Historical analysis of depreciation accounting--The United States Steel experience

              The Accounting Historians Journal Vol. 16, No. 2 December 1989
1989 MANUSCRIPT AWARD
Sarah Auman Reed TEXAS A&M UNIVERSITY
A HISTORICAL ANALYSIS OF DEPRECIATION ACCOUNTING — THE UNITED STATES STEEL EXPERIENCE
Abstract: This paper examines the magnitude of the reporting bias inherent in the historical cost accounting of a firm's physical capital. Reported depreciation data pertaining to U.S. Steel Corpo-ration (currently USX) between 1939 and 1987 are compared with standardized historical cost figures and replacement cost esti-mates. The findings suggest that replacement cost depreciation would have provided more information about U.S. Steel's ability to maintain its productive capacity than historical cost depreciation did. Thus, this analysis provides an illustration of one of the primary arguments for replacement cost accounting.
Changing prices have created accounting measurement problems for business enterprises throughout the twentieth century. Paton [1922] noted that in periods of sweeping price changes the accountants' yardstick (money) becomes "an un-stable, variable unit; and comparisons of unadjusted accounting statements prepared at intervals are accordingly always more or less unsatisfactory and are often positively misleading . . . When prices on all sides are climbing sharply it seems clear that a mere increase in the number of dollars possessed is not a valid expression of true improvement in economic condition" [pp. 427-428]. In such periods, Paton pointed out that management must be careful not to pursue a dividend policy which threatens "the preservation and expansion of the physical capital of the enterprise" [p. 440].
Paton argued that "by reducing what would otherwise be the net income figure," recognition of replacement cost depre-
I would like to thank Barbara Merino for her helpful comments on earlier drafts of this paper and for her professional guidance in general. This paper also has benefitted from the substantive comments provided by four anonymous reviewers. Finally, I would like to thank graduate students: Byron Harris, William Shows, and Alan Pavelec.