Accounting Development: Historical Cost, CPPA, CCA, and Fair Value Accounting

This article discusses the different methods of accounting such as Historical Cost, CPPA, CCA, and Fair Value Accounting. It explains the advantages and disadvantages of each method and their critical evaluation. Additionally, it covers the International Accounting Standard Board and the conceptual framework of financial reporting. The article is relevant for students studying accounting and finance courses in universities and colleges.

Running head: ACCOUNTING DEVELOPMENT
Accounting Development
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to question 1..................................................................................................................................2
Answer to question 2..................................................................................................................................7
Answer to question 3..................................................................................................................................9
References:................................................................................................................................................13

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Answer to question 1
Historical cost accounting is a conventional process of accounting whereby the transactions are
recorded in terms of money that in that amount which was purchased at the cost at which it was
purchased, that is at historical cost (Grossi et al., 2016, pp. 441-450). This method, the principle of
historical cost requires recognition of the revenue at the price at which it was realized in the financial
statements (David, Wolfender & Dias, 2015, pp. 299-315).
However, the historical cost ignores the value of decline of the monetary value and thus
alternatives has been found in order to replace the technique, according to a recent research by the
international account the alternatives of this method of accounting are :
Constant Purchasing Power Accounting:
The Constant purchasing power accounting that is known as CPPA is a recent accounting model
that has been approved by the international accounting standard board. This has been a great
alternative to historical cost accounting (Borio et al., 2015). In this technique, the capital maintenance of
finance is measured in units of constant power of purchasing in terms of daily index (Grossi et al., 2016,
pp. 441-450). In case of Constant purchasing power accounting, the constant purchasing power of the
capital for a period that is indefinite can be automatically maintained (David, Wolfender & Dias, 2015,
pp. 299-315).
The assumption of the CPPA set by the IFRS (International Financial Reporting Standard)
 It follows the accrual basis of accounting: the transaction effect and the other events that are
relevant are recognized at the time they occur. They are not dependent on the time when the
cash is paid or gained (Krasner, 2014).
 Another assumption is that the PPA follows the going concern basis, that is the business will
carry on till near future.
 The measurement unit of CPPA is in terms of real value (David, Wolfender & Dias, 2015, pp. 299-
315).
Illustrative example of CCPA

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In order to compute, the monetary result of Company X Ltd. as at 31 December 2017, the following
example has been shown. The data are given below:
particulars 1st Jan 2017($) 31st Dec 2017($)
Cash 5000 10000
Debtors 20000 25000
Creaditors 15000 20000
Loan 20000 20000
Retail price index numbers ($):
Jan1, 2017 20
0
Dec 31, 2017 30
0
Average for the
year
24
0
Calculation of purchasing power gain or loss
particulars Unadjusted($) Conversion
factor($)
Adjusted ($)
Net assets as at Jan 1, 2008
Add: increase in monetary receipts
Less: increase in monetary liabilities
Net assets/ liabilities:
(10000)
10000
300/200
300/240
300/240
(15000)
12500
Nil
(5000)
(2500)
(6250)
(5000) (8750)
Gain of purchasing power= $ 8750 – $5000 = $3750

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Note: The amount of net monetary liabilities as on December 31, 2008 should be Rs. 8750 during
inflation. However, such liabilities are only Rs. 5000. Therefore, the company is making purchasing
power gain of Rs. 3750.
Critical Evaluation of CPPA
Advantages of CPPA:
 It relies on the data that are already available under the historical cost accounting
(David, Wolfender & Dias, 2015, pp.299-315).
 There is no need for incurring the cost for collecting the data of the current values of
assets (Thompson & Daniel, 2016).
 The data of general price index are easily available.
Disadvantages of the CPPA:
 The price movements of the commodities included in the price index may not
represent the specific movements of price in different industries.
 The various information that is obtained may be confusing to the users.
Current Cost Accounting
The current cost accounting in another alternative identified to the historical cost accounting.
The CCA is based on the actual values and not on the adjusted historical cost. It differentiates the profits
from holding and trading gains (Brown & Wang, 2016, p.191). The gains of holding can be either realized
or unrealized (Thompson & Daniel, 2016). The Income perspective adopted will determine whether
holding gains or losses will be treated as income.
The Assumptions:
 The holding gains or losses can be treated as income.
 The holding gains and losses can be treated as adjustments to capital.
Illustrative Example

