At a General Session of the INTERSTATE COMMERCE COMMISSION, Held at Its Office in Washington, D. C., on the 3d Day of June, 1907. [Figures in brackets on right-hand side of pages indicate folios of original issue.] The subject of a Uniform System of Accounts to be prescribed for and kept by carriers being under consideration, the following order was entered: It is ordered, That the Classification of Operating Expenses and the text pertaining thereto, prepared under the direction of this Commission by Henry C. Adams, in charge of Statistics and Accounts, and embodied in printed from to be hereafter known as Third Revised Issue, a copy of which is now before this Commission, be, and the same is hereby, approved; that a copy thereof duly authenticated by the Secretary of the Commission be filed in its archives, and a second copy thereof, in like manner authenticated, in the office of the Division of Statistics and Accounts; and that each of said copies so authenticated and filed shall be deemed an original record thereof. It is further ordered, That the said Classification of Operating Expenses with the text pertaining thereto be, and is hereby, prescribed for the use of carriers by rail (exclusive of electric railways) subject to the provisions of the act to regulate [5 commerce as amended June 29, 1906, in the keeping and recording of their operating expense accounts; that each and every such carrier and each and every receiver or operating trustee of any such carrier be required to keep all operating expense accounts in conformity therewith; and that a copy of such Third Revised Issue be sent to each and every such carrier and to each and every receiver or operating trustee of any such carrier. It is further ordered, That the rules contained in said Third Revised Issue of the Classification of Operating Expenses are, and by virtue of this order do become, the lawful rules according to which the said operating expenses are defined; and that each and every person directly in charge of the accounts of any such carrier or of any receiver or operating trustee of any such carrier is hereby required to see to, and under the law is responsible for, the correct application of the said rules in the keeping and recording of the operating expense accounts of any such carrier; and that it shall be unlawful for any such carrier or for any receiver or operating trustee of any such carrier or for any person directly in charge of the accounts of any such carrier or of any receiver or operating trustee of any such carrier to keep any account or record or memorandum of any operating expense item except in the manner and form in said Third Revised Issue set forth and hereby prescribed, and except as hereinafter authorized. It is further ordered, That any such carrier or any receiver or operating trustee of any such carrier may subdivide any primary account in said Third Revised Issue established as may be required for the purposes of any such carrier or of any receiver or operating trustee of any such carrier; or may make assignment of the amount charged to any such primary account to operating divisions, to its individual lines, or to States: Provided, however, That a list of such subprimary accounts set up or such assignments made by any such carrier or by any receiver or operating [6 trustee of any such carrier be first filed in the office of the Division of Statistics and Accounts of this Commission subject to disapproval by the Commission. It is further ordered, That in order that the basis of comparison between the fiscal year ending June 30, 1908, and previous years be not destroyed, any such carrier or any receiver or operating trustee of any such carrier may, during the twelve months ending June 30, 1908, keep and maintain, in addition to the operating expense accounts hereby prescribed, such portion or portions of its present accounts with respect to operating expense items as may be deemed desirable by any such carrier, or by any receiver or operating trustee thereof, for the purposes of such comparison; or, during the same period, may maintain such groupings of the primary accounts hereby prescribed as may be desired for that purpose. It is further ordered, That any such carrier or any receiver or operating trustee of any such carrier may, in addition to the operating expense accounts hereby prescribed, keep any temporary or experimental accounts the purpose of which is to develop the efficiency of operations: Provided, however, That such temporary or experimental accounts shall not impair the integrity of any general or primary account hereby prescribed; and that any such temporary or experimental accounts shall be open to inspection by the Commission. It is further ordered, That July 1, 1907, be, and is hereby, fixed as the date on which said Third Revised Issue shall become effective. [7 INTRODUCTORY LETTER. To. Carriers: Interstate Commerce Commission, The first revised issue of the Classification of Operating Expenses took effect July 1, 1894, and the second revised issue became effective July 1, 1901. The Classification herewith submitted will become effective July 1, 1907, and is issued in accordance with an order of the Interstate Commerce Commission, a copy of which will be found immediately preceding this letter. It is eminently appropriate that public acknowledgment should be made to the Association of American Railway Accounting Officers, and to the standing and special committees appointed by that association, for their hearty cooperation in working out the details of this Classification. In no other way would it have been possible for. the Commission to avail itself of that special knowledge and expert experience necessary for the successful accomplishment of the task undertaken. With one exception, the Classification of Operating Expenses herewith promulgated conforms to the recommendations of that association. This exception refers to the treatment of per diem and mileage payments between carriers on interchanged or loaned equipment, and, in view of the great variety of opinions expressed by railway accounting officers, as well as by certified accountants and others, relative to this point, it seems proper to submit an explanation of the reasons for the rules here promulgated. Before submitting [9 that explanation, however, it may be proper to say a word relative to a new feature of this Classification, namely, the establishment of formal depreciation charges. Consideration of Depreciation: A number of points have been raised by correspondents relative to depreciation that call for the following general statements, all of which bear upon the manner in which depreciation accounts should be treated: 1. The question of depreciation is fundamentally a question of values, and not a question of maintaining the original capacity, or a standard of operating efficiency, or of keeping full the numbers in equipment series. 