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ABSTRACT
This study examines the approach to depreciation adopted by companies engaged in two light engineering industries associated with the second industrial revolution: the cycle and motor vehicle industries. Through an examination of the published accounts of 21 companies engaged in these sectors at some time during the study period, and the archival records of two of them (Birmingham Small Arms and Daimler), this study examines the extent to which firm depreciation practices differed from those in more traditional sectors (iron and steel, coal, transport) previously examined by historians. It is found that depreciation was applied more regularly and, at least in some cases, according to set rates and using sophisticated systems. Nevertheless, the depreciation practices of firms, especially in the motor vehicle sector, have been deemed to render net profit figures unusable as a means of comparing business performance before the introduction of new legal requirements relating to financial reporting introduced by the 1928 Companies Act.
Acknowledgement
I would like to thank Dick Edwards and Pierre Labardin for their comments, suggestions and insights provided in relation to a previous version of this paper; to Dick for providing updated references to the 2019 revision of his 1989 book; and to the two anonymous reviewers and the journal’s editor, Cheryl McWatters, for their comments on, and advice in relation to the original draft submitted to Accounting History Review.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 The companies in each ‘year’ sample were not necessarily identical.
2 For the 1920–1950 period, Arnold and Matthews (Citation2002, 5) identify five issues of financial disclosure widely discussed in the literature: accounting for fixed assets and the associated issue of depreciation; the forms of accounting for investments in other companies; the use of omnibus headings for large groups of assets; secret reserve accounting; and the treatment of taxation.
3 Unless otherwise indicated, the information contained in this section is based on material contained in Thoms and Donnelly (Citation1985, Introduction and Chapters One and Two). For further details regarding the origins of the British cycle industry and related industries see Harrison (Citation1977, Citation1981, Citation1985).
4 Starley’s activities led ultimately to the formation of The Rover Cycle Co. Ltd. which subsequently went on to become a major motor car manufacturer.
5 For further details of their involvement in the 1896–97 boom and those of the early 1900s, see Cottrell (Citation1980, 173–176).
6 The bulk of its output comprised the assembly of cars imported in kit form from the USA.
7 Internal records show that between 1910 and 1914 inclusive, Daimler produced an annual average of 1596 cars (CA, PA594/2/1/2/28, f.5).
8 The prime example here was Austin, which was forced into receivership in 1921 before being bailed out by financial institutions and going on to become a major player in the industry (Church Citation1979).
9 Arnold (Citation1997) uses both published and internal records, revealing the importance of the latter as a source of more detailed information for some companies, including BSA.
10 Amongst companies formed at the beginning of our sample period, other intangibles mentioned were patents, trademarks, licences, etc.
11 Promoted by E.T. Hooley and floated in 1896, Singer was one of those over-capitalised firms singled out by The Economist for the ‘absurd amounts to the credit of goodwill’ which appeared in its balance sheets. It reported that, at the company’s 1898 AGM it was revealed that ‘of £680,629 standing to the credit of freehold and leasehold properties, plant, machinery, patents, trade-marks and goodwill, no less that £620,752 represented goodwill’ (The Economist 10 December 1898, 1761).
12 The purchase price of £19,737 represented the amount the five individuals holding 14,990 of the 14,997 shares in H.H.P. Deasy & Co. Ltd. were prepared to accept for the business (The Times 22 February 1906, 13), which was still developing its vehicle, only commencing the supply of cars to the public in the summer of 1907.
13 Coventry Chain is one of those companies for which it has been impossible to locate a copy of the 1907 IPO prospectus, though a copy of the 1915 prospectus has been examined.
14 Prior to this, between 1898 and 1919, BSA had only resorted to loan financing during the three-year period 1906–1908, when a mortgage for £50,000 was obtained in conjunction with the purchase of the Sparkbrook small arms factory.
15 In some cases, there were changes in the name of the auditing practice, due to changes in partnership arrangements or, for example, when Chas. Baker & Co. merged with Thomson McLintock & Co. in 1921/2, the latter replacing the former at the very end of the study period as the named auditors for three companies in our sample (Coventry Chain, Standard, and Triumph).
16 Eadie Manufacturing, as previously noted, was absorbed by BSA in 1907, while Albert Eadie Chain Co. became Ecco Works Ltd. at the end of 1904, before merging with Abingdon Works Ltd. in 1906 to form Abingdon Ecco Ltd.
17 Matheson’s book, The Depreciation of Factories, was based on a series of articles published in The Engineer in 1883.
18 In Napier’s accounts for 1920/1, for the first time fixed assets were presented ‘at cost, less Depreciation’.
19 In its 1914 report, Austin’s directors used the term ‘appropriation’ while in 1913/14 Napier’s referred to depreciation as ‘an allocation’. In its 1897/8 report, Riley’s directors referred to the sum ‘absorbed’ by depreciation. Subsequently, depreciation was treated as a deduction in the profit-and-loss statement.
