I received another Moody’s Transportation Manual last night and was looking thru it. It is dated 1980 and gives a wealth of info for the 70’s…our favorite economic decade to discuss it seems.
There is a footnote which reads:
“Figures based on new ICC expense groupings effective Jan.1, 1978: not comparable to prior years.”
The expense ratios seemed to have jumped considereably in those two years. In fact, most carrier’s OR’s jumped nearly 10%.
So, what was this acccounting change which would have caused such a drastic jump?
I was under the impression that in the late 70’s carriers were allowed to depreciate certain investments in trackage, rather than expense those investments. It seems to me that would have resulted in a reduction in the OR.
Comments?
BTW, I now have 4 Moody’s dated 1972, 1980, 1990, and 1998 if anyone is wanting any financial info on a specific railroad or the industry.
Most of the deregulation happened with the Staggers Act of 1980. Before that was the 4R Act of 1976, mostly aimed at the failing eastern roads. The real fun started in in 1983 with the re-writing of the ICC Uniform system of Accounts (now 49CFR1201)…I believe most of what you are looking at is the elimination of passenger service and the beginning of Amtrak.
If you know your way around an income statement and balance sheet and accounting practises, you will know that accrual accounting is employed to write off (expense) the physical assests over the life of the asset.
Prior to 1900, companies employed a method of dealing with “plant” assets called Betterment Accounting-aka Retirement-Replacement-Betterment. Using railroads to illustrate, when track structure was initially installed, the cost would be booked as an asset on the balance sheet and was not depreciated. Thereafter, the inkind replacement of tie, rail and the other elements of track structure was recorded as a current expense and with the other costs of running the railroad was subtracted from revenue to determine profit for the reporting period. If the work on the track was an improvement or “betterment” then part of the work would be booked as an asset. For example, if 75lb rail was replaced with 100lb rail, 25% of the cost of the rail replacement was booked as an asset and the balance as a current period expense. Finally, if track is pulled up due to track or line abandonement, the book value of the asset-actually its “original” value is written off as a current period expense.
I believe it was 1906 when the ICC odered the railroads to convert to acrual or depreciation accounting. This change was made for other capital items, such as rolling stock, but the railroads argued that it would be impossible to keep records for all the individual pieces of track structure and convinced the ICC that Betterment Accounting should continue for track.
The Betterment Accounting system can work reasonably well as long as track structure maintenance proceeds at steady pace from reporting period to reporting period and maintenance is not defered. However defering maintenance for a period and then doing “catch-up” work could cause big swings in reported p
I see what you are saying regarding the “betterment” issue. The “original” track was never depreciated off of the books. Only the betterment (increase in weight or other measurement) was expensed. How did they handle the inflationary pressures of the items.
For example…lets use the 75 pound rail, lets say it was installed in 1950. Then in 1978, suddenly there was coal to be hauled and it was replaced with 136 pound rail. So 61 pounds or 81% of the rail would be expensed. But, the cost of the rail no doubt had increased so that the 75 pound rail from the 1950 install is considerably less than 75 pounds of the 1978 install.
Perhaps I am thinking too much about this.
Now, moving on…when railroad started abandoning their track, these assets were removed from the balance sheet. That had to be done as a “loss” on the income statement and typically I would think that would be as an “extraordinary loss”, which wouldnt affect the operating ratio, since it is “below” the operating expenses on the income statement.
However this was handled, and whatever this is, no doubt it made comparisons very difficult for analysts and others, including me nearly 30 years after the fact!
I should back up and explain that although I knew betterment accounting was in use when I worked at the IC in the 1970’s, I wasn’t an accountant and I don’t know exactly how it was applied. I had to refresh my memory on the subject from information out on the net.
That said: Inflation does not come into play in the write-off of assets. Even when depreciating a long life asset, only the original cost number is used. In your illustration of a betterment the 19% over “replacement” cost is booked as an asset and added to the asset cost of the original 1950 installation.
To tell you the truth, I have never looked into the make-up of the operating ratio and I am not sure where the write off of the abandoned asset would have gone. Your are correct that costs resulting from discontinued operations are usually reported in a way to indicate that they are extraordinary items. On the other hand, with the betterment accounting writing off the asset when the track is removed is the regular way of booking the cost as an expense.
Don’t know if there is an old time accountant out there, but an answer from someone experienced would be interesting. Other than that, a look at annual reports from the years just before 1983 might have a clue. Seems to me that was a period of fairly high reduction in track mileage and if the write-off was considered “extraordinary” there would be notes.