Current Purchasing Power Summary

If the value of money is changing, it is clear that the money standard of measurement ceases to be efficient. Financial reports should be adjusted, therefore, for the effects of changes in the value of money for the following reasons:

(a) to provide a more accurate basis for assessing the value of a shareholder's investment in a company;

(b) to enable more meaningful comparisons to be made between the reported results of successive years;

(c) to enable more meaningful inter-company comparisons to be effected.

The unsatisfactory nature of historical cost as a basis for financial reporting is reflected in the fact that companies have been increasingly incorporating partial adjustments for inflation in their reported values. The revaluation of fixed assets by firms in the United Kingdom, and the adoption of LIFO by companies in the United States are examples of this phenomenon.

CPP accounting allows adjusted historical costs to be matched against current revenues. It computes losses arising through holding monetary items during periods of inflation.

CPP accounting has serious limitations. It may be argued, for example, that the concept of generalized purchasing power does not exist; that individuals hold specific purchasing power for the assets they wish to buy. Price level accounting, moreover, does not necessarily maintain the productive capital of the firm: it merely maintains the general purchasing power of the firm. Also, the distribution of monetary 'gains' could seriously affect the firm's liquidity.

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Read on: An Appraisal of Cpp Accounting

CPP accounting restates historical cost in terms of current purchasing power. It is an attempt to remove the major objection to historical cost valuations, namely that the unit of measurement changes when price levels change. The intention is that this objection should be removed by an adjustment which results in units of the 'same purchasing power' being added together in the measurement process.

Common accounting can be applied with a high degree of objectivity, required of accounting valuation, as it does not depart in principle from historical cost based measurement. Price level adjustments... see: An Appraisal of Cpp Accounting