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    Slide AKT 405 Teori Akuntansi 6 Godfrey

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    This document discusses different accounting measurement systems including historic cost accounting, current cost accounting, and exit price accounting. It provides arguments for and criticisms of each system. While historic cost accounting is still commonly used, there is a movement toward current value systems and fair value under international accounting standards. However, standards still allow for a mixed valuation approach and lack consistency in theoretical concepts of valuation and capital maintenance. This creates challenges for auditors.

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    Slide AKT 405 Teori Akuntansi 6 Godfrey

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    aayiaruh
    340 views35 pages
    This document discusses different accounting measurement systems including historic cost accounting, current cost accounting, and exit price accounting. It provides arguments for and criticisms of each system. While historic cost accounting is still commonly used, there is a movement toward current value systems and fair value under international accounting standards. However, standards still allow for a mixed valuation approach and lack consistency in theoretical concepts of valuation and capital maintenance. This creates challenges for auditors.

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    This document discusses different accounting measurement systems including historic cost accounting, current cost accounting, and exit price accounting. It provides arguments for and criticisms of each system. While historic cost accounting is still commonly used, there is a movement toward current value systems and fair value under international accounting standards. However, standards still allow for a mixed valuation approach and lack consistency in theoretical concepts of valuation and capital maintenance. This creates challenges for auditors.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    340 views35 pages

    Slide AKT 405 Teori Akuntansi 6 Godfrey

    Uploaded by

    aayiaruh
    This document discusses different accounting measurement systems including historic cost accounting, current cost accounting, and exit price accounting. It provides arguments for and criticisms of each system. While historic cost accounting is still commonly used, there is a movement toward current value systems and fair value under international accounting standards. However, standards still allow for a mixed valuation approach and lack consistency in theoretical concepts of valuation and capital maintenance. This creates challenges for auditors.

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    © All Rights Reserved
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    of 35

    GODFREY

    HODGSON
    HOLMES
    TARCA

    CHAPTER 6
    ACCOUNTING
    MEASUREMENT SYSTEMS

    Three main income and


    capital
    measurement
    The historic cost accounting system
    systems
    emerged after the 1929 Wall Street collapse
    In the 1960s several alternatives were
    developed
    current cost accounting
    financial capital maintenance (the purchasing
    power of the financial capital)
    physical capital maintenance (the physical
    ability to produce goods and services)

    exit price accounting


    2

    Historic cost accounting


    Separation of ownership and control
    information asymmetry

    Most critical objective of accounting is


    accountability - stewardship
    (conservatism)
    The income statement is paramount
    transaction based
    revenue recognition
    matching
    profit measurement

    Arguments for historic


    cost accounting
    Relevant in making economic decisions
    Based on actual, not merely possible,
    transactions
    Data have been found to be useful
    The best understood concept of profit
    Must guard data against internal modifications
    Profit based on alternatives may not be useful
    Market prices can be supplementary data
    Insufficient evidence to reject it
    4

    Criticisms: Objective of
    accounting
    Stewardship is only a secondary objective
    Providing the decision making needs of
    users is the primary objective and
    historic cost data is a failure in this
    regard
    Historic cost information is
    not objective
    can be easily manipulated
    does not maintain the entitys capital
    5

    Criticisms: Information
    for
    decision making
    Is irrelevant when evaluating past
    decisions
    After acquisition, historic cost data is
    fictional
    Connected to inconsequential
    measures of capital
    Produces only flawed measures of
    profit
    6

    Criticisms: Basis of
    historic cost
    The going concern assumption does not
    justify the use of historic cost accounting
    many businesses fail
    no businesses continue indefinitely doing
    only or at all what they are presently doing
    all businesses, except those presently
    existing, cease operations

    All businesses have alternatives and


    choices going forward
    7

    Criticisms: Matching

    Is a practical impossibility
    Is totally arbitrary
    The balance sheet is important
    Resulted in non-assets being
    classified as assets and non-liabilities
    being classified as liabilities
    Leads to volatility and smoothing
    8

    Criticisms: Notions of
    investor needs

    Distorts and conceals


    Its goals are ill-conceived
    Creative accounting is commonplace
    Incentives to produce misleading
    data
    Today, investors pay little attention
    to historic cost accounting data
    about a firm
    9

    Objective of current cost


    accounting
    CCA values assets at their current market buying
    price and profit is determined using matching
    expense allocations based on the current cost to
    buy
    Profit is more precisely defined as the change in
    capital over the accounting period
    Managers are better able to evaluate their past
    decisions and better use the firms resources to
    maximise future profits
    Shareholders, investors and others are able to
    make better allocations of their resources
    10

    Objective of current cost


    accounting
    Managers will examine
    the current operating profit
    the excess of the current value of the output
    sold over the current cost of the related
    inputs

    realisable cost savings


    increases in the current cost of assets held
    holding gains/losses
    realised/unrealised

    11

    Financial capital versus


    physical capital
    Profit is the change in capital
    Holding gains are included in profit
    under financial capital
    Holding gains are excluded from
    profit under physical capital

    12

    Arguments for and


    against current cost
    Recognition principle
    violates the conservatism principle - but actual
    phenomena
    are holding gains profits or revaluation
    adjustments?

