AbstractsBusiness Management & Administration

An examination of profitability assessment by the Prices Justification Tribunal.

by S. A.(Stewart A.),1946- Leech

Institution: University of Tasmania
Year: 1975
Keywords: Australia. Prices Justification Tribunal; Profit
Record ID: 1032630
Full text PDF: http://eprints.utas.edu.au/20076/1/whole_LeechStewartA1976_thesis.pdf


"Many major accounting problems deal with aspects of income measurement. In the analysis of these problems accounting suffers from the lack of a clear-cut, operational definition of income based on a well-defined objective." One such problem with which accounting must deal is the measurement of the profitability of an enterprise for the purpose of prices investigation by Governmental regulatory authorities. The aim of this project is to examine profitability assessment by the Australian Prices Justification Tribunal in its public inquiries. The project commences with a review of the methods of profitability assessment used by price regulatory authorities in the United Kingdom, the United States of America, New Zealand and Australia. The most popular indicators of a company's profitability are found to be accounting rates of return. The accounting rate of return is examined with the aim of establishing the most appropriate definition of the ratio for the purpose of prices justification. There are important differences between various definitions of the rate of return, and no single definition will suffice for the one purpose. The analysis suggests that four major ratios, with specific definitions of the numerator and denominator, should be examined for any one company. The use and interpretation of the accounting rate of return is investigated in each of the public inquiries held by the Tribunal in its first seventeen months of operation (until the end of 1974). It is found that the Tribunal utilises the Industries Assistance Commission and Reserve Bank profitability ratio series for comparisons with a company's level of profits. However, the Tribunal's reliance on companies' definitions of the rate of return results in a diverse set of ratios being accepted for the one purpose - prices justification. This research shows that the Tribunal is inconsistent in its use of the Industries Assistance Commission and Reserve Bank series, and in several comparisons, the definitions of the companies' rate of return do not conform with those of the guidepost series. Comparisons using a rate of return measure can be severely distorted by traditional historical cost accounting conventions, and by the irregular patterns of asset revaluations carried out by companies in Australia. The Industries Assistance Commission and Reserve Bank series are distorted by these factors, and the Tribunal does not attempt to adjust either series to eliminate the distortion. A method is devised to restate on a "current-value basis" the accounting data of several companies that have appeared before the Tribunal. These current-value results are compared with the ratios that would be presented, to the Tribunal, from company annual reports. Additionally, a current-value guidepost series is developed from Reserve Bank data, and compared with the companies' adjusted current-value ratios. This analysis shows that the use of current-values in profitability ratios may change, to a considerable extent,…