Current cost accounting
This article analyses the accounts of some 250 major companies, prepared according to current cost and
historic cost conventions, for the last three years.
Historic cost accounting generally overstates profitability-the average current cost pre-tax return on
capital is around half the historic cost figure. Industries most affected are textiles, motors, paper and
packaging and chemicals, while construction, engineering contracting and retailing are least affected.
Post-tax returns on equity are reduced even more using current cost accounting.
Around half the companies studied have paid dividends that were not fully covered by current cost profits.
Introduction
In recent years, various articles in the Bulletin have
discussed trends in the real profitability of industrial and
commercial companies (ICCs). (I) These articles were based
on national accounts data, and use aggregate figures for
ICCs;(2) they do not use companies' own current cost (CC)
adjustments. However, most major companies have by
now produced two, and in some cases three, years' results
on a CC basis under the Statement of Standard Accounting
Practice No 16 (SSAP 16) introduced with effect from
January 1980; their accounts, taken together, represent a
substantial body of information on the impact of inflation
on company results and on the effects on management
decisions of CC accounting. This article discusses some
findings of a recent study of the accounts of a sample of
almost 250 major companies, most of which have turnover
in excess of £ 1 00 million; in 1981 the total of their current
cost capital employed was some £165 billion. The aim was
to examine the impact of the SSAP 16 adjustments on
corporate p}ofitability, net earnings and dividend cover as'
reported on an historic cost (HC) basis, distinguishing
where possible between different industrial sectors.
The findings of this study are not directly comparable with
the estimates of company profitability derived from
national accounts data. There are a number of obvious
differences:
• the national accounts data exclude overseas
activities, whereas the analysis described here is
based upon the reported consolidated results ofUK
company groups, including where applicable
overseas activities;
• profitability measures based on national accounts
data exclude non-trading income, which is included
by companies in their accounts;
• the national accounts figures make no allowance for
the accelerated write-off of obsolete or redundant
(I) See for example 'Profitability and company finance' in the June 1982 Bulletin.
plant and machinery-such write-offs by companies
in their accounts may have become increasingly
significant in recent years;
• the companies included in this study are major listed
companies, while the national accounts data seek to
cover the whole corporate sector;
• differences arise between the financial information
reported by companies and the data collected in the
national accounts because of the different treatments
of, inter alia, depreciation, taxation and
extraordinary items (eg redundancy payments);
• the data do not cover identical time periods because
company accounting periods are not uniform and it
is impossible to aggregate company results according
to precise calendar years.
These variations in approach give rise to different absolute
levels of real profitability, but the trends identified in this
study are generally consistent with the trends in real
profitability calculated from national accounts data.
In preparing data for this analysis, the only adjustments
made to companies' reported financial information have
been to remove the effects of any prior-year deferred
taxation adjustments following the changes in stock relief
introduced by the Finance Act 1981; and to reverse,
wherever possible, the effects on the HC accounts of
any revaluations of fixed assets and of any additional
depreciation in the cases of companies which adopt a
modified HC convention. (3) The analysis covers the three
years 1979-81; company results were aggregated on the
basis of accounting periods most closely coinciding with
calendar years. Approximately half of the companies
reviewed chose not to publish comparable figures
for 1979 in their 1980 CC statements; this was permitted by
SSAP 16. Those companies whose real profitability was
most depressed were perhaps more likely to choose not to
(2) However, some work has been done on a sectoral breakdown of real profitability: see, N P Williams, influences on the
profitability 0/ twenty-two industrial sectors, Bank of England Discussion Paper No 1 S, March 1981.
(3) However, in the majority of cases where companies have incorporated revaluations into their He accounts, it has not been
possible to identify the effects, if any, on capital employed or on the depreciation charge, and the results should be interpreted
in this light.
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