20 In the foreword to a recent report on the subject of depreciation or capital allowances, published by the Office of Tax Simplification, it is stated that, if a new system was being designed from scratch, the former might make ‘eminent sense’, but rejected a move away from capital allowances on the grounds that the costs would outweigh the benefits (OTS Citation2018, 2).
21 A note added to the draft return for 1901/2 indicates that the company intended to deduct £8600 from its return of taxable profit, even though plant and machinery only stood in the company’s books at a value of £156,685.
22 In an editorial in The Accountant on 15 November 1884, Matheson (Citation1884) was criticised for not providing exact rates for different classes of plant to which he responded (3 January 1885) to the effect that to try to provide exact rates ‘would be more likely to mislead than inform’, considering fixed rules to be ‘impossible, and examples, if offered for imitation, dangerous’. Indeed, he considered that there were ‘about ten variables [that] are relevant to the determination of the proper rate of depreciation’ (quoted in Brief Citation2020, 134).
23 This convention was criticised by Matheson who felt that it needed to be recognised that the value of land could depreciate as, for example, in the case where a factory built on a specific piece of land was rendered obsolete and had no alternative use, thereby reducing the value of the land itself since the factory would need to be cleared away before the land could be used for any other purpose (comment on Hammond Citation1907, 288).
24 It is interesting to note that in the issue prospectus associated with the conversion of Dennis Brothers to a public company, it was stated that the profits of the former private company for 1910–12 were given without any allowance having been made for the depreciation of buildings since it had been considered that ‘the Freehold Land on which the Buildings have been erected has appreciated to an extent equal to any Depreciation on the Buildings themselves’, a view that was echoed in the external valuation carried out by Messrs. Alex H. Turner and Co. (The Times, 10 March 1913, 17).
25 Norton in the context of a textile business, suggested the following rates (Citation1900, 236):
Warehouses, offices and cottages 2½ per cent – 4 per cent
Mill Buildings, exclusive of motive plant 2½ per cent – 5 per cent
Motive Plant 5 per cent – 7½ per cent
Plant & Machinery 5 per cent – 10 per cent
Furniture & Fixtures 7½ – 10 per cent
These rates assumed that all assets, especially machinery, were kept in efficient repair and that normal operating conditions pertained, Norton recognising that they may need to be varied in line with changes in economic conditions.
26 In this context, it is interesting to note that Matheson (Citation1884, v–vi) considered the determination of the appropriate rates to be charged to be a role for ‘those technically acquainted with the operations of manufacture’, that is engineers or valuers, the role of accountants being simply to allot the sums so determined to Capital and Revenue. Edwards (Citation2019a, 291–295) notes that it was the engineer Armstrong who determined the depreciation rates used by the Staveley Coal and Iron Co. in most of the years up to 1877.
27 The first British motor show was held in 1896, but it was in 1903 that the Society of Motor Manufacturers and Traders held the first of its annual shows.
28 Internal balance sheets indicate that this practice continued after Daimler became a private company following its acquisition by BSA in late 1910.
29 As the motor car industry developed, what had initially formed The Economist’s annual review of the results of cycle companies in turn became a review of motor and cycle companies and, eventually, of motor manufacturing companies. Some, but not all, of the companies analysed in the review remained the same as they evolved from cycle manufacture, through making motorcycles to manufacturing cars.
30 BSA’s balance sheet at 31 July 1919 shows ‘Freehold Land and Buildings, Plant, Machinery and Tools at Small Heath, Sparkbrook and Redditch’ at £1,353,231, the figure rising to £3,100,096 as at 31 January 1921.
31 No reference is made to this revaluation in the directors’ report for 1920/1, the balance sheet figure of £240,226 being given as ‘at cost, less Depreciation’, suggesting depreciation for the year of £12,869 or 5.1 per cent.
32 While companies often wrote off the expenses of share or loan capital issues to profits in the year of issue, no examples of the immediate write-off of capital expenditure have been found in the published accounts examined. However, in the abridged prospectus for Vauxhall (The Times 18 May 1914, 19), it was noted by the company’s auditors that the fall in profit indicated between 1911 and 1912, when it was a private company, was ‘due to the payment out of revenue of the expenses involved in reorganizing the Works’.
33 The accounts of the 21 sample companies were audited by 18 different firms of chartered accountants, three of which, all based in Birmingham, audited two of the sample companies: Agar, Bates & Co. (Albert Eadie Chain and Eadie Manufacturing); Charles Baker & Co. (Coventry Chain and Triumph); and Carter & Co. (Austin and BSA).