And this want of perception on the part of the listeners will be due not to the fact that the added equipment will not properly function, but to the fact that such addition is a mere refinement producing no result observable by the customers of the Department. '-

His Honour said that the Crown claimed that the whole plant should be depreciated to the extent of 60 per cent, of its original cost and most of the claim was for "obsolescence" which was rejected. No attempt was made to separate "obsolescence" from "obsoleteness" so that ho had no assistance from witnesses of the Crown upon the real point in the case. DEPARTMENT'S ASSESSMENT. "Moreover, although the Crown in its opening led.me to understand that it claimed that the proper • value was to bo arrived at by taking the original cost and deducting 60 per cent, from such original cost, it appeared during the hearing that the Department, for some reason not explained, refused to avail itself of the opportunity given to it by the company of ascertaining what the original cost was," stated his Honour. "What the Department did was to ignore figures showing what had actually been paid by the company, and the Department's officers then attempted to ascertain what was the original cost either by insufficient inquiries from outside sources or by mere valuation.! By adopting this process' the alleged original cost was a figure- never above the actual cost, and in many instances, a figure well below the actual cost. The Department was thus departing from its own basis, because it lowered the actual cost, and then asked me to award 60 per cent, depreciation on such lowered cost. This meant that I was asked to award depreciation in greater proportion than the Department itself claimed. .. . The difficulty I am faced with in considering the Department's figures for valuation of the plant ia, firstly, that they entirely ignore actual cost; secondly, I have no means of knowing precisely how they arrived at their estimates as to the original cost; thirdly, they claim 60 per cent, depreciation, and it is admitted that this 60 per cent, is mainnot give me anjr indication what'propor-

tion of this 60 per cent, iras attributable to "obsolescence" and.what portion was attributable to obsoleteness. In the result the -whole of the Department's figures relating to plant and equipment -were of little use to me for the. purpose of ascertaining ivhat ivas the value of the plant c , ,