[OPE-L:4063] RE: RE: RE: Revaluation

From: P.J.Wells@open.ac.uk
Date: Thu Oct 12 2000 - 12:27:50 EDT

Re-reading my [#4062], replying to John's [#4060]...

> > You then face the problem of how to account for the missing $50. 
> 	Surely this just --> work-in-progress --> inventory --> money,
> according to how far production/realisation has gone?
	... I realise this doesn't answer the question of unexpected moral
depreciation (as I suspect hallowed usage will force us to refer to it).

	This of course is just a loss of capital, which will have to be made
up out of profits (if any; out of the proprietors' pockets, if not) as an
"extraordinary item" -- defined as one "deriving from events or transactions
that fall outside the ordinary activities of the company and which are both
material and expected not to recur frequently or regularly. They do not
include items which, though exceptional by virtue of size or incidence (and
which therefore require separate disclosure), fall within the ordinary
activities of the company", in the words of the UK's Accounting Standards

	(Though in the UK accounting standards have been changed so that
earnings (as in "earnings per share") are defined as profits after, rather
than before, extraordinary items: Ian Griffiths (1986) "Creative accounting"
-- an enjoyable bit of rabble-rousing -- has the following story:

	Finance director discovers overseas division has made an
uncharacteristic loss of $1m and goes to tell the managing director. "How
extraordinary!" says the latter. "Let's hope they don't do it again", and
the finance director exits with a knowing look on his face.

	Shortly afterwards the finance director finds that another overseas
division has made an uncharacteristic profit of $1m. "How exceptional!" says
the MD. "Let's hope they keep it up", and the finance director exits with an
even more knowing look.

	"exceptional" items, of course, have always been allowed to be taken
in when calculating earnings per share. Clearly this is a very old
accountancy joke.)


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