§ 3.56 p.m.
§ Lord JACQUES
My Lords, with the leave of the House, I will repeat a Statement which is being made in another place by my right honourable friend the Secretary of State for Trade, on the Sandi lands Report on inflation accounting. The Statement is as follows:
"The Report of the Committee on Inflation Accounting under the Chairmanship of Mr Francis Sandi lands was published on 4th September as Cmnd. 6225. My right honourable friend the Chancellor of the Exchequer and I are most grateful to the Committee for the hard work which has gone into producing this detailed and useful Report and for its clear analysis leading to a new and constructive approach.
"The main proposal of the Committee is that the system of company accounts should be changed from an historic cost basis to a system known as current cost accounting (CCA), and that this should become mandatory for all listed and certain other companies for accounting periods beginning after 24th December 1977.
"Having considered the Report, and taken into account the views of the accountancy profession and others, the Government agree with the Committee 295 that company accounts should allow for the effects of inflation, and that existing accounting conventions do not do so adequately. There are, as the Committee point out, a number of methods of adjusting for inflation, none of which, by itself, completely satisfies all the requirements of users. But the Government agree that current cost accounting, by bringing out the effects of changes in costs and prices on the fixed assets and stocks used in a business, could lead to a better understanding of the economic performance of companies. They accordingly endorse the recommendation that the detailed practical problems should be examined urgently with a view to current cost accounting becoming the future basis for company accounts.
"I am pleased to be able to announce that the accountancy profession has agreed to set up a Steering Group, as recommended by the Committee, to consider further the practical and other issues involved, with a view to the implementation of CCA in company accounts for all periods beginning after 24th December 1977 if this proves feasible. The Steering Group, which will be chaired by Mr. Douglas Morpeth, will seek my guidance on any general issues arising and will keep me informed of progress. The Government will be prepared to make an appropriate contribution to the costs.
"The Government will consider whether guidance is necessary, and in what form, on the amount available for distribution under the proposed accounting system. It is also necessary to consider further the desirability of showing the effects of inflation on the capital invested in the enterprise, having regard to the suggestion of the accountancy profession, and of continuing to provide historic cost figures, as a supplement to CCA figures, at least for a traditional period. I shall of course seek the views of the Steering Group on these questions.
"The Committee also make recommendations on taxation and price control which are independent from the main recommendations on company reporting. Those on taxation will need 296 to be considered separately before the Government are in a position to give their views on them. The Chancellor of the Exchequer has, however, already accepted the principle of stock relief for the tax years ending in 1973 and 1974 and has stated his expectation of continuing it in some form. With regard to price control, the changes proposed by the Committee could in any case only take full effect when companies publish CCA accounts in some years' time. Whilst the Committee's proposals will be taken into account in future reviews of price control, there is no question of amending the present code now."
My Lords, that is the conclusion of the Statement.
§ 4.2 p.m.
§ Lord ABERDARE
My Lords, the House will be grateful to the noble Lord for having repeated that Statement. I would say straight away that we welcome the Statement and also the fact that the Government have accepted the Report of the Sandi lands Committee. May I take this opportunity of congratulating Mr. Sandi lands and the members of his Committee, which was established by the previous Conservative Administration, on their Report, which I think is a very useful one. There can be no doubt that if in the future industry is to earn the profits on which the whole standard of living of this country depends, we must obviously work on correct figures; and the proposals made by the Sandi lands Committee, and now adopted by the Government, will take account of inflation through the system, as the noble Lord has described, of current cost accounting. I also welcome the fact that the accountancy profession are setting up a Steering Group, chaired by Mr. Douglas Morpeth. I wish them well in their attempt to implement this system by the end of 1977.
May I ask the noble Lord just two questions? He referred to the Government's consideration of whether guidance is necessary on the amount available for distribution under the proposed accounting system. Does this indicate a possible end of dividend control? If it does not, what does it mean? Secondly, there is a reference to continuing to provide historic cost figures. May I ask the noble Lord I why this is necessary? May I also ask 297 him to assure us that, when this new system of current cost accounting is introduced, these new realistic figure will be used for the purposes of company taxation, and not the historic cost figures, which are totally meaningless at a time of high inflation.
