Sandilands Committee

Overview

The Sandilands Committee was a crucial initiative by the UK government in 1975, tasked with designing robust methods to account for inflation’s impact in published financial statements of companies. Chaired by Sir Francis Sandilands, the committee’s work led to significant recommendations in accounting practices.

Key Recommendations

The Sandilands Committee recommended the following:

Current-Cost Accounting (CCA): As a primary method, CCA was endorsed instead of the Current Purchasing Power (CPP) accounting. Current-Cost Accounting captures the costs that would be incurred should a company replace its assets at current market prices.
Changes in Inflation Accounting: The committee urged adaptation in accounting standards to carefully reflect the dynamic nature of inflation, arguing that conventional historical cost accounting did not adequately illustrate the real financial position and performance of companies during periods of high inflation.

Examples

Example 1: Application in Manufacturing

A manufacturing company, in 1977, applies the CCA method to account for rising costs of raw materials due to inflation. By adopting the latest market prices in their financial reports, the company could provide a more realistic view of their cost of goods sold, ultimately providing stakeholders with accurate profitability data.

Example 2: Retail Sector Impact

A retail company adjusts the value of its inventory using CCA, reflecting the immediate cost to replace stock at market prices due to inflation. This adjustment helps in addressing the distorted profits that would have resulted if historical cost accounting were applied.

Frequently Asked Questions

What is the Sandilands Committee?

The Sandilands Committee was established by the UK government in 1975 to recommend ways to account for inflation in the financial statements of companies.

The committee recommended Current-Cost Accounting (CCA) over the Current Purchasing Power (CPP) method.

Why was Current-Cost Accounting abandoned?

With the significant reduction in inflation from the 1980s onwards, the need for CCA diminished, causing a shift back to historical cost accounting methods.

What is the difference between CCA and CPP?

CCA focuses on current market costs for asset replacement, while CPP adjusts financial statements based on the overall change in price levels or purchasing power.

Current-Cost Accounting (CCA)

An accounting method that values assets and liabilities at their current market value, rather than their historical purchase price.

Current Purchasing Power Accounting (CPP)

An accounting approach that adjusts financial statements according to changes in the general price level, reflecting purchasing power.

Historical Cost Accounting

The conventional method where assets and liabilities are recorded at their original purchase price without adjustment for inflation.

Online Resources

Suggested Books for Further Study

“Understanding Financial Statements” by Lyn Fraser and Aileen Ormiston
- Provides comprehensive insights into different accounting approaches, including inflation accounting.
“International Financial Reporting and Analysis” by David Alexander and Anne Britton
- Discusses contemporary issues in financial reporting, including the impacts of inflation.
“Financial Accounting: An Introduction” by Pauline Weetman
- A foundational text on various accounting principles, including historical cost and current-cost accounting.

Sandilands Committee: Fundamentals Quiz

### What was the primary focus of the Sandilands Committee? - [ ] Corporate tax structures - [x] Accounting for inflation - [ ] Financial fraud detection - [ ] Banking regulations > **Explanation:** The Sandilands Committee was established to determine the most suitable way to account for the effects of inflation in the published accounts of companies. ### In what year was the Sandilands Committee set up? - [ ] 1965 - [x] 1975 - [ ] 1985 - [ ] 1995 > **Explanation:** The Sandilands Committee was established by the UK government in 1975. ### Who was the chairperson of the Sandilands Committee? - [ ] Sir David Tweedie - [ ] Sir Adrian Cadbury - [x] Sir Francis Sandilands - [ ] Lord Sharman > **Explanation:** The committee was chaired by Sir Francis Sandilands. ### What type of accounting did the Sandilands Committee endorse? - [ ] Historical Cost Accounting - [x] Current-Cost Accounting - [ ] Activity-Based Accounting - [ ] Fair Value Accounting > **Explanation:** The Sandilands Committee recommended Current-Cost Accounting in preference to Current Purchasing Power Accounting. ### Why did Current-Cost Accounting fall out of favor in the 1980s and 1990s? - [ ] Due to increase in fraud cases - [x] Due to reduction in inflation - [ ] Due to changes in tax laws - [ ] Due to technological advancements > **Explanation:** With the reduction in inflation, the need for Current-Cost Accounting diminished, leading to its decline in usage during the 1980s and 1990s. ### Which accounting method adjusts financial statements based on overall price level changes? - [ ] Historical Cost Accounting - [ ] Current-Cost Accounting - [x] Current Purchasing Power Accounting - [ ] Mark-to-Market Accounting > **Explanation:** Current Purchasing Power Accounting adjusts financial statements according to changes in the general price level, reflecting purchasing power. ### What is a key difference between Current-Cost Accounting and Historical Cost Accounting? - [x] Valuation at current market value vs. original purchase price - [ ] Application in public vs. private sector - [ ] Use of cash flow analysis vs. periodical reporting - [ ] Fixed vs. variable cost treatment > **Explanation:** A key difference is that Current-Cost Accounting values assets and liabilities at their current market value, while Historical Cost Accounting uses the original purchase price. ### How does Current-Cost Accounting impact financial reporting during high inflation periods? - [ ] It reduces asset valuations - [ ] It causes financial statements to be delayed - [ ] It increases profit margins artificially - [x] It reflects more accurate financial positions > **Explanation:** During high inflation periods, Current-Cost Accounting helps in reflecting a more accurate financial position by valuing assets at their replacement costs. ### What is one drawback of Current-Cost Accounting? - [ ] It undervalues long-term assets - [x] It can be complex and costly to implement - [ ] It ignores market fluctuations - [ ] It uses outdated prices > **Explanation:** One drawback of Current-Cost Accounting is its complexity and the potential cost of applying current market valuations regularly. ### Which of the following was NOT a role of the Sandilands Committee? - [ ] Exploring accounting for inflation - [ ] Recommending current-cost accounting - [x] Investigating corporate fraud - [ ] Proposing changes in financial reporting standards > **Explanation:** The committee was not tasked with investigating corporate fraud; its focus was on methodologies for accounting for inflation.

Thank you for diving into the significance of the Sandilands Committee and testing your knowledge with our quiz. Keep learning and excelling in your understanding of accounting principles!