A cos-benefit analysis of accounting for inflation

This research develops a methodology to assess the net social benefits associated with three alternative measurement models: general price-level adjusted historical cost (GPLA), current cost (CC), and current cost general price-level adjusted (CC-GPLA). Net benefits were estimated in six basic steps: 1) computer programs were used to restate historical cost financial information covering 16 years for 21 companies for specific and general price-level changes; 2) three multiple regression models were developed for each company and each measurement model that were used to develop forecasts of the societal rate of return (income before deducting interest and income taxes divided by total assets net of accumulated depreciation, depletion, and amortization) for each year of a three-year test period; 3) the total societal resources available to each industry were allocated to the companies with forecasted average rates of return in the higher percentiles of the distribution of rates of return as measured by each mode; 4) gross benefits were estimated by comparing the total societal income (using CC-GPLA as a surrogate) under GPLA, CC, and CC-GPLA with the total societal income under the historical cost model; 5) estimated costs of applying each model were obtained by surveying company executives; 6) net benefits of each measurement model were estimated by discounting the differences between estimated gross benefits and the estimated costs. The results indicated that the CC-GPLA model almost always was superior to GPLA and CC. The CC model was inferior to GPLA for the chemical industry, but whether it was inferior for the steel industry depended on the assumptions made.