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Salient. Official Newspaper of Victoria University of Wellington Students Association. Vol 40 No. 26. October 3 1977

Rip Off

Rip Off

Imagine if a boss went to a worker and said to him or her, "I've decided to give you regular wage increases to keep you abreast of inflation."

Obviously this is a ridiculous situation. Companies wish to keep themselves ahead of inflation but do not extend this privilege [unclear: to] their worker. Companies are proposing [unclear: o] do just this—alter their system of accounting so that they keep ahead of inflation.

"Well that's all right", you say, "if any-one can escape from inflation well good [unclear: ack] to them". But it's not alright because [unclear: ie] major changes to business practice that will come about by inflation accounting will:
  • reduce the share of national income going to wage and salary earners.
  • reduce the share of total taxation paid by companies.
  • [unclear: Pause] drastic increases in the prices paid by consumers.
  • [unclear: ulate] business from inflation and [unclear: to] workers subject to its ravages.
  • [unclear: iner] mean a savage increase in tax paid by workers, or a deterioration in health, education, housing and welfare benefits.

[unclear: do] you can see that it is vitally important [unclear: tha ve] understand these proposed changes [unclear: be cunningly] introduced under the guise of a technical revision of accounting method. Workers and trade union officials usually consider accounting method to be of little [unclear: dire] importance to them, but it is absolutely [unclear: v] that the latest proposals be studied, [unclear: unde ood] and resisted.

[unclear: So st] of all we need to understand [unclear: prese] accounting standards.

[unclear: Present] Accounting Standards

The rules which firms present their accounts are very complex—after all, accountants get rich because they understand them. However, the basic principles are quite simple. The system is known as the historical cost method. All revenue, costs, even assets (things the firm owns) are measured in terms of what they actually, cost when the firm bought or sold them.

Business firms prepare reports on their activities to inform themselves and their shareholders and the Government and (if they are public companies) general public of how they have spent their capital and what returns they have received. These reports are prepared according to a set of rules or accounting standards. It is according to these standards that investors judge whether to invest, lenders to judge whether to lend, and the Government knows how much tax to charge or what levels to control prices at. The rules are not infalible—and crooks can break them, but they do set up agreed standards by which to assess company performance. As trade unionists we sometimes use these figures to assess whether the company can afford pay increases.

But businessmen now say the real costs and profits of a business cannot be measured on this basis. They say that the statement should be based on current costs.

So we need to understand "current cost" or "inflation accounting".

Inflation Accounting

Under this system, costs are assessed in a different [unclear: w or] example, if they are assets [unclear: which contro] to the continuing activity of the business, then the cost is whatit would now cost to replace the asset. If they are not essential then they should be valued at their "net realisable value"—i. e. what they could now be sold for.

Depreciation (the charge made against revenue for the use of an asset over a year on a fixed rate basis) would then be charged against the "revalued" worth of the asset. This would mean that the company would have to pay less tax, because "profit" as it is now measured will be lower.

Stocks which are held by a business would be valued not at what was actually paid for them, but at the current price. When these stocks are sold they will show a smaller profit margin than was actually earned. Once again, profits appear to fall, taxes fall, and the company is able to ask price control authorities to allow them to charge higher prices to consumers.

Monetary assets which the business owns would be revalued in terms of their current purchasing power.

The Effects of Inflation Accounting

As you can see, these proposals will change the rules of business quite substantially. These changes mean that prices will go up annually by a higher amount than they would have under the existing method. The system builds inflation into the price structure, to the exclusive advantage of the companies.

Profits on the revised basis will appear to fall as a proportion of national income. In fact, the owners of capital will benefit substantially. The committee of enquiry into inflation accounting assesses that if the adjustments are made which they recommend then the share of wage and salary earners will fall by about eight percent.

Decisions on what "current costs", "essential assets" etc. are, will be made by the companies themselves, and it will be almost impossible for taxation pricing authorities to effectively check or control the prices that should be allowed, and the taxes that should be paid by companies.

Inflation accounting is meant to help businessmen overcome the problems of inflation, while you and I have to rely on delayed cost of living adjustments (in the case of bursaries we do not even get adjustments) and these are inadequate with the spiraling cost of living.

(Reprinted from "Paperclip", the newspaper of the Clerical Workers Union).

BUT USING INFLATION ACCOUNTING I WOULD PUT DOWN WHAT IT WOULD COST TO REPLACE THIS TYPE WEATHER—IT'S NOW $1400 UNDER THE OLD SYSTEM, WHEN I DO MY ACCOUNT. I WOULD WRITE DOWN WHAT IT COST ME TO BUT THE TYPE-WRITER-$900 ....AND THAT WILL MEAN THAT BECAUSE I'M NOT SHOWING ANY PROFIT—I WONT HAVE TO PAY MUCH TAX AND I'LL BE ABLE TO RAISE MY PRICES THAT WILL MEAN THAT I TAKE $500 OFF MY PROFIT—BUT IT STILL STAYS HERE IN MY POCKET-CLEAR HUH!