Inflation accounting for Australian public enterprises: economic rationale and financial implications

Since 1982 Victoria's (Labour) Government has implemented several significant reforms for the state's major public enterprises. Public enterprises in Victoria are required to aim at a 4 per cent real rate of return on the current value of total assets and pay dividends of up to 5 per cent on the 'equity' the community is deemed to have in each public enterprise. These reforms are appraised in Xavier (1986b). Beginning with their Annual Reports for 1985-86, the state's major public enterprises are also required to present, in addition to conventional historical cost accounts, supplementary financial statements designed to measure the rate of return on assets and the real return to shareholders i.e. the return on equity. These supplementary financial statements constitute the so-called Rate-of-Return (RRR) Reporting accounts which is a version of inflation or Current Cost Accounting (CCA). In his foreword to the MMBW's Annual Report for 1985-86, the Board's chairman Mr. R.D. Marginson, made a call for wider discussion of the significant changes in accounting policy which were being implemented. This paper is a response to this call. Section 1 of the paper introduces the topic. Since the genesis of the RRR Reporting version of inflation accounting is the Victorian Government's policy that major public enterprises target to earn a real (inflation adjusted) rate of return of 4 per cent and pay dividends of up to 5 per cent of equity, sections 2 and 3 discuss these issues.