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An asset was purchased on 1st Jan 2012 at a cost of $10, 00,000 and its useful life was estimated
to be 10 years. Its replacement cost was $18, 00,000 on 1st Jan 2017 and $ 20, 00,000 on 31st Dec
2017.calcuate the depreciation adjustment.
Calculation of depreciation adjustment under CCA
Current years depreciation (CCA method):1800000+2000000/(2*10)= $1,90,000
Historical Depreciation= 1000000/10=$100000
Depreciation adjustment=Current years depreciation on CCA-Historical Dep.
=190000-100000=$90000.
Critical Evaluation of CCA
Advantages of CCA:
 Performance of various entities can be compared in a better manner (Brown & Wang, 2016).
 The users of this method are able to assess the current state or performance of the business.
Disadvantages of the CCA:
 The replacement cost of assets may not be same for all the assets
 Lack of familiarity and high complexity
Fair Value Accounting
Fair value accounting utilizes the recent market values for recognizing the assets and liabilities.
Fair value is the estimated price at which an asset can be sold or a liability settled in an orderly
transaction to a third party under recent market conditions (Nobes & Stadler 2015,pp.572-601).
Illustrative example:
Suppose X ltd purchased a two-acre land in 2008 for $1 million, then a historical-cost financial
statement would still record the land at $1 million on the balance sheet. If Y ltd. purchased a similar
two-acre land in 2017 for $2 million, then Y ltd would record $2 million on its balance sheet. Even

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though both the land are identical, X would report an asset with one-half the value of Y’s land; historical
cost is unable to identify that the two items are similar. However, X and Y used fair-value accounting,
and then both would report an asset of $2 million. The fair-value balance sheet provides information for
investors who are interested in the current value of assets and liabilities, not the historical cost (Brown
& Wang, 2016, p. 191).
Critical Evaluation of CCA
Advantages of Fair Value:
 Reflects the reality of the economy.
 Losses are recognized and the valuations are accurate.
Disadvantages of the Fair value:
 It is of high risk.
 Fair value may affect the down market accounting.

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Answer to question 2
The International Accounting Standard Board (IASB) is the independent standard for accounting
responsible for developing the standards for the international reporting standards or IFRS (Jessen et al.,
2014, pp. 844-852). The conceptual framework sets out the concepts of financial reporting that are
fundamental and provides a guide for the IFRS (Tracey, 2015, pp. 539-542). It also helps in ensuring that
the standards are consistent conceptually.
Users of the IASB
The framework of the IASB sets the concepts that help in the preparation of the accounting
statements for the external users (Brown & Wang, 2016, p.191). The users interpret the information
contained in the financial statements with the help of IASB. The users include:
 Investors
 Lenders
 Suppliers
 Employees
 Creditors
 Consumer
 The Public
 Government Agencies.
Implication of the users on the conceptual framework
The various users of the financial statements, who use the conceptual framework that are
pointed out, have different implications in the future measurement of accounting (Brown & Wang,
2016). The suppliers and the trade creditors are interested in the information that helps them in the
determination of the time of payments of their owing amounts. The lenders want information that helps
them to decide whether the loan will be paid when it is due and whether or not to issue new loans to
any entity (Jessen et al., 2014). Investors on the other hand are the ones who supplies the risk capital in
the form of funding, are concerned with the risk that are inherent with it (Whittington, 2016, pp.1-6).
They also take in hand the returns that are provided by them. Customers are interested to continue in
the entity thus, they depend on the IASB. Employees, who work in the entity, can get to know about the

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profitability and stability of their employers (Díaz et al., 2015, pp.1-16).They can obtain a lot of
confidence about their work. They also can get a lot of information about their salary and employment
conditions through the conceptual framework. Moreover the public are influenced the conceptual
framework by getting information regarding the contribution to the local economy. Lastly, the
implication of the government employs in the conceptual framework is various allocations of the
resources and the general operations (Brown & Wang, 2016, p.191).
The main motive for selecting a measure for a specific item can be done by maximization of the
various information that are obtained regarding the organizations prospects reporting for the future
cash flows subject to the ability to loyally represent the same at a cost that is justified by the benefits
(Chaudhry et al., 2015, pp.29-37). This is because neither the historical cost nor the fair value accurately
or clearly describes the set of possible measurement processes that are to be considered. Thse items
should not be taken in hand in the measurement process (Jessen et al.2014, pp. 844-852). The financial
statements are complements, they provide various useful information that are beneficial for the
financial reporting. This why the best way to satisfy the financial reporting objective of reporting if
finance is to consider the impact of a particular specific measurement selection on all the financial
statements., instead of emphasizing the statement of financial position over the statement of
comprehensive income or vice versa.

