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58 HASKINS & SELLS August Secret Reserves ACCOUNTANCY practice teems with perplexing questions. Some are old; some are new. Some may be answered easily; others only after mature deliberation. One of the questions now arising frequently because of changed economic conditions is how, in connection with fire losses, to treat the excess of recovery value over book value. During the period of more or less stable prices which preceded the Great War, property values for insurance purposes presented no particular problem. With the rise in prices which extended over the period from 1914 to 1920, replacement values on which insurance was based went so high as to get entirely out of line with book values, or cost less depreciation. Hence, concerns taking out insurance policies based on replacement values prevailing in 1920 or subsequently, sometimes find, when they have a fire loss and recover from the insurance company, that there is a considerable excess of amount recovered over the book value. This raises the question as to what disposition from an accounting viewpoint should be made of the amount. It is not improbable that the average accountant, when confronted with this question, if he were free and untrammeled and not influenced in any way, would favor crediting the amount involved to surplus. The excess of assets over liabilities and capital is greater now than before. The courts have generally held that excess of assets over liabilities and capital is surplus, and as such is available for dividends. There is little concern apparently on the part of the learned judges as to the derivation of surplus; but the accountant who desires that his statements shall be not only clear but comprehensive and shall represent the facts in the case, hesitates to throw into surplus any considerable amount which may have been derived from sources other than operations. Conservative accounting undertakes to differentiate surplus derived from operations and that derived from other sources. The average accountant would probably hesitate to merge any considerable amount of economic profit—for such is the profit in the case in question— with the results of operations, unless the extraordinary profit were satisfactorily earmarked, for fear that any other presentation might be misleading. It is with this thought in mind probably that accountants occasionally resort to the expedient of setting up the economic profit resulting in an increase in value of property as a special surplus item, frequently referred to as capital surplus. This method has no particular advantage as far as can be seen, except to put the reader of the balance sheet on notice that some part of the surplus was derived from an increase in values due to changes in economic conditions, rather than as a result of trading or other operations. The situation is somewhat affected by the ever present influence of government control exercised through the Treasury Department in connection with taxes. While it is true that a business organization may treat a gain resulting from fire loss in any way it may desire, in order to be acceptable to the government in the matter of taxes the item must be handled in a certain way. Article 261 of Treasury Department Regulations 62 is generally interpreted to mean that if a taxpayer would escape a tax on any excess of recovered value over book value, he must carry the new property created through the process of re-
Object Description
Title |
Secrect reserves |
Author |
Anonymous |
Subject |
Fires -- Accounting Insurance, Property -- United States -- Accounting |
Citation |
Haskins & Sells Bulletin, Vol. 05, no. 08 (1922 August 15), p. 58-59 |
Date-Issued | 1922 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 5-p58 |