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Bulletin HASKINS & SELLS 75 Inventory REPRESENTATIVES of a certain large "industrial" recently appeared before the Inventory Committee of the Internal Revenue Department, and submitted an argument in favor of being permitted, in stating its accounts for income tax purposes for the year 1918, to use in valuing its inventory prices as of December 31, 1916. The counsel for the company submitted that the present level of prices is abnormally high, and that to use the prices in force December 31, 1918, would have the effect of inflating the profits for the year. Counsel for the company further argued that the company desires to be conservative and does not wish to include in its profits for the year 1918 any amount arising from a valuation of its stock in hand at an inflated price. While the case has not been settled, it is understood that the Inventory Committee looks with some tolerance upon the argument of the company, and it seems quite possible that a decision favorable to the company will be rendered. This case brings to mind a somewhat similar attempt on the part of certain English companies to obtain relief from the burden imposed by the high prices incident to the war. The substance of the request is well stated in the following letter which appears in the London "Accountant," Vol. 52, page 567: " T H E VALUATION OF STOCK." To the Editor of The Accountant: Sir:—At the present time the values of some commodities are much above the normal. Is there any obligation on the part of a trader, or company, to value stock at cost or market price instead of prudently taking a much lower figure and omitting all reference to this reduction in the Balance Sheet? Valuations To illustrate my meaning, a company owning a flour mill took stock on 31st of March last. Calculating the value of wheat and flour on hand in the usual way (cost price or market price, whichever is lower) the amount came to (say) £50,000. Wheat was at that time about 60s. a quarter and is now higher. The managing director proposes to reduce the value of the stock by a round sum of £7,500. on the ground that present prices are excessive, and that at any time changed circumstances may result in a sudden and heavy fall in market values. The mill usually carries about ten week's requirements in wheat and flour, so that at the present time, when the accounts are being made up, about half the stock on hand at 31st March will have been sold at prices well above the market prices on that date. The directors anticipate a very difficult time when the inevitable fall in prices does occur, and they prefer to make such 'secret reserve' as I have indicated to disclosing a larger profit and transferring a similar sum to Reserve Account in the usual way. Yours faithfully, 24th April, 1915. MILLER. (We see no objection to the proposed course.—Ed. Acct.)" A discussion which took place between the Association of Controlled Owners and the Board of Inland Revenue, as set forth in Sanders's "The Law and Practice of Excess Profits Duty," pages 54-62, appears below: "It is necessary with Excess Profits Duty that the same basis of arriving at stock be followed throughout all pre-war and accounting periods, so as to ensure a fair comparison between the pre-war and war periods. It is not permissible to write down stock against a possible future loss on the termination of war producing a fall in prices, but any actual loss on stock held
Dickinson, Arthur Lowes
Fisher, F. L.
Keen, F. N.
Stainforth, R. H.
Inventories -- Taxation
Haskins & Sells Bulletin, Vol. 02, no. 10 (1919 October 15), p. 75-79
|Source||Originally published by: Haskins & Sells|
|Collection||Deloitte Digital Collection|
|Digital Publisher||University of Mississippi Libraries. Accounting Collection|
|Identifier||HS Bulletin 2-p75|