A special accounting treatment for regulated industries? The case of the port wine industry

Abstract

Some industries face difficulties fitting in with the traditional accounting framework. This is the case of the port wine industry, which is characterised by its high quality product and long-lived inventories. Our main research hypothesis is that port companies face the same problems as other wine firms in the world: time is a port wine accounting problem. The research method used was a questionnaire survey to determine the accounting practices and problems in the port industry. We found that some of these wine accounting problems were not felt in the industry and that port wine companies have their own accounting practices—such as a unique cost formula.

Acknowledgements

The authors would like to thank Professor Oriol Amat for his helpful comments on an early version of this paper. The comments of António Filipe and Carlos Caldeira from Symington Family Estates were also very much appreciated as were the comments of all the participants at Pompeu Fabra's University Research Seminar and the Third EIASM Workshop on Accounting and Regulation. The financial support of the Faculdade de Economia do Porto and PRODEPIII is also gratefully acknowledged.

Notes

1. In 1987, the Port Shippers Association issued a questionnaire survey to its members concerning the accounting implications of the port wine practices.

2. There are exceptions such as the Portuguese Vinho Verde. Even in port wine, the vintage is bottled after maturing for two years in wood barrels but needs to stay in bottle for almost 20 years in order to achieve all its potential.

3. Our study deals only with the wine-making industry but, in many companies, agricultural and industrial operations are joined. Some wine accounting problems associated with the agricultural operations—like grape valuation—have a new accounting treatment due to the fact that several accounting standards setters issued unique standards regarding agriculture.

4. Nowadays, this cost formula is not allowed by IAS 2—inventories.

5. In the special case of sherry wine—Xerez, manzanilla and fino—some products, produced under the Solera method, can be accounted in the tangible-fixed assets account.

6. When Amat and Blake (1995) studied the implementation of activity based-cost (ABC) system in a medium-sized family-owned wine firm, they suggested the restatement of all stocks to replacement cost, due to inflation.

7. In his work, Amaro (2005) gives us a literature review where he identifies the same wine accounting problems that we stated here. Nevertheless, his work focuses specifically on the management accounting area in the activity-based costing management accounting system.

8. Portuguese Tax Secretary of State decision (5 July 1991).

9. There are some port wine industry operators that refer to this cost formula as ‘year LIFO’.

10. Projecto de Linhas de Orientação para um Novo Modelo de Normalização Contabilística, (CNC, 2003) (Guideline Project for a New Accounting Standardisation, Portuguese Accounting Standard Setter; CNC, 2003).

11. For example, port with an indication of age: 10-years-old; 20-years-old; 30-years-old; 40-years-old are superior quality wines, obtained by blending wines from different years in order to obtain complementary organoleptic characteristics. Aged in wood for varying periods of time, the age that is indicated on the label corresponds to the approximate average age of the different wines in the blend.

12. Due to world accounting harmonisation, the Australian Accounting Standards Board is implementing the Financial Reporting Council's policy of adopting the standards of the International Accounting Standards Board (for application to reporting periods beginning on or after 1 January 2005 by all reporting entities).

13. This standard supersedes the AASB 1040—statement of financial position and is equivalent to IAS 1—presentation of financial statements issued by the IASB.

14. Orlando Wyndham, Fosters, Southcorp, BRL Hardy and McGuigans.

15. This standard supersedes the AASB 1036—borrowing costs and is equivalent to IAS 23—borrowing costs issued by IASB.

16. This standard supersedes the AASB 1037—self-generating and regenerating assets (SGARAs) and is equivalent to IAS 41—agriculture issued by the IASB.

17. Symington Family Estates, Sogrape, Gran Cruz and Fladgate Partnership.

18. Portuguese law by decree no. 166 86, 26th of June 1986. Article no. 20 to 25.

19. Portuguese law by decree no. 22:460, 10 April 1933. It was replaced by law by decree no. 23 183, 28 October 1933 and by the law by decree no. 23 184, 28 October 1933—which introduced the exception of the sales capacity limitation to firms in a sell-out process

20. Former IVDP.

21. For further information see Lima (1941).

22. In the law, reservas (reserve).

23. Implemented by the Portuguese law by decree no. 22 460, 10 April 1933;

24. The questionnaire is very embracing regarding financial and management accounting areas. We focus here on the financial accounting area because it is a standard-setting piece of research. Nevertheless, we believe that the questions regarding management accounting procedures would be very useful for future research.

25. The respondents were informed in the questionnaire that fair value could be measured through market value or on the basis of a generally accepted theoretical model.

26. Informação da Direcção de Serviços de Fiscalização Tributária de 21 de Junho de 1982 (report from the Tax Inspection Services Department, 21 June 1982).

27. From 1 January–31 December.

28. Usually associated with the period: 1 September–31 August.

29. The classification of firms regarding their size was made according to the Portuguese commercial law. Our classification here is made according to total sales.

30. Until 1996, only the port shippers were allowed to export port.

31. In the conclusion of the 1987 Port Wine Shippers Association questionnaire survey, the association's lobbying activity is clear.