    Objectivity of current cost


    lacks objectivity

    Technological change
    appears to ignore technological advances

    13

    More specific criticisms


    Advocates of historic cost accounting
    violates the realisation principle; subjectivity of increase

    Comparisons of the results with historic cost


    industry variations

    Advocates of exit price


    the logical expression of opportunity cost is the current selling
    price
    the arbitrary allocation of expenses is still a problem issue
    additivity problem exists
    number of reasons for an asset having value to a business
    irrelevant to most business decisions
    physical capital concept fraught with weaknesses
    14

    Exit price accounting


    Exit price = selling price = fair market
    value
    Has two major departures from historic
    cost accounting:
    the values of non-monetary assets are
    selling prices and any changes are included
    in profit as unrealised gains
    changes in the general purchasing power of
    money affect both financial capital and
    profits
    15

    Exit price accounting


    Represents clean surplus accounting
    The income statement explains all of
    the differences existing between the
    opening and closing balance sheets

    16

    Objective of accounting
    Objective = data for adaptive decision making
    The assumption is that the business world is dynamic
    and business must adapt to survive
    Firms and those associated with them go into markets
    to take advantage of opportunities as they arise
    The ability to engage in market transactions is revealed
    by net financial position (net current market value)
    Ultimately all accounting information users are
    interested in cash and cash equivalent values
    In the final analysis, the economic survival and
    performance of a firm depends on the amount of cash
    it can command
    17

    Objective of accounting
    Chambers:
    the single financial property which is
    uniformly relevant at a point of time for
    all possible future actions in markets is
    the market selling price or realisable
    price of any or all goods held.

    18

    Arguments for exit price


    accounting
    Provides useful information
    Provides relevant and reliable information
    there is one way to determine profit that is
    superior to all others
    profit is the difference between capital at two points
    in time exclusive of additional investments by and
    distributions to owners

    to be relevant, information must be useful in


    the decision models of accounting data users
    the present selling price is the only item of
    information that is relevant to all decisions
    19

    Arguments for exit price


    accounting
    Additivity
    if we use different measurement systems then
    no practical or commercial meaning can be
    deduced from the aggregate
    even if we use historic cost accounting as the
    sole measurement system, the jumble of
    historic costs on different dates means we
    cannot put any meaning on the calculation of
    net assets or profit
    exit price accounting does not have this
    problem
    20

    Arguments for exit price


    accounting
    Allocation
    the financial statements are allocation
    free

    Reality
    references are to the real-world in that
    every disclosed amount refers to a
    present, actual market price
    exchangeability
    21

    Arguments for exit price


    accounting
    Objectivity
    market prices are relatively more
    objective than most believe

    A measure of risk
    can indicate the financial risk of
    purchasing an asset

    22

    Arguments against exit


    price accounting
    Profit concept
    does not provide a meaningful concept of profit
    the critical event does not relate to the
    performance of the firm
    does not produce realistic financial reports

    Additivity
    violates the principle of exclusion of
    anticipatory calculation that it claims to reject

    23

    Arguments against exit


    price accounting
    The valuation of liabilities
    valuing liabilities at face value and not market
    value is internally inconsistent

    Current cost or exit price


    at what stage of the operating cycle should
    exit price dominate asset valuation?

    24

    Value in use versus value


    in exchange
    Similar when markets are liquid and
    efficient
    There are factors common to both
    market prices are more relevant for decision making
    additivity and reliability are prime requirements
    historic cost accounting has too many defects

    They are complements not substitutes


    Value in use assesses long term survival
    (solvency), value in exchange assesses the
    ability to adapt in the short term (liquidity)
    25

    A global perspective and


    international
    financial
    reporting
    standards
    Current cost in the United States
    an experiment but abandoned (1976 -1984)

    Current cost in the United Kingdom


    implemented but abandoned (1975 1985)

    Current cost in Australia


    recommended but abandoned (1976 1980s)

    26

    International accounting
    standards and current
    IASB/FASB have agreed that fair
    costs

    value is the best measurement basis


    (2004)
    the amount for which an asset could be
    exchanged, or a liability settled,
    between knowledgeable, willing parties
    in an arms length transaction

    27

    International accounting
    standards and current
    Historic cost accounting still generally applied
    costs

    Distinct movement toward current value


    systems
    IASB moving toward exit prices (2004)
    But still a mixed valuation approach
    Fair value means current market entry price,
    current market selling price, historic cost and
    discounted future cash flows

    There is no mention in the standards of


    capital maintenance concepts
    28

    How is historic cost


    applied
    Subjectivity is involved in the
    determination of the acquisition cost
    of an item
    Thereafter the measurements are
    even more subjective

    29

    Historic cost under


    attack
    The era of historic cost accounting
    has ended
    it produces irrelevant, unreliable, noncomparable and non-understandable
    data

    30

    A mixed measurement
    system and international
    Market values - exit prices - are
    standards

    implied in the fair value approach in


    international financial reporting
    standards
    A lack of a theoretical concept of
    valuation, capital maintenance and
    profit measure, has resulted in a still
    mixed measurement system and a
    lack of consistency
    31

    Issues for auditors


    The mixed measurement model
    creates misstatement so that
    auditors struggle to meet one of their
    primary objectives
    determining whether the financial
    statements present a true and fair view

    32

    Summary
    Overview of three main measurement systems
    The historic cost system and arguments for
    and against
    Current cost accounting
    Financial capital versus physical capital
    Exit price accounting
    Value in use and value in exchange
    Global initiatives and fair value accounting
    Issues for auditors
    33

    Key terms and concepts

    Historic cost valuation


    Current cost valuation
    Financial capital and physical capital
    Recognition principle
    Exit price valuation
    Adaptive behaviour
    Useful information
    Relevant and reliable information
    Additivity
    Allocation
    Reality
    Objectivity
    A measure of risk
    Value in use and value in exchange
    34

    35

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