Legal acceptance of accounting principles in Great Britain and the United States: Some lessons from history

              The Accounting Historians Journal Vol. 15, No. 1 Spring 1988
Jean Margo Reid NEW YORK UNIVERSITY
LEGAL ACCEPTANCE OF ACCOUNTING PRINCIPLES IN GREAT BRITAIN
AND THE UNITED STATES: SOME LESSONS FROM HISTORY
Abstract: This paper examines and contrasts nineteenth century case law in Great Britain and the United States in which courts had to decide whether to accept accounting concepts having to do with making provisions for depreciation, amortization and deple-tion. It should be emphasized that the courts were not arguing about accounting theory, per se; they were deciding particular disputes, which depended on the meaning in each case of profits. By 1889, when Lee v. Neuchatel Asphalte Company was decided, British courts had rejected accepted fixed asset accounting con-ventions in determining profits in tax, dividend, and other cases while United States courts accepted these conventions, except in the case of wasting asset companies. This historical contrast is of particular interest because a recent reversal of these countries legal stances has occurred through legislation. In the United States, the Revised Model Business Corporation Act and the legislatures of several states have now rejected accounting con-cepts of profit as the legal test for dividends and other shareholder distributions. The reasons for this rejection appear to be similar to those used by the British Court of Appeal nearly 100 years ago. In Great Britain, on the other hand, the 1980 Companies Act reverses much of the Lee case and places on accountants new respon-sibilities for determining whether company distributions to shareholders would violate the capital maintenance provisions of the act.
Almost 100 years ago, in 1889, the British Court of Appeal decided Lee v. Neuchatel Asphalte Company1 and this case con-tinues to be cited by accountants interested in the development of thought. The Lee decision is frequently interpreted to mean that companies are not required to make provisions for depre-ciation, but the debate over the meaning and significance of this case is not over [Morris, 1986].
Lee was the culmination of a series of nineteenth century legal cases in Britain where courts had to decide whether to
1Case citations are contained in the Table of Cases in the References.