Thomas A. Ratcliffe
and Paul Munter
TEXAS TECH UNIVERSITY
ASSET VALUATION: AN HISTORICAL PERSPECTIVE
Abstract: Asset valuation has been discussed in the accounting and economic literature for most of the twentieth century. In the literature, discussions ranged from advocating only historical costing to the use of current value accounting exclusively. This paper traces the development of theoretical and pragmatic discussions on the topic of asset valuation.
Inflationary pressures in the developing environment of accounting have forced accountants to begin analyzing means of reflecting the impacts of inflation on financial statements. The notion of accounting for the effects of inflation on financial reporting is not new. During the early years of this century, the idea of current cost accounting was being deliberated. For example, Hatfield discussed current cost accounting as far back as 1909. Further, in discussing the differences between accounting income and economic income, Canning indicated a preference for current costs as a valuation mechanism. And in 1939, MacNeal went as far as to suggest that “truth in accounting” can only be attained when financial statements display the current value of assets and the profits and losses resulting from changes in these asset values.
This paper represents an attempt to trace the development of theoretic and authoritative thought concerning asset valuation issues. Two tables are presented to summarize this developmental process. Table I outlines the basic asset valuation conclusions of some classic theoretical works in accounting and business. While this annotated listing is not all-inclusive, it is representative of the related substantive works of this century. Table II summarizes the asset valuation conclusions in studies performed under the auspices of authoritative organizations within accountancy.
An analysis of the development of asset valuation thought reveals the reactive nature of accounting as a discipline. Seemingly without regard to the theoretical works on asset valuation, authoritative bodies in the accounting profession had not, by the 1930s, made
TABLE I ANNOTATED BIBLIOGRAPHY OF THEORETICAL VALUATION STUDIES
Author Hatfield
Canning
Bonbright
MacNeal
Hicks
Edwards and Bell
Staubus
Chambers
Sterling
Revsine
Year General Conclusions
1909 Historical cost is the appropriate valuation method for most circumstances, however current cost may be better at times.
1929 Assets should be valued based upon the future cash flows to be generated if such a measure is directly available. If not, an indirect measure (such as exit prices) may be used as a surrogate.
1937 Value to the Owner Concept—an asset’s value to the enterprise is what the enterprise would lose if it was deprived of the asset.
1 939 “Truth in Accounting” only exists when assets are valued at their current value, which is best mea-sured by replacement cost.
1 946 Income is a change in wealth, e.g. the amount which can be consumed in a time period to leave ending wealth equal to beginning wealth.
1961 For information to be useful in managerial decision making, replacement cost is the most appropriate valuation method.
1961 Investors are interested in cash flows, hence assets should be valued at the present value of the future cash flows to be generated to the enterprise.
1966 Assets should be individually valued at their current cash equivalent (exit price) and then summed to de-termine the aggregate value of the assets.
1970 Assets should be valued at the price for which the assets could be sold (exit price) as one basket of goods. This is an aggregate valuation as opposed to Chambers’ individual asset valuation.
1973 The long-term investor is interested in cash flows. Current replacement cost provides the closest ap-proximation to the present value of future cash flows generated by the assets and therefore should be used in valuing assets. any attempts to effectively operationalize the positions of current value advocates. In fact, the trend was to adhere more closely to historical cost as an approximation of value. However, over the past few decades, several influential accounting organizations have moved toward advocating some form of inflation accounting
Ratcliffe and Munter: Asset Valuation: An Historical Perspective although many of these approaches continue to adhere to the principle of historical costing.
Current trends in authoritative thought seem to indicate that authoritative rule-making bodies in accounting are moving toward recognizing the necessity for some form of inflation accounting. Witness for example the recent Financial Accounting Standards Board statement on constant dollar and current cost accounting. If it is in fact true that current values are more indicative of accounting truths than historical costs, apparently the accounting profession soon will be providing financial information that reflects “truth in accounting .”
TABLE II AUTHORITATIVE BODIES’ VALUATION STUDIES
Authoritative Body American Accounting Association
Year Study
1936 A Tentative Statement of Accounting Principles Underlying Corporate Financial Statements
1941 Accounting Principles Underlying Corporate Financial Statements
1948 Accounting Concepts and
Standards Underlying
Corporate Financial
Statements
1951 Price Level Changes and Financial Statements— Supplement No. 2 to the 1948 Statement
1957 Accounting and Reporting Standards for Corporate Financial Statements
1964 Accounting for Land,
Building, and Equipment —Supplement No 1 to the 1957 Statement
General Conclusions Historical Cost is only proper valuation base
Historical cost is only proper valuation base
Historical cost is proper valuation base but par-enthetical disclosure of current value may be needed if materially greater than historical cost
Historical cost is appropriate valuation base for primary financial statements. General price-level adjusted statements appropriate for supplemental disclosures
Does not specify an appropriate valuation base
Current cost and holding gains and losses should be reported in the primary financial statements
Authoritative Body
Accounting Research Division of the American Institute of Certified Public Accountants (AICPA)
Accounting Principles
Board
AICPA
AICPA Study Group 1973 on the Objectives of Financial Statements (Trueblood Committee) Financial Accounting 1974 Standards Board (FASB)
Securities and Ex-change Commission
FASB
FASB
Year Study
1966 A Statement of Basic Accounting Theory
1961 ARS #1 — The Basic
Postulates of Accounting
ARS #3 — A Tentative
Set of Broad Accounting
Principles for Business
Enterprises
1962 Statement No. 1
1965
ARS #7 — Inventory of Generally Accepted Accounting Principles
1969
Statement No. 3 — Financial Statements Restated for General Price-Level Changes Objectives of Financial Statements
Financial Reporting in Units of General Purchasing Power — Exposure Draft ASR #190
1976
1978 Reserve Recognition Accounting
1978 Financial Reporting and
Changing Prices —
Exposure Draft
1979 Financial Reporting and
Changing Prices —
SFAS #33
General Conclusions Dual presentation of historical cost and replacement cost in the primary financial statements Current costs should be incorporated into primary financial statements
Rejects ARS #1 and #3
Discusses state-of-the-art of accounting principles thus relies on historical costs Optional use of sup-plemental disclosure of general price-level statements
Use current values if they differ significantly from historical cost
Mandatory use of sup-plementary general price-level adjusted statements
Supplemental disclosure of replacement cost of plant assets and inventories with related expenses
Present value of future cash flows used as valuation base in primary financial statements
Mandatory use of sup-plementary current cost information
Requires reporting of constant dollar and current cost information for disclosure in annual reports to shareholders
BIBLIOGRAPHY
Accounting Principles Board. “Statement By The Accounting Principles Board,” Statement No. I (New York: American Institute of Certified Public Accountants, 1962).
