Measuring and Evaluating Replacement Costs: An Application

Abstract

Replacement cost accounting has received considerable attention recently because of the disclosure requirements imposed by Rule 3-17 of Regulation S-X issued by the Securities and Exchange Commission in the United States, and the report of the Sandilands Commission in Great Britain. A major problem encountered in implementing these proposals centers on the appropriate method for estimating replacement costs of inventories and other assets. Several studies have been conducted dealing, in part, with this problem. However, the motivation of these studies was primarily to demonstrate that replacement cost accounting was feasible that is, that financial statements could, in fact, be generated. (See, for example, Dickerson [1965]; Dockweiler [1969]; Harned [1964]; Shenkir [1964]; and Voth [1964].) In most cases, the evaluation of the degree of satisfactory implementation was left to the personal judgment of the researcher.' This evaluation is complicated by the fact that several methods may exist for converting a replacement cost concept into an actual measurement. The SEC, in its new Rule 3-17, recognizes some of the measurement problems associated with current replacement cost accounting. Subse-