Inflation accounting and Nonfinancial Corporate Profits: Physical Assets

자료: http://faculty-gsb.stanford.edu/bulow/articles/Inflation%20accounting%20and%20nonfinancial%20corporate%20profits%20financial%20assets%20and%20liabilities.pdf

John B. Shoven, Jeremy I. Bulow

※ 메모: 

The Definition of Real Corporate Profits: 

It is widely recognized that inflation of the general price level and relative price adjustments distort and cloud themeaning ofcorporate accounts and, therefore, also corporate taxation and the portion of the national income accounts (NIA) that is based on corporate financial statistics. The distortion arises primarily because under current accounting practice firms carry many physical and financial assets and liabilities at original cost or book value, figures that are expressed in dissimilar units and that may deviate widely from current market value or replacement cost. Accounting practices also differ greatly across firms and between tax and book financial reports for the same company. These practices may create unnecessary inefficiencies

in taxation and investment, and increase difficulty in predicting or assessing the cyclical position of the economy. Indeed, there has been some speculation that the recognition ofthe 1974—75 recession was delayed by the distorting effects of inflation on reported business statistics. 1)

1) See, for example, James P. Gannon, “Analysts Now Agree Recession’s Key Cause Was Rampant Inflation,” Wall Street Journal, April 25, 1975.

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The first issue to be addressed in such a study is the definition of corporate net income or profits. Corporate income figures are used for a wide variety ofpurposes. They serve as a base for corporate taxation, as a guide to investment allocation and management performance, as an ingredient in the construction of national income accounts, and as data for determining the functional and personal distribution of income. No single concept or measure of income will always be optimal for all of these uses. While we will focus on a definition that we find most appropriate for income or welfare comparisons, other constructions will be describedand the

available data necessary for their evaluation will be presented here and in the sequel.

In discussing income definitions, the initial question is whose income is being estimated. There are several classes of claimants on the assets and income flows of a firm, including bondholders, banks and other short-term lenders, and preferred and common stockholders. In our work, profits are taken to be a measure of the increase in real economic power of the equity holders due to their investments. This definition is consistent with current accounting practice and with the tax base of the present corporation income tax.

A fuhdamental choice faced in defining corporate profits is between using a realization or an accrual basis. An identical issue exists in assessing personal income. The fundamental question is whether assets and liabilities should be carried on balance sheets at historical cost or at current market value. When is economic power enhanced—at the time the market value of an asset increases (or a liability decreases), or when these changes in value are converted into cash? Present corporate accounting practices adopt a combination of the accrual and realization criteria. While accounts receivable and payable are accrued (that is, treated as equivalent to cash), other financial assets and liabilities of nonfinancial corporations are carried at their issue or purchase prices until redeemed or sold, a convention consistent with a realization principle. Land and other real capital assets that are deemed nondepreciable andnondepletable are also carried at purchase price. Real depreciable assets are written down from original cost according to a presumptive schedule of the effects of wear, tear, and obsolescence. The depreciation aspect of this policy can be interpreted as an attempt to approximate accrual accounting for these items, while the original-cost basis is more consistent with the realization principle. As will be described

below, current accounting practice with respect to inventoried assets in effect gives firms a once-and-for-all choice between accounting methods that approximate the accrual or realization definitions of income. The present accounting system rests on an intended logic with respect to the accrual-realization choice, although it has not been implemented as precisely as it might. One of the major tenets of financial accounting is the going-concern assumption, according to which the firm will continue in its particular productive activity indefinitely.4)  It is in the business of selling some things and using (not selling) others (like physical plant and equipment).

Since these latter items are not going to be sold, their current market value is not relevant for the firm. This classification of goods implies accrual accounting on items that the firm sells and a realization method on those that it does not. ...