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Answer to question 3
In the financial reporting, the conceptual framework is the theory of accounting that is prepared
by a standard setting body against which practical problems of accounting can be tested (Stolowy &
Breton 2014). A conceptual framework (as discussed in Q2) deals with the fundamental issues of
financial reporting and the various objectives of the same. In a simpler term, conceptual framework is a
statement consisting of theoretical principles that provides guidance for financial accounting and
reporting (Gebhardt, Mora & Wagenhofer, 2014).
The main reasons for developing an agreed conceptual framework are that it provides:
 A framework to set standard of accounting.
 A basis for resolving disputes of accounting;
 Fundamental principles, which then do not have to be repeated in accounting standards (Glaser,
& Strauss, 2017).
The various advantages of conceptual framework are:
 The main advantages of conceptual framework are that it helps to clarify the various concepts
underlying with the accounting standards and the makers of stands like the IASB to develop
accounting standards consistently (Jessen et al.2014, pp. 844-852).
 The conceptual framework provides a sound understanding to the accountants, auditors and the
other users of the financial statement. The approach to standard setting is made clear to them
and the nature and function of the financial information is reported (Gebhardt, Mora &
Wagenhofer, 2014).
 The framework also provides proper guide for transactions that are unusual, which may be
otherwise open to interpretation. Many believe that by having a conceptual framework, it
improves the overall credibility of the profession of accounting as well (Glaser, & Strauss, 2017).
 The conceptual framework helps to increase the comparatibility of the statements of finance by
decreasing the various other alternative of finance.

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 The requirement of reporting will be more consistent and more practical as it is and systematic
and orderly concept.
 It provides a measurement of various specific accounting that can be tested in a objective
sense.
The key steps to develop the conceptual framework are ( Scholten et.al., 2017):
 Identification of the variables used in the subject area.
 literature review of the key idea
 analyzing the idea
 Determining the relationship between the variables of the idea.
In the second part by Hines proposed the conceptual framework as the body of knowledge that
is existing in the practice of accounting. According to her, the conceptual framework as core knowledge
of various accounting practice. It is a guide to all the transactions. The primary reason for the
development of the conceptual framework is to develop the specific accounting standards (Glaser, &
Strauss, 2017). When the question has aroused as to how the accountants have attained a level of sound
success, even after various technical failures, it has been found out that the main rationale for
undertaking the conceptual framework is functional and not technical. It is considered as a strategic
maneuver for providing the legitimacy to set standard. The accountants of U.K and Canada are benefited
the highest with the help of this technique (Stolowy & Breton 2014,pp. 5-92).
Hines has pointed out various limitations of the conceptual framework. her prespective is different, her
point of view is that the standard setting boards and the professional accounting bodies have some
other interest in establishing the conceptual frame work (Kakwani & Son, 2016,p.14(2)). The
professional practioners of accounting. A representation of the threats are the problematic nature of
auditing and financial accounting, expansion and the diversification of the work of accounting, the
arbitraries of the accounting standard and practice and the lack of knowledge in the political process of
accounting (Walton, 2018, p. 1-7). In the above a discussion about the advantage of the accounting
(Stolowy & Breton, 2014), there is a sharp contrast between the two. The advantages it has been
discussed about the framework of guidance that the conceptual framework provides, however Hines has
interpreted in a very different manner. The problematic nature of accounting and auditing has not
been avoided and the conceptual framework is not being able to provide a sound clarity (Fiske & Maddi,

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2016). In terms of teleological normative ethics, Hines' position is most aligned to ethical elitism and/or
ethical parochialism ( Smieliauskas, Craig & Amernic, 2017).
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