Exploring Current Development in Accounting Thought and Practices

This essay provides a comprehensive analysis of current developments in accounting thought, focusing on historical cost accounting and its alternatives, including CPPA, CCA, and CoCoA. It evaluates the strengths and weaknesses of each method, discussing the relevance of historical cost in times of rising prices and whether alternatives offer more relevant information. The essay also examines the conceptual framework of accounting, particularly its role in ensuring transparency and the ongoing debate about objectivity in standard-setting. Furthermore, it explores the shift from historical cost to fair value accounting, analyzing the reasons behind this shift and the challenges faced by the IASB in providing detailed measurement guidance. The document is contributed by a student and available on Desklib, a platform offering various study tools and resources.

Running head: CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Current Development in Accounting Thought
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1CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Table of Contents
Question 1:.................................................................................................................................2
Introduction:...........................................................................................................................2
Discussion:.............................................................................................................................2
Historical cost accounting, its strengths and weaknesses:.................................................2
CPPA, CCA and CoCoA and their strengths and weaknesses:.........................................3
Comparison of strengths and weaknesses of the identified methods:................................4
Conclusion:............................................................................................................................4
Question 2:.................................................................................................................................5
Introduction:...........................................................................................................................5
Discussion:.............................................................................................................................5
Evaluation of the proposed statement:...............................................................................5
Arguments for and against the proposed statement:..........................................................6
Conclusion:............................................................................................................................7
Question 3:.................................................................................................................................7
Introduction:...........................................................................................................................7
Discussion:.............................................................................................................................8
Reasons behind the shift:...................................................................................................8
Doubt in replacing historical cost by fair value:................................................................9
Conclusion:..........................................................................................................................10
References:...............................................................................................................................11

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Question 1:
Introduction:
In accounting, the historical cost of an economic item is denoted as the original
nominal monetary value of that item. Alongside historical cost accounting, there are a
number of alternatives like current purchasing power accounting (CPPA), current cost
accounting (CCA) and continuously contemporary accounting (CoCoA). Therefore, this
section would focus on analysing the strengths and weaknesses of historical cost accounting
along with identifying whether any of the above-stated users has the ability to overcome such
deficiencies.
Discussion:
Historical cost accounting, its strengths and weaknesses:
Historical cost accounting signifies includes reporting liabilities and assets at
historical costs, which are not updated for changes in the values of the items. However, the
amounts disclosed in these balance sheet items often vary from their existing market or
economic values (Ellul et al., 2015). This method is supported by a number of arguments. It
is simple to understand and the users not having financial background could understand the
financial statements. Moreover, as indicated by Smith and Smith (2014), users do not have to
conduct market research for obtaining the market value of the financial items, since historical
cost is not subject to future changes.
However, this method has been criticised over the years by a number of scholars. As
mentioned by Palea (2014), under historical cost accounting does not reflect the true profit of
the organisation. This is because revenues are recorded on existing price; however, expenses

3CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
are recorded at the original cost leading to profit overstatement. Secondly, this concept does
not portray the actual values of assets of an organisation, as assets are recorded at the
acquisition date resulting in unrealistic values of fixed assets. Finally, under this method,
depreciation is charged on the actual fixed asset costs and they are not charged at the acquired
prices. Depreciation is deemed to be a mechanism of obtaining funds for replacement of non-
current assets. Hence, the provision of depreciation charged on the original cost would not be
adequate for asset replacement (Taplin, Yuan & Brown, 2014).
CPPA, CCA and CoCoA and their strengths and weaknesses:
CPPA:
This is an accounting model, in which the non-monetary item amounts recorded on
historical cost basis in the financial reports of an organisation are restated by applying a
general price index prevailing at the end of the accounting year. As commented by Deegan
(2014), this method assures keeping intact the purchasing capital power contributed by the
stockholders and it provides useful information based on which the management could design
effective policies and strategies for undertaking decisions. However, this method is reliant on
statistical index number that could not be utilised in an individual organisation and thus, it
becomes difficult in selecting sound price index.
CCA:
This approach gauges assets at fair market values by considering both time value of
money and inflation. Thus, it assists in recognising a number of criteria that include like
inflationary factor, changes in price level, allocation of depreciation expense and difference
between holding profit and operating profit. However, it becomes difficult to ascertain the
fair market values of assets accurately and operating profit could not be restated for depicting
real earnings.

