Thursday, April 05, 2007



In journal 23 (Leave accounting to the Accountants) of 26 April last year, I was fairly scathing about the decision of the Court of Appeal in Small v Mars (UK) Ltd where I applauded the minority judgement of Lord Reed and, after noting that it was likely that the case would go to the House of Lords, ended by saying “It is to be hoped that their lordships will be convinced by the argument of Lord Reed, which is the only of the judgements that, to an accountant, accords both with the facts and with the logic of the accounting principles”.

Thankfully that is exactly what happened. The House of Lords handed down its judgement on 28 March and in a commendably short judgement, Lord Hoffman concluded, “I agree with the lucid dissenting opinion of Lord Reed”.

This is an important case for the accountancy world because it emphasises that accounting principles are constantly developing and that the Courts need to pay far more attention to the accounting principles in force at the time of a transaction than to prior Court decisions made on the basis of accounting principles that existed at an earlier time.

The case was concerned with whether or not depreciation included in stock had to be disallowed. HMRC took the approach that depreciation and other expenditure is debited in the accounts and a corresponding credit is then made to offset the debit by the introduction of the closing stock figure. This was in the face of accountancy evidence that what closing stock does is to keep the costs relating to future years out of the computation of profits.

Lord Hoffman summed the position up very well in his judgement. “Stock is an asset which has a value and cannot be a cost. But that seems to me to confuse the role of stock in a balance sheet with its role in a profit and loss account. The balance sheet is a statement of assets and liabilities on a given date and in that statement, stock is indeed one of the assets. The profit and loss account, on the other hand, is concerned with revenue and costs, and in that context, the figure for stock represents a cost which SSAP 9 requires to be kept out of the computation of profit for the year but recorded to be carried over into the computation for a future year”.

Robert Maas


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