An Evaluation of Proposals to Reinstate Fully Amortized Emergency War Facilities When They Are Useful for Post-War Operations

173 Pages·13.578 MB·English

by  McCullough, Elzy Vern, Jr

AM gVALUATIOK OF
PROPOSALS TO REINSTATE
fully moRTim® emergence war facilities
WHEN THEY ABE USEFUL FOR POSTWAR OPERATIONS
fcy
Elzy Vera Me Co Hough, Jr*
A dissertation submitted In partial fulfillment of the
requirements for the degree of Doctor of Philosophy
in the Department of Accounting
In the Graduate College of the
State University of Iowa
June 1951
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Following the 3eeon& World far much discussion
developed concerning the accounting treatment of fully
amortized emergency war facilities* Ho definite conclu­
sions for account lag presentation have developed and at
the present time the problem continues.
Since the beginning of this dissertation the
Korean situation, and the national rearmament program
have combined to reintroduce new emergency war facilities
and accelerated amortization* fhe Importance of this
topic is augmented by this repetition* A decision in
respect to the proper accounting treatment of emergency
war facilities la urgently needed in order to prevent a
repetition of the mistakes committed during the last
emergency and the confusion resulting therefrom*
ill
fABDE OF COHTEM8
■Chapter page
I Introduction* « • « • # . . « t * « • * * « • • . 1
11 Definitions# Postulate® and Principle©* * * * * * 0
Definition of Accounting Terms * • * * t # « $
Accounting Postulates*. « * * * * .* * * * * * B
Accounting Principles^-fixed Assets,* * * * # BO
III Depreciation Accounting * « * • « • * * * # * * * 26
What is.the Beeson for Depreciation.
Accounting?* * * * « . • * * * « * » * * # « 20
The, Beteminat 1 on of Periodic Expense
Arising from the 'ds© of Fixed Assets « * * « ■ 4#
Correction of Depreciation » * * « + * # * • 57
X? imergenoy War Facilities* * * * • * * * • * * « • 64
Provisions of the Internal Revenue Code* • ♦ 64
Treatment During the War • * « # « » • » * » 66
V Fostirar Treatment of'Emergency War Facilities • • 60
situation and Eroblem* .' *, * ♦ « * * * * « * « 70
Amortisation Reinstatement # # * * ; « « # # * 72
Menem « Inatatement of Fully Amortised
Emergency Facilities * * « * • * * * * * « * 80
'71 Summary and Recommendations * * * * * * * * * « * 124
Summery * * ■ * ■ * • * «r * * # * ' • * * * * * » * 124
Current Situation* # « * « * * * » * * * * « 15#
Recommendations*' * # « « • » * » * * * * * » 130
Appendix A^&ummary of .Annual Reports Contain*
ing .References to Emergency War
Facilities* * * * # * • « * » • * » • 132
Appendix 8**S»tra©t» fror* Annual Reports * * * * * 142
Bibliography* * * * . * • # . * * * . * * * * ♦ ♦ # 153
iv
CUttX OF CABLES
fafcla page
X Proposed Presentation of Emergency Facilities* * • 100
XI Response of Flfty**flve Corporation© to the
Request for Copies of their Annual Reporta * * * * 133
111 A flummery of the Information Concerning JSmergency
War Facilities As leper ted In the Annual Reports
of fm&tw**!* Corporations inuring the Period 1940
to 1948# Inclusive * # * * * « * . « # * # * . * * • 13d
Ilf Summary of the Exporting of Emergency Faellitiee
" During the Period 1940 to 1944 * « # + • * • # • • 136
¥ Comparison of the Sk&ergeney Facility Information
Contained in the Annual Reports of 1944 and 1945
With Wttergeney Facility Information Contained In
the Annual Reports of 1946 and 1947* * » # # « * « 139
¥1 Summary of Information Reported Ooncerlng Emer**
geaey Facilities aa It Relate® to the Per Cent
of total Fixed Assets Which Were Emergency
Faeillties in 1943 * * * * * * * * * * * * * * * * 140
v
Chapter X
xvnomic^xov
Sine® th© turn of the century accounting lias
attained recognition as on® of the professions* Before
achieving this recognition, there was a long period ©f time
when the basic postulate® and principles belonging to the
field were not grouped and generally recognised* In a pro­
fession which had completed Its initial growth the lack of
such generally recognised and stated postulates created a
serious handicap* taring the thirties this handicap was
emphaslc©& by a series of events* The leaders In the field
became aware that a body of postulates and principles wa®
urgently needed# There was m strong likelihood that If such
postulates and principles were not developed by the account­
ants themselves governmental regulatory bodies would inter­
vene and develop them* taring the past fifteen years marked
advances have been made toward evolving a coherent body of
accounting postulates* These have been organised not with
the aim of making accounting a static formalised profession*
but . with the twofold' purpose of stating the basic underlying
postulate# of the profession for the guidance of its own
members, and of Increasing the usefulness of reports pre­
pared from accounting data* '
2
Some of the Interesting problems In accounting
