Accounting for the use of special war reserves;

              Accounting Research BULLETINS
Issued by the Committee on Accounting Procedure, Americas Institute off Accountants, 13 East 41st Street, New York 17, N. Y.
Copyright 1946 by American Institute of Accountants
October, 1946
No. 26
Accounting for the Use of Special War Reserves
1. The propriety of the use of reserves to achieve more sig-nificant financial statements,* particularly those prepared to report the results of business operations, has long been recognized. The creation of reserves by charges against current revenues for fore-seeable expenses, costs or losses applicable to such revenues, results in more adequate financial statements for the current period and, at the same time, serves to eliminate from income statements of subsequent periods the effect of the final determination or incur-rence of the costs or losses provided for and thus makes possible a more adequate reflection of the results of operations of both periods. The applicability of this accounting technique in the measurement of the financial results of war and postwar periods was recognized in Accounting Research Bulletin No. 13.
2. During the war years many industrial companies created special war reserves. Data given in the annual reports of such com-panies indicate that many of these special war reserves were of a composite or omnibus nature and that a precise classification of the nature of the costs and losses for which the reserves were provided was difficult. This fact has been reflected in the variety of practice in the treatment of these reserves and in the diverse nature of the charges that have been made thereto.
3. The committee recognizes that it is impossible to generalize with respect to the diverse situations created by the termination of the war. In general, however, two concepts have been advanced as theoretical bases for the determination of the items considered appropriate as charges to special war reserves. The first of these theories or concepts may be characterized as one which would con-sider the war reserves available for items representing the costs or losses of war production incurred after the termination of that pro-duction. Such costs would include the expenses of getting productive and other facilities which had been converted to wartime uses recon-verted for peacetime operations as well as the nonproductive or stand-by expenses of that period of reconversion. In general, this
*"It is not permissible to create reserves for the purpose of equalizing reported income." Accounting Research Bulletin, No. 13, p. 112.
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