AN APPLICATION OF REPLACEMENT VALUE THEORY

The replacement value theory for the calculation of the net income, or loss, and capital of an enterprise, is not yet a generally accepted principle throughout the world. The tendency towards general acceptance of the theory in the Netherlands has gradually developed over a period of forty years. However, the extent to which these principles are reflected in the published financial statements still leaves much to be desired. In the Netherlands, “ sound business practice” is the basis from which both economic and accounting principles and conventions have evolved. While in the United States an “ accounting principle” reflects a generally accepted practice, in the Netherlands the yardstick is the concept of “ sound business practice.” Both from my contacts with colleagues in the United States and from American publications, I can see that there is still considerable opposition there to replace ment value accounting. I am pleased, however, to note that more is currently being said and written in favor of the theory. Both in the United States and in the Netherlands, the accountancy profession has to meet similar problems in the practical application of “accounting principles” and “ sound business practice.” The actual implementation of neither of these concepts is so definite as to guaran tee identical financial presentations. Consequently, I think it worthwhile to offer some contribution toward an understanding of the subject of the replacement value theory. As I see it, the opposition to replacement value accounting comes from two sources. First, there are those who reject the theory in principle. Second, there are those who accept the principle but who maintain that it is impractical in its application. As to the former, it must be proved that the net income or loss and capital of an enterprise can only be calculated properly if the replacement value theory is adopted. As to the latter, it must be demonstrated that the practical difficulties can be over come and are not so great as to justify the abandonment of such an important principle. An article by the Technical Services Department of the American Institute of CPAs, “ Opinion Survey on Price-Level Adjustment of Depreciation” (JofA, Apr. 58, p. 36), has led me to conclude that many do not object to the theory as such, but reject it on the ground that, since is not acceptable for tax purposes, the application of the theory is of no importance, quite apart from the fact that its application would involve a great increase in cost as compared with traditional methods of accounting. If these arguments can be refuted, it is possible that the replacement value theory may be considered as a generally accepted “ accounting principle” or “ sound business practice” in the future. The best means to overcome objections of a practical nature is to demonstrate both their relative insignificance and the way in which they may be solved. To this end I will give the details in this article of the application of this theory by N.V. Philips’ Gloeilampenfabrieken, a large international industrial company with headquarters in Eindhoven, the Netherlands.