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uct liability where claims have not yet been made; bad debts for which the payor
has not yet declared his inability to pay; the estimated life of equipment where the
retirement date is not yet certain; 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 . .
THE ENVIRONMENT OF MARINE ACCIDENTS
Marine accidents at the Panama Canal inherently place the accountant in the
role of an estimator. Obviously, it cannot be predicted 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 occur-
rences of accidents over a period of time, it is possible to reach reasonable judge-
ments regarding levels of cost.
One thing is certain: if the Canal operates, accidents will occur. What is uncertain
in a given month or year is the number of accidents and their relative severity. To
wait until a claim is ultimately settled before accounting for it has potential for
great distortion in the measurement of cost. The more appropriate basis is to nor-
malize the costs by recognizing that accidents are an inherent 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 recommended that the
Panama Canal Company establish a reserve for marine accidents by charging each
year with a pro-rata cost of accidents over a multiyear period. This has been the
policy of the Panama Canal Company and the successor Panama Canal Commission
in accounting for marine accidents. We believe it to be a sound and prudent ap-
proach.
I wish to quote from our report dated August 24, 1973, setting forth our reasoning
for a change in the method of accounting:
"The Panama Canal Company is precluded by law from obtaining outside insur-
ance coverage to protect it from the risks associated with the costs of these losses.
By their nature, such losses are unusual and would distort the cost of providing
Canal service in the year(s) of occurrences if provisions were not made annually to
reserve for such losses. Under the previous practice of recording these losses in the
year of occurrence, the risk of nonrecovery of such costs was borne by the company.
Under the new policy, which recognizes the unpredictability but certainty of such
occurrences, the company is attempting to minimize a risk for which it is not being
compensated.
"Recording annual provisions for these losses which will occur. These provisions
are comparable to the insurance expense which would be incurred if the company
were permitted to obtain outside insurance coverage. This practices also allows for a
reasonable accommodation of the cost of marine accidents and other casualty losses
in the rate-making process."
LIABILITY
At this proceeding there is substantial testimony on the question of the Commis-
sion's legal liability for ship accidents. Mr. McAuliffe has indicated that the present
legislation is somewhat confusing on this matter and requires clarification. Accord-
ingly, there appears to be a legal question regarding the longstanding policy of the
Commission to reimburse the Panama Canal's customers where the Commission or
its employees are found to be at fault.
I am not a lawyer. I deal with the issues from the perspective of an accountant.
With the long-standing policy of assuming the costs of ship accidents where the
Commission has been found at fault, it is sound from an accounting standpoint to
continue the recognition of marine accident costs in the accounting process. This re-
quires an estimation, as previously described, and is obviously based on the assump-
tion that the Congress will not preclude such reimbursement. However, until the
Congress concludes that a different policy is appropriate, the proper accounting is to
recognize the cost as has been done by the Commission.
In a matter not different from changes of other accounting estimates, if ultimate
costs are different than estimated, then new estimates are accounted for and reflect-
ed in the Commission's accounting records. Such accounting adjustments will be re-
flected prospectively in the tolls-setting process, giving credit for overestimates or
charging back underestimates.