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positive economic contribution and is essential for a service such as
the Canal to be able to attract users.
From an accounting standpoint, the basis for tolls requires that
all costs of maintaining and operating the Panama Canal be recog-
nized-reflected in the accounting records. Costs which are not rec-
ognized cannot be reckoned with in the toll-setting process. It
should be appreciated that the accounting process for a rate-regu-
lated utility such as the Panama Canal has special significance in
that the level of cost recognized through the accounting process es-
tablishes the price to be charged for the service. Thus, the account-
ing process has a direct relationship to the actual cash received.
This is in contrast to a profit-oriented company wherein the ac-
counting process serves the principal function of measuring the
level of profit earned.
Let me deal with the use of estimates in the accounting process.
The accountant constantly deals with the requirement for cost esti-
mation. Decisions on when to recognize costs require the exercise of
judgment based upon the understanding of financial realities and
the application of generally accepted accounting principles. Howev-
er, the alternative of not recognizing incurred costs or recognizing
such costs only after some physical event has occurred certainly ig-
nores economic facts, and is wrong.
For a sound basis of cost measurement, the accountant must
make estimates based upon the asssumption that the enterprise is
a going concern. Months or years before a check is drawn, the ac-
countant must measure costs for such things as product liability
where claims have not yet been made; bad debts for which the
payor has not yet declared his inability to pay; estimate of taxes
when the tax return has not yet been completed, or the position of
the taxing authority is not yet known; estimate of cost to complete
a contract months or years before it is physically completed; and
the list of examples goes on and on.
Marine accidents at the Panama Canal inherently place the ac-
countant in the role of an estimator. Obviously, it cannot be pre-
dicted when an accident will occur, who will be responsible, or how
much the repairs will cost if the Panama Canal is held responsible.
Although these are complications, they do not present overwhelm-
ing obstacles to a proper accounting. By reference to level of traffic
and past occurrences of accidents over a period of time, it is possi-
ble to reach reasonable judgments regarding levels of cost.
One thing is certain: If the canal operates, accidents will occur.
What is uncertain in a given month or a given year is the number
of accidents and their relative severity. To wait until a claim is ul-
timately settled before accounting for it has potential for great dis-
tortion in the measurement of cost. The more appropriate basis is
to normalize the costs by recognizing that accidents are an inher-
ent part of operations and that each period of operations should
bear a pro rata share of costs over a longer period of time.
Prior to the Panama Canal's first toll increase in 1974, we recom-
mended that the Panama Canal Company establish a reserve for
marine accidents by charging each year with a pro-rata cost of acci-
dents over a multiyear period. This has been the policy of the
Panama Canal in accounting for marine accidents. We believe it to
be a sound and prudent approach.