The End of Betterment Accounting: A Study of the Economic, Professional, and Regulatory Factors That Fostered Standards Convergence in the U.S. Railroad Industry, 1955-1983

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Abstract: On January 26, 1983, the Interstate Commerce Commission (ICC) announced that it would require all railroads under its regulatory jurisdiction to change from Retirement-Replacement-Betterment (RRB) accounting, to a more theoretically sound depreciation accounting for matching revenues and expenses. The change was needed because RRB did not allow for the recapture of track investment, leaving the railroads with limited capital to replace aging track lines. Over the previous three decades, it had become painfully obvious to everyone that the industry's economic woes were the result of archaic accounting procedures that lacked harmony with the rest of American accounting standards, but the ICC was reluctant to change until new tax legislation in the early 1980s forced the issue. The decision was a culmination of a debate that started in the mid-1950s when Arthur Andersen, with the help of the securities industry, began an effort to harmonize railroad and industry standards using arguments that mirror those supporting the international accounting harmonization efforts of the early 21st century.


As the globalization of business markets grows, the debate over proper accounting standards to meet the needs of cross-border and cross-cultural investors has grown. This is especially true since the reorganization of the international standards-setting apparatus in 2001 and the creation of the International Accounting Standards Board. Even before the reorganization, the Financial Accounting Standards Board (FASB) had attempted to harmonize some of U.S. generally accepted accounting principles (GAAP) with international principles. For example, one of the intentions of SFAS 128, Earnings per Share, was to make "computing earnings per share more compatible with EPS standards in other countries" [FASB, 1997, para. 1]. Other U.S. GAAP that is not yet harmonized lies in the areas of accounting for research and development and for inventories. These and other accounting standards lack current convergence with international GAAP. Though the drive to harmonize international standards continues at the forefront of changing accounting thought, this debate over diverging accounting standards is not a new one.

Nearly half a century before the current international accounting standards debate, some in the accounting profession, led by Arthur Andersen (AA), felt that railroad accounting practices required by the Interstate Commerce Commission (ICC) were rapidly diverging from GAAP and, in 1955, asked for a change. It was felt that such a divergence was a major cause of the economic hardships facing the U.S. railroad industry. At the core of these divergent practices was "betterment accounting" or, more theoretically, Retirement-Replacement-Betterment (RRB). The ICC had institutionalized the practice in the early 20th century to account for "track and way structures," but it was rapidly becoming an anachronism in the face of modern depreciation rules.

In brief, AA and its allies felt that the ICC needed to phase out RRB in favor of depreciation accounting in an effort to allow the capital-starved railroads to recoup investments that, in some cases, were more than 50 years old. In addition, AA cited problems with comparable financial statements, problematic auditing procedures, and clarity as other reasons for the much-needed change. Ironically, the drive for international standards convergence is predicated on some of the same reasoning as Andersen's arguments.

The ICC and the American Institute of Accountants (AIA) (1) saw no reason to eliminate the traditional method of track accounting because it tended to keep replacement costs in line with inflation. The railroads, however, were much more pragmatic. They wanted to keep RRB due to the cost of the change and the impact such a change would have on their rate-of-return on assets (ROA), the centerpiece of ICC rate-making policy. In the face of powerful interests, the ICC refused the change. …