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An examination of profitability assessment by the Prices Justification Tribunal.

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Leech, SA (1975) An examination of profitability assessment by the Prices Justification Tribunal. Unspecified thesis, University of Tasmania.

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Abstract

"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, the
pricing decisions made by the Tribunal.
The "internal rate of return" (IRR) is examined as an alternative
measure of profitability for prices justification. The conceptual
relationship between the accounting rate of of return (AM) and the
IRR is investigated, and it is concluded that, under some conditions,
the ARR will approach the IRR. However, more empirical research is
necessary if appropriate adjustments to the ARR are to be discovered
that will assist in estimating the IRR from accounting data.
Chapter six summarises the main findings of the project and
outlines several recommendations on profitability assessment for
prices justification that arise from the research.
It is hoped that at least a small part of accounting will be
improved by this analysis of one of the problems with which
accounting must deal.

Item Type: Thesis (Unspecified)
Keywords: Australia. Prices Justification Tribunal, Profit
Copyright Holders: The Author
Copyright Information:

Copyright 1975 the Author - The University is continuing to endeavour to trace the copyright
owner(s) and in the meantime this item has been reproduced here in good faith. We
would be pleased to hear from the copyright owner(s).

Additional Information:

Thesis (M.Ec.)--University of Tasmania, 1976. Bibliography: l. 275-285

Date Deposited: 19 Dec 2014 02:23
Last Modified: 27 Jul 2017 01:15
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