Current Value Accounting

The debate concerning the appropriateness of adjustments for price level changes has highlighted the problems associated with historic cost measures. Neither partial nor general adjustments to historic cost measures deals satisfactorily with the problem of price level changes.

Current value accounting is a radical alternative to the proposals we discussed in detail. It represents an attempt to combine desirable aspects of economic theory with the conventional accounting method based on historic costs. Current value income models use current market prices which are incorporated in the traditional accounting format.

For reporting purposes, concepts of income are required which satisfy the criteria of relevance and feasibility. We have noted that concepts of income which were relevant were not necessarily feasible and vice versa. Whereas economic income is more relevant to decision making than account-ing income, it does not satisfy the criteria of feasibility. By contrast, accounting income fails to satisfy the criteria of relevance, though it does meet the criteria of feasibility.

Current value accounting attempts to bridge the gap between accounting and economic income by providing measurements which are both relevant and feasible. Current values are applied to the measurement of income and capital for the purpose of financial reporting, thereby providing more relevant information to investors than the information based on historical cost records found in the financial accounting system. Objectivity is maintained in an accounting sense by retaining the realization convention for timing value changes.

The result is that the financial accounting system recording historical cost data retains its usefulness for establishing the legal rights and obligations created as a result of transactions, whereas the financial reports which are directed at investors contain information concerning the value of income and capital based on the current value of the items appearing in those reports.

Current value accounting takes three forms:

(a) Replacement cost accounting-which is based on the current acquisition value of assets, so that in effect, they are valued at their current entry price.

(b) Realizable value accounting-which is based on the current realizable value of assets, that is, at their current exit price.

(c) Current cost accounting-which is concerned with the value to the business of assets, and which combines replacement cost and realizable value accounting.


Interested in Capital Maintenance

Read on: 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... see: Current Purchasing Power Summary