Current Developments in Accounting Thought

Running head: CURRENT DEVELOPMENTS IN ACCOUNTING THOUGHT
Current Developments in Accounting Thought
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1CURRENT DEVELOPMENTS IN ACCOUNTING THOUGHT
Table of Contents
Answer to Question 1:.....................................................................................................................2
1.1 Normative theory:..................................................................................................................2
1.2 Historical cost accounting:....................................................................................................2
1.3 Alternatives to historical cost accounting and their assumptions:.........................................2
1.4 Feasibility of the normative alternatives to historical cost accounting:................................4
Answer to Question 2:.....................................................................................................................4
2.1 Conceptual framework of IASB and its objective:................................................................4
2.2 Primary users of general purpose financial reporting:...........................................................5
2.3 Implications to the users for measurement of accounting:....................................................6
Answer to Question 3:.....................................................................................................................8
3.1 Advantages to be derived from the conceptual framework development and pertinent
beneficiaries:................................................................................................................................8
3.2 Disadvantages of the conceptual framework after consideration of the work of Hines:.......9
3.3 Contrast between the view of Hines and the identified benefits of the conceptual
framework:.................................................................................................................................10
References:....................................................................................................................................12

2CURRENT DEVELOPMENTS IN ACCOUNTING THOUGHT
Answer to Question 1:
1.1 Normative theory:
In order to gauge income, the importance of normative theory is immense in the current
era. The reason lies behind the use of a formula in order to ascertain income based on value,
while cost is not taken into consideration. Hence, observation is not the sole factor for normative
theory; however, the reliance is on the accounting process to be formulated (Barth, 2015).
1.2 Historical cost accounting:
Historical cost accounting (HCA) is a part of the normative accounting theory, which
gauges the value in which the asset price on the statement of financial position relies on nominal
cost when it is acquired. The main benefit of this measure could be observed in terms of
unbiased estimation and independent verification. Due to this, the investors and other users are
provided with reliable information about the financial information of the organisations (Deegan,
2014). However, its benefit is minimised during recessionary period and as a result, there is
decline in the asset price.
1.3 Alternatives to historical cost accounting and their assumptions:
The alternatives to HCA are numerous, three of which along with their assumptions are
enumerated as follows:
Current Purchasing Power Accounting (CPPA):
Depending on everyday consumer index, this method denotes updating and recording the
accounting-related items. During recession, there would be rise in price and thus, up-to-date
maintenance of accounts is needed in order to adjust monetary items. The assumptions stated in

3CURRENT DEVELOPMENTS IN ACCOUNTING THOUGHT
going concern as well as accrual basis concepts are used in this theory (Ellul et al., 2015). Due to
the supplementary preparation of CPPA statements, there is effective maintenance of the
historical accounts. However, only the differences in general purchasing power are considered in
this method and no attention is paid on the differences in the values of individual items.
For example, XYZ Limited bought machinery on 1st January 2016 at an amount of
$148,000. The economic life of the asset is four years and it follows the straight-line depreciation
method having no residual amount. The general price level indices have been 140 on 1st January
2016 and 150 on 1st January 2017. Thus, the depreciation to be charged would be $37,000
($148,000/4). However, the amount that would be reported in the income statement of the
organisation on 1st January 2017 would be $39,643 ($37,000 x 150/140).
Current cost accounting (CCA):
In this method, the change in individual item price is realised because of the change in
the general level of price. This method considers the method of preparing and evaluating
financial statements in a way that the relevant price change is considered adequately (Henderson
et al., 2015). It is assumed that the replacement cost is used to record fixed assets, while
inventories are shown at market values. The primary benefit of this system is the computation of
profit, as there is no change in historical profit. On the other hand, this method lacks to supply
information that is needed for the investors.
For instance, a ten-year life machinery could be bought for $80,000. It is assumed that the
machinery could be used for additional five years having no residual amount. Due to this, the
replacement cost of the machine would stand at $40,000 ($80,000 minus five-year depreciation
amount).