2. The depreciation rules may be worked either on the basis of the value of individual cars and locomotives, or on the basis of the value of series of cars and locomotives. On this point, accounting officers are at liberty, until advised to the contrary, to follow whichever method seems to them the more appropriate. 3. The basis of accumulation-that is to say, the amount to which the percentage rate is applied-ought, in strict theory, to be the original cost. For the current year, however, accounting officers are at liberty to accept original cost (estimated, if not known), record value, or purchase price. The term "record value" should not be interpreted to mean the value of the equipment as it stands in the capital account (unless that account represents the original value of the equipment on hand), but the actual cost or value of all equipment, regardless of where charged when purchased; and in case purchase price be accepted as the basis of the percentage charge to depreciation, the percentage rate should be limited to the rate required to replace the price paid. A second-hand locomotive, for example, is not called upon to provide for its replacement, when abandoned, by a new locomotive. As stated above, it is [10 values and not locomotives with which depreciation charges deal. 4. The application of depreciation charges for the current year and subsequent years must not be influenced by the practice of years past. In case property has been appreciated by excessive charges to operating expenses in years past, the value thus placed in the property must be regarded as a permanent undivided asset to the stock holders. On the other hand, in case property has depreciated on account of insuf ficient charges to operating expenses in years past, this fact must not be permitted to influence the determination of the depreciation rate for the current year. 5. The monthly charges to operating expenses for "depreciation" on the several classes of equipment, will, of necessity, create or require corresponding liability ae counts to which such depreciation may be credited. To that end, carriers will be required, beginning July 1, 1907, to set up an appropriate liability depreciation account for each of the several classes of equipment upon which depreciation is charged. These accounts should be designated as follows: (a) Locomotives-Replacement (including both steam and electric); (b) Passenger-Train Cars-Replacement; (c) Freight-Train Cars-Replacement; (d) Electric Equipment of Cars-Replacement; (e) Floating Equipment-Replacement; (f) Work Equipment-Replacement (except locomotives). To these replacement accounts should be credited monthly the amount of accrued depreciation on each class of equipment, respectively. Such credits should invariably equal the gross charges to maintenance for depreciation. [11 To these several replacement accounts under their appropriate heads should be charged, at cost, all equipment purchased, built, or otherwise acquired for the purpose of maintaining the value of a carrier's equipment. The monthly charges to operating expenses for "renewals" of the several classes of equipment will be similarly treated. It is not intended that these accounts should be restricted to individual cars or locomotives, or that carriers are not at liberty to renew or replace equipment upon which depreciation has accrued prior to the retirement of such equipment. On the other hand, the several amounts standing to the credit of those replacement accounts should be available to carriers for the purpose of replacement of equipment to the extent of such credits; however, all replacements in excess of such credits must be considered as Betterments or Additions, and charged either to Income or to Capital. Per Diem and Mileage Payments Between Carriers: In the second revised issue of the Classification of Operating Expenses, "Car mileage-balance" and "Hire of equipment-balance'' were charged directly to operating expenses under the general account "Conducting Transportation." The propriety of including such items in operating expense accounts has been questioned by many railway accountants, it being claimed that the amount paid by one carrier for the use of cars and locomotives of another carrier is in its nature a rent and not an operating expense. This suggestion, that the per diem and mileage for cars, for example, should be treated as a rental proposition, while in the main correct, involves a result which from the statistical point of view cannot be wholly approved, for the reason that [12 under the regulations for depreciation operating expenses are charged with the depreciation upon the total equipment of the carrier, while, as a matter of fact, some or all of that equipment may at some time or other during the year be in operation on the line of another carrier. Such a method of treating per diem and mileage payments would burden the general account "Maintenance of Equipment" of a lessor road with an expense not traceable to the traffic of the lessor road. From the statistical point of view, operating expenses are a measure of the cost of transportation, and no expense should be included in the operating accounts of one carrier that is occasioned by the traffic of another carrier, from which it follows that the Maintenance of Equipment accounts of a lessor road should not be burdened with Repairs, Renewals, or Depreciation occasioned by the use of its cars by a lessee road, for not only would this make the account in question too high when assigned to the traffic of an individual carrier, but it would destroy comparison between the Maintenance of Equipment accounts of lessor and of lessee roads. A complete analysis of the situation discloses the fact that the gross rental charge is in part an operating expense and in part a rent proper, and the Classification herewith promulgated provides for the separation of the gross rental charge accordingly. |