§ Lord MACKIE of BENSHIE
My Lords, from these Benches, we should like to welcome the Statement and the, Government's acceptance of the Sandi lands Report on the system of accounting which has been consistently pushed in another place by the Liberal Members. I think that the Government could not really do anything else, since it is a fact that at present British industry is not making or keeping enough profit to maintain the fabric of industry in this country, as is indicated by the high level of rights issues. In fact, on current cost accounting we may still be short of sufficient money for replacements in many companies unless the Government are successful in slowing the rate of inflation a great deal below what it is now.
The Government state that they will continue the stock relief allowance, which is absolutely necessary at a time of inflation. Could they state whether, before 1977, they would be willing to take any other measures with regard to the replacement of equipment?—which, of course, is enormously inflated in its replacement value. While the Government say that they will make no change in the Price Code now, may I ask whether they realise that they really will have to make some change to the Code if the private sector of industry is to be able to play its part in the recovery of this country. It is quite impossible for industry at this moment to absorb the whole of inflation without price increases in many areas.
§ Lord JACQUES
My Lords, I will deal with other questions, but I think I owe it as a courtesy to reply first to the questions which have already been raised. First of all, I thank both noble Lords for the general welcome they have given to the Statement. Four questions have been raised. The first concerned dividend control. The Statement, and the intentions of the Government arising out of the Statement, have no relevance to dividend control. What was meant by the 298 reference to distribution made in the Statement concerned the question of whether any changes in company law were needed. The general principle at the moment is that dividends cannot be paid out of capital; but it will be necessary to give further consideration as to whether capital profits as well as revenue profits should be available for dividend purposes and, if so, to what extent. We should like to see the Steering Group get to work and do some research so that they may offer some opinions before we reach a conclusion as to whether or not further company legislation is required.
The second question was whether it is necessary for historic cost accounting to continue. There are several reasons why that must continue. First of all, it is a general practice that there is some overlap when a change is made, for several reasons. For example, it may be necessary to make comparisons as between one company and another, one of whom may be using an historic cost system while the other may not. If there is an overlap, then there is a better chance of getting a correct comparison; so for comparison purposes, not only as between one company and another but as between different years for the same company, some overlap is advisable.
Regarding the replacement of equipment, I would remind the noble Lord that so far as taxation is concerned there is the 100 per cent. depreciation allowance. I would remind him, secondly, so far as the Price Code is concerned, that a number of concessions were made by the present Government 12 months ago. One of those concerned the new investment relief, which involved a 20 per cent. allowance on expenditure in the fixing of prices. I am pleased to be able to say that the Price Commission indicated that up to the time of their Report it was estimated that this relief was expected to amount to something like £344 million. Therefore, both for taxation and price relaxation, some substantial moves have been made in the direction suggested by the noble Lord.
The last question concerned the Price Code. In addition to the concession made on investment allowance, there were other concessions, including that made for the productivity deduction. This was reduced from 50 per cent. to 20 per cent. Finally, there was the new safeguard which was 299 introduced for firms in special difficulties; so this Government have taken steps to give relief on the Price Code. Those reliefs were not directly related to the Sandi lands Report, but they offset the effects which arise out of that Report. It is expected that there will be a major review of price control next July. The work on that is going on now and it can be taken for granted that the issues raised by the Sandi lands Report will be taken into account in that review.
§ Baroness FISHER of REDNAL
My Lords, I do not stand here as somebody who knows a tremendous amount about current cost accounting. I know what the housewife has to do each week with her accounting, which has to be current cost and every other kind of cost. Will this new form of accounting have any indirect effect of increase on prices? I ask that question sincerely because so many housewives are still firmly of the opinion that the changeover to decimalisation caused an increase in prices because of the change in monetary accounting. I should like my noble friend to assure me that this new form of current cost accounting by companies will not have an indirect action on prices as happened when we went over to decimalisation.
§ Lord ORR-EWING
My Lords, will the noble Lord let the House know whether this change could start a little earlier? The Conservative Administration set up this inquiry approximately two years ago. It took two years to report, and then another five months before the Government reached their conclusions and made this announcement. Now we are told it has to be another two years, until Christmas Eve 1977, before this change starts to take effect. If I understand that rightly, it means that for the majority of companies we shall not start this new form of accounting until the year starting in 1978–79. Is this not an unconscionable time to bring about reform? Was this the earliest that the Confederation of British Industry and the accounting institutions could under take it, or was it because of the heavy hand of the Treasury? We have a feeling they will gain so long as the present system goes on because it inflates profits, while the new system will tend to reduce profits to more realistic proportions. What has been the controlling factor in post- 300 poning the start of this admirable new idea?
