Current Development in Accounting Thought

Running head: CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Current development in accounting thought
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1CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Table of Contents
Answer to question 1.......................................................................................................................2
Answer to question 2.......................................................................................................................4
Answer to question 3.......................................................................................................................7
Reference.......................................................................................................................................11

2CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Answer to question 1
Historical cost accounting (HCA) system presumes that the purchasing power of any
currency remains steady over the time. In the same way, it is presumed that value of the asset
acquired in the different time periods can be simply added to indicate their value at particular
point of the time. Over the decades, criticisms against HCA have been raised by different
scholars like Chambers, particularly with regard to its incapability to deliver useful information
during the period of rising prices. Over the time, these criticisms have been acknowledged to the
certain level by the accounting regulators (Ellul et al., 2015). For instance, AASB 116 offers the
preparers of financial statement a choice among fair value approach and cost approach while
measuring plant, equipment and property. However, investment properties as per AASB 114,
biological assets as per AASB 141 and financial instruments as per AASB 139 shall be valued at
the fair values. In 1966, Chambers argued that information generated through HCA suffers from
the issue of irrelevance during the times of rising prices (Curtis, Lewis-Western & Toynbee,
2015). During time of the rising prices, the HCA may cause the below mentioned issues –
 If the prices for various assets those are acquired in different times are simply added
together, total amount for the assets may become meaningless and will be more like
adding the currency values together. It will further, understate the asset’s present market
value
 Considering the above point, if the assets are undervalued it will eventually undervalue
the entity’s net book value. It will make the owners to sell the entity at lower value than
actual. Hence, it lacks the relevance during the period of rising prices (Canziani, 2014).

3CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
 Under historical cost method the COGS and depreciation are based on the historical cost
that means the profits will be overstated during the period of rising prices. However, the
dividends can be paid out of the profits which in turn may erode the firm’s actual
operating efficiency. This is because too much will be distributed to owners and
insufficient amount will be retained for replacing the assets whose replacement cost
might have increased.
 Under the historical cost method, operating result of current year will be distorted as it
will include the income holding gain for the current year that may have generated for
number of years (Canziani, 2014).
 It relies upon the arbitrary cost allocation that have little correspondence with the actual
changes in the value of the asset
 Information those are generated through the historical cost approach suffers from
“additivity problem” that is adding the values of assets together acquired in different
times makes little sense (Li, 2015).
Alternative to the historical cist that may provide the information of greater relevance to
the accounting users is Current cost accounting
Current cost accounting (CCA) provides more realistic values through valuing the assets
at the current buying price in the market. It considers the inflation and time value of the money.
CCA is more complex as compared to the HCA and created controversies regarding the
appropriate adjustments. Unlike the historical cost approach in CCA no need is there for the
assumption of inventory cost flow like weighted average and last-in-first-out. Further, the
business profit under CCA represents the way in which the entity gained the increase in resource
cost in financial terms that is not considered under historical approach (Kirkman, 2014). Holding