Financial Statements Restated For General Price-Level Changes,” Statement No. 3 (New York: American Institute of Certified Public Accountants, 1969).
American Accounting Association. A Tentative Statement of Accounting Principles Underlying Corporate Financial Statements (Columbus, OH: American Accounting Association, 1936).
Accounting Principles Underlying Corporate Financial Statements (Columbus, OH: American Accounting Association, 1941).
Accounting Concept and Standards Underlying Corporate Financial Statements (Columbus, OH: American Accounting Association, 1948).
Price-Level Changes and Financial Statements, Supplementary Statement No. 2 (Columbus, OH: American Accounting Association, 1951).
Accounting and Reporting Standards for Corporate Financial Statements (Iowa City, Iowa: American Accounting Association, 1957). Bonbright, James C. The Valuation of Property (New York: McGraw-Hill Book Company, Inc., 1937). Canning, John B. The Economics of Accountancy (New York: The Ronald Press Company, 1929). Chambers, Raymond J. Accounting, Evaluation and Economic Behavior (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1966). Committee on Concepts and Standards. “Accounting for Land, Buildings and Equipment,” Supplementary Statement No. 1 (Accounting Review, July 1964). Committee to Prepare a Statement of Basic Accounting Theory. A Statement of Basic Accounting Theory (Sarasota, FL: American Accounting Association, 1966). Edwards, Edgar O. and Bell, Philip W. The Theory and Measurement of Business Income (Berkeley, CA: University of California Press, 1961). Financial Accounting Standards Board. “Financial Reporting in Units of General Purchasing Power,” Proposed Statement of Financial Accounting Standards (Stamford, CN: Financial Accounting Standards Board, 1974).
“Financial Reporting and Changing Prices,” Proposed
Statement of Financial Accounting Standards (Stamford, CN: Financial Accounting Standards Board, 1978).
“Constant Dollar Accounting,” Proposed Statement of
Financial Accounting Standards (Stamford, CN: Financial Accounting Standards Board, 1979).
“Financial Reporting and Changing Prices”, Statement
of Financial Accounting Standards No. 33 (Stamford, CN: Financial Accounting
Standards Board, 1979). Grady, Paul. “Inventory of Generally Accepted Accounting Principles for Business
Enterprises,” Accounting Research Study No. 7 (New York: American Institute
of Certified Public Accountants, 1965).
Hatfield, Henry Rand. Modern Accounting (New York: D. Appleton & Co., 1909). Hicks, John R. Value and Capital (London: Oxford University Press, 1946). MacNeal, Kenneth. Truth In Accounting (Philadelphia: University of Pennsylvania
Press, 1939).
78 The Accounting Historians Journal, Spring, 1980
Moonitz, Maurice. “The Basic Postulates of Accounting”, Accounting Research Study No. l (New York: American Institute of Certified Public Accountants, 1961).
Revsine, Lawrence. Replacement Cost Accounting (Englewood Cliffs, NJ: Pren-tice-Hall, Inc., 1973).
Securities and Exchange Commission. “Notice of Adoption of Amendments to Reg-ulation S-X Requiring Disclosure of Certain Replacement Cost Data,” Accounting Series Release No. 190 (Washington: Securities and Exchange Commission, 1976).
“Adoption of Requirements for Financial Accounting and
Reporting Practices for Oil and Gas Producing Activities”, Accounting Series Release No. 253 (Washington: Securities and Exchange Commission, 1978).
Sprouse, Robert T. and Moonitz, Maurice. “A Tentative Set of Broad Accounting Principles for Business Enterprises”, Accounting Research Study No. 3 (New York: American Institute of Certified Public Accountants, 1962).
Staubus, George J. A Theory of Accounting to lnvestors (Berkeley, CA: University of California Press, 1961).
Sterling, Robert R. Theory of the Measurement of Enterprise Income (Lawrence, Kansas: The University Press of Kansas, 1970).
Study Group on the Objectives of Financial Statements. Objectives of Financial Statements (New York: American lnstitute of Certified Public Accountants
