Inventory valuations;

              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