§ Lord HARMAR-NICHOLLS
My Lords, while the Government have accepted the cost accounting section of the Report, and we all welcome that, and indeed put a date when they hope to bring it into operation (although my noble friend thinks that that date is too long distant), am I to understand from the Statement that there has been removed from speedy consideration the taxation element that was recommended as an ancillary to the Sandi lands Report? One hopes that the review of general taxation on industry will be speedily undertaken because, however much we rearrange current business in terms of different accounting, the real problem for manufacturing and industry generally today is the high rate of taxation itself. I hope that the urgency of dealing with that, bearing in mind the investment needs of this country, will be taken into account. That is why I am a little worried, if I heard the noble Lord aright, that that part of the recommendations has been taken out and will not be speedily looked at.
§ Lord JACQUES
My Lords, three questions have been raised and the first is prices. Let us bear in mind the purpose of the Sandi lands Report. The purpose is to set forth a system of accounts which will show more clearly what a company has achieved and what its financial position is. That, by itself, will obviously not increase prices or increase profits; it just makes the position clearer. Prices depend on other elements. Prices depend upon competition and the control which is exercised by the Government of the day. Certainly in present circumstances, we would not expect application of the Sandi lands Report to have any effect upon prices. If it were to have a serious effect on prices, then counteraction would be necessary.
So far as the date of operation is concerned, the main reason for the delay is the intricacy of the problem. These matters are comparatively easy to set out in a report but much more difficult to apply in practice, because the circumstances vary from one company to another. Therefore, a good deal of study is necessary on application as distinct from the ideas. That is what the Steering Group are to 301 deal with. They will consider the application. In the meantime, there is no reason at all why any company should not adopt the system if it wishes to. What we are saying is that, so far as the accountancy profession is concerned, there will be a mandatory direction as from the date I gave; but we are not saying somebody could not do it in the meantime.
Lastly, I come to the taxation element. I am not surprised that the point has been raised, but it would be very optimistic to expect any great changes in taxation arising out of this Report, for the simple reason that the changes have already been made. There is already 100 per cent. depreciation allowance and there is already stock relief, and these are the main elements which arise out of the Report. They are already in effect because of action by the previous Government and action by this Government.
§ Lord ALPORT
My Lords, following the question from my noble friend Lord Orr-Ewing, may I ask the noble Lord whether the time factor could be reconsidered? It is quite right to say that this is a very complicated matter in its application, but does the noble Lord realise that where two principles of accounting will run parallel, as he forecast in his last answer, the confusion will be very great indeed and should be avoided at all costs? Would it not therefore be possible for the Government to consider interim guidance from the Steering Group not later than a year from now?
§ Lord JACQUES
My Lords, it is our view that if we attempt to start the change earlier there will be more confusion. There will be companies adopting the new system in dribs and drabs. If we allow a proper period of time for the work on application to be done—and it has to be done not only by the Steering Group but also by the individual companies—there will be less confusion. There will be a greater tendency for companies to act together, rather than in dribs and drabs.
§ Lord ROBBINS
My Lords, is the noble Lord aware that his Statement will be welcomed in many quarters quite unconnected with organised Party politics? This is because it indicates a policy which should serve us in very good stead in anticipating correctly the course of policy to be pursued by private industry in making its plans for the future. Is it 302 intended that the same system of accounting should be adopted by all enterprises for which the Government are responsible in an industrial way?
§ Lord JACQUES
My Lords, in answer to the last question, it is intended that the system would apply in the nationalised industries. That indeed was in the Report. We appreciate the welcome that has been given to the Report in academic circles. That is especially fortunate, because in many of the changes that we make in industry we depend upon our educational system to prepare the men who will be at the helm when the changes are effected. I would again thank the House for the welcome it has given to the Statement.
§ House adjourned during pleasure and resumed by the Lord Chancellor.