Appreciation from the point of view of the certified public accountant;

              2 HASKINS & SELLS January
Appreciation From the Point of View of the
Certified Public Accountant
By JOHN R. WILDMAN
Address Delivered at a Meeting of the American Association of
University Instructors in Accounting, Chicago, December 27, 1928
THE certified public accountant's in-terest
in the subject of appreciation is
a practical one. He is forced to consider
the matter in connection with his review
of accounting and his certification of fi­nancial
statements.
The facts are, whether or not such pro­cedure
is justifiable, that physical prop­erty
and intangible assets frequently are
revalued by, or at the instance of, the
owners of such possessions who attempt,
in various ways, to give expression to the
estimated increases in value. The certi­fied
public accountant, therefore, is con­fronted
primarily with a condition; not a
theory.
The authority for the restated value may
be either a report of independent appraisers
or a resolution of corporation directors.
Inasmuch as the certified public account­ant
does not attempt to act as an appraiser,
to pass judgment on the work of such per­sons,
or to assume responsibility for the
values which they fix, he accepts their
judgment and qualifies his statements
accordingly.
Inasmuch as corporation directors, in
some jurisdictions, are empowered by
statutes to fix values, and even though not
specifically so empowered are within their
corporate rights in so doing, the accountant
usually takes the position that he must
accept their judgment when they revalue
assets, provided there is no fraud involved
and they officially record such acts in the
corporate minutes. In such cases the ac­countant
places the responsibility on the
directors by proper explanation in his
statements.
The occasions for revaluations which
give rise to estimated increases in values
are various. One corporation may wish
to bring out a bond issue. Another cor­poration
may wish to offer an issue of pre­ferred
stock. Still another company may
see in the procedure an opportunity to
overcome a deficit in capital, thus prepar­ing
the way for future declarations of divi­dends
payable in cash. A fourth concern
may wish to use the restated value as a
basis for depreciation and thus increase the
charge for depreciation against earnings.
In one particular case, a company own­ing
city realty considered using an ap­praised
valuation for the purpose of re­stating
its land and building values, credit­ing
the estimated increment in land values
to surplus available for cash dividends.
This was done on the theory of equalizing
the increase in value among the stock­holders
over a period of years, rather than
giving the benefit of large profits to the
shareholders at some future time when, and
if, the profit might be realized.
In another case, a company having on
its balance sheet a large amount of de­ferred
charges which had accumulated as
the result of numerous refinancings, caused
certain intangibles to be revalued, credited
the amount of the increase to capital sur­plus,
and wrote off the deferred charges
against such surplus.
Cases, illustrating the use which is made
of asset revaluation in order to take advan­tage
of an estimated increase in the value
of such assets, might be continued at
length. It is doubtful, however, if a con­tinuation
would develop uses substantially
different from those already described.
The principle is well settled, and is
specifically exemplified in cases such as the
one involving the directors of the American
Malting Company (65 N . J . Equity 375),
that anticipated profits may not be made
the basis of dividends payable in cash. In
that case, quoting from the opinion written
by Judge Clarke, "These contracts were to
deliver at a future time a product not yet