have their' origin- in events which prompt a questioning of
mm®' of the postulates advanced earlier# Accounting for
oxt&argemcy war facilities la swob a problem*
during the second world war a provision in the
federal income tax law was Initiated* the purpose of which
was to encourage* the acquisition of certain facilities nec­
essary to the war effort*® The application- of the tax pro­
vision enabled firms to ©mortise completely the facilities
during the period of the emergency for the purpose of deter-
.mining taxable.net income# tony organisations applied the
above procedure to their accounts and financial statements,
'and at the end of the war were left with valuable facilities
of significant post-war usefulness. However* they had been
completely* or nearly completely amortised under the accel­
erated amortisation practiced during the war#
With the eeneluaton of the emergency period and
■k* The encouragement was .In the'form of permission by the
government for the firms to deduct.the total cost of the
facilities from the revenue© of the emergency period in the
determination of taxable income* This resulted in a signif­
icant tax saving to the firms since the provision reduced
the revenue subject to the inflated income and excess prof­
its taxes of the period*
®* These facilities were called “emergency war facilities”
after the title given to them by the federal income tax law.
the. entrance Into tfa& pm% war period, those organisation
whieii.had amrtls©^ their ©laer-gency war facilities at the
&##©l©rj&t©4 rat© discovered- that i (1) taoj war© using these
amorblised facilities for productive purposes; (2) the
facilities were not included in the balance sheet at any
^hook ¥aluewl (5) no expense a were being charged against
revenue in their.financial statements for the productive use
of the facilities#
Consideration of these fact© led to a division of
opinion among accountants over the accounting presentation
of emergency war facilities In financial statements# Two
methods of presentation were advocated$ (1) reinstatement
in some degree of the amortised cost; (2) no reinstatement
of the amortised cost# Tbm difference of opinion as to the
accounting presentation of emergency war facilities in finan­
cial statements has continued and has resulted in *a question­
ing of the accounting postulate that a cost once amortized
should not be reestablished In the accounts# (Reinstatement
for tax purposes 1© not possible, of course, and no ques­
tions arise in this respect*)
i w m &
fhis study will review emergency war facilities as
they relat#. to the-accounting postulate that a cost once
4
amortised should met fee reestablished in the accounts* A
reooms^m&afcien will fee tikadev (a) as to the retention 02*
revision of the postulate, and (b) as to the accounting pro**
sanitation of emergency war facilities*.
the Procedure to' Be Imnlowd
I* A group of currently advocated accounting postu­
lates and fixed asset principles will he presented^
Such a statement la necessary for the ©valuation
of accounting procedures advocated by various
accountants or accounting organisations#
XX* A review of depreciation accounting will be incor­
porated to provide a better understanding of
underlying facts since the question of emergency
war facilities Is but one aspect of depreciation
accounting* The review will be acoos^>llshed by an
analysis of the purposes and procedures advocated
by members of the profession for depreciation
accounting* The analysis will be presented as a
The accounting postulates have been drawn largely from
the current- reeemmehdmtton of the American Accounting Asso­
ciation# They have been regrouped and revised* The latest
reoemendation is 1 Executive Committee of the American
Accounting Association# '^Accounting Concepts and Standards
Underlying Corporate Financial Statements% Accounting
Beyiyw* fol# ,!e* 4# Oct# 1948, p* 340 ff*
s
direct background for the procedures advocated
reXewmnb fee thm problem of emergency war facile
itlea*
XXI* A study will be made of the account lug present a**
tlon of emergency war facilities*
A* A discussion with respect to the nature of
emergency war facilities and their accounting
treatment during the emergency will fee given*
It was this treatment which created the prob­
lems with which the Inquiry is concerned*
B* A presentation Of the two .methods advocated
for the presentation of the emergency war.
facilities and a weighing of the arguments
pro and con*
XV* ^eeomsndatlon will fee offered as to the proper
accounting presentation of emergency war facil­
ities fully ©mortised with m remaining service
life*
V* ffh© actual accounting treatment given emergency
war facilities as revealed fey the annual reports
mf twenty-*el'T*- corporations will fee discussed#
** hettere were sent to flf&y^flvo oorpor©felons requesting
their Ammml reports for X®40»4© Inclusive* fifty sets were
studied for references concerning emergency war facilities*