current estimate of the remaining useful life with disclosure in the period of change of the effect of revaluation of material.
Some businessmen may see this as a solution to the new burden of depreciation accounting.
They may believe that it is necessary to revalue each year by the same amount as charged against depreciation.
This, of course, does not work since revaluations would not be reflected in the Profit and Loss Account, while depreciation would be.
TARGET believes this to be unfortunate as it will probably act as a deterrent to directors revaluing property in the future since the effect is to increase the depreciation charge and, hence, all else being equal, reduce operating profits which, in many cases, is the measure of directors' performance.
The revaluation, signifying Capital growth in many circumstances, will not be credited to directors' performance record.
One professional person interviewed by TARGET on this point expressed sympathy for the directors, but quickly added that, maybe, they are not making the right decision. Possibly, the Returns they are earning for shareholders are not that good.
Paragraph 30 drives home the point since this paragraph stipulates that where assets are depreciated for the first time under the terms of the Statement, it will represent a change in the accounting policy and 'therefore the amount of depreciation charged relating to prior periods should properly be treated as a prior-year adjustment and charged against the opening balance of retained profits....
The application of this paragraph could have a startling effect. It seems quite possible to TARGET that this prior-year adjustment could be so large as to wipe out opening balances of retained profits. This would then imply dividends in those prior years had been paid out of
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