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CoCoA:
This approach gauges assets and liabilities at their existing cash prices by relying on
the existing selling prices of the items (Kieso, Weygandt & Warfield, 2016). CoCoA assists
in depreciation cost allocation and it takes into account inflation and price level changes after
which it focuses on the updated fixed asset values in the statement of financial position.
However, as it considers only general market price, an asset might fetch income to one
organisation, while another organisation might incur loss.
Comparison of strengths and weaknesses of the identified methods:
Particulars Historical cost accounting CCA CoCoA
Strengths Easy to understand and no
additional costs to be
incurred on market
research
Consideration of
inflation, price level
changes and allocation
of depreciation
expense
Allocation of
depreciation cost and
focus on updated
values of fixed assets
Weaknesses Overstatement of profit and
incorrect allocation of
depreciation expense
Inability to restate
operating profit and
ascertainment of fair
market values of
assets
Misleading
information due to
consideration of
general market price
Conclusion:
After consideration of all the possible aspects, it could be stated that all the
approaches suffer from certain drawbacks despite of having a number of benefits. The
advantage of one approach has been identified as the disadvantage for another approach and

5CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
vice-versa. Therefore, it could be inferred that the other accounting measures are not
adequate to cover the loopholes inherent in historical cost accounting system and thus, this
system is still used by many global organisations in the current era.
Question 2:
Introduction:
Conceptual framework is defined as the mission of IASB for formulating high-quality
accounting standards, which would increase the confidence of the accountants in financial
reporting. Alongside providing guidelines for IASB delegates, the conceptual framework has
to shape the discourses between IASB and its elements (Cheng et al., 2014). It has been
argued by Deegan (2014) that conceptual framework is used in the form of devices for
assuring the ongoing existence of the profession of accounting by strengthening public
standard. This section would aim to analyse this statement by taking into consideration a
number of aspects.
Discussion:
Evaluation of the proposed statement:
According to the statement, conceptual framework is prepared by the accounting
profession that identify qualitative features like objectivity mainly to provide benefits as a
profession. The conceptual framework is considered to depict a way of enhancing the ability
of a profession for self-regulation. As a result, it counteracts the probability of the occurrence
of governmental intervention (Zhang & Andrew, 2014). It has been identified by Deegan
(2014) that as the assumption of objectivity is the main premise of the society, there has been
accrual of fundamental type of social power to those able to trade on the assumption of

6CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
objectivity. There has been accomplishment of legitimacy by tapping to the main proposition,
since the accounts generated under the proposition are deemed to be normal.
In case; the provided argument is accepted, it means that the principle of objectivity is
just a facade. It has been evaluated from the statement that at the time accounting profession
is in crisis owing to threats related to governmental intervention, it has been the first time the
projects associated with formulation of conceptual framework have been undertaken. The
standard-setting process of accounting is a political procedure where the elements mainly
offer a number of submissions during the period of development of the accounting standards.
Based on the force of the argument, there would be more effect of some arguments on the
regulators compared to others (Simnett & Huggins, 2015).
Moreover, there has been public statement by the standard-setters in conceptual
framework that economic and social implications of potential needs are prioritised, as part of
the process to formulate new standards. After the consideration and weight of potential costs
and benefits to different elements regarding the relevance and nature of costs, it is difficult to
believe that the final standards of accounting are prepared in a way that have objective
considerations (Wahlen, Baginski & Bradshaw, 2014). Hence, if accounting standards are
established on a basis having lower objectivity, the financial statements could not be
adjudged as objective, despite the fact different projects of conceptual framework promote
objectivity.
Arguments for and against the proposed statement:
This argument is valid in the sense that in case of developing standards of accounting,
it is significant and therefore, it would not be appropriate to take into account the costs to be
imposed on certain parties, if the standards are enforced. This implies that there might be few
unacceptable economic consequences, which might arise from enforcing the standards. The

7CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
issue here is to identify the perspective of that party to be affected adversely by the economic
consequences (Henderson et al., 2015). It has been believed by few researchers that
accountants are mainly accountable for ascertaining the factors to be realised in the process of
accounting and the factors to be ignored.
However, after consideration of the costs and benefits expected to occur as well as the
weight and recognition of the retrospective benefits and costs, instead of the benefits of the
standards, it is not possible to argue that the standards have been prepared in an unbiased
manner. On the other hand, it needs to be borne in mind that if the accountants record and
identify particular phenomena, they would be real and other phenomena that are not recorded
would be unreal. This is not valid, as majority of the accountants does not take into account
environmental and social externalities caused by an organisation (Nobes, 2014). Hence, the
accounting profession identifies those issues for which the organisation would be accountable
by ignoring the other significant information.
Conclusion:
Based on the above discussion, it could be stated that conceptual framework is
designed mainly to ensure transparency in financial reporting by establishing appropriate
accounting standards. The statement that it boosts the accounting profession does not seem to
be relevant, as it emphasises on social and environmental concerns as well; thereby, focusing
on public welfare.
Question 3:
Introduction:
According to “Paragraph 4.54 of the IASB Conceptual Framework”, measurement
implies the method of ascertaining the monetary amounts at which the components of the

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financial statements are to be realised and they are to be carried in the income statement and
balance sheet statement (Aasb.gov.au, 2019). Measurement is considered as a fundamental
issue in financial accounting, as it enables in attributing values to the items appearing in the
financial reports. At the time the standard-setters have a specific measurement method in
preference to others, it could be controversial. It has been argued that IASB fails to provide
detailed descriptions on the measurement issues. As a result, some organisations have shifted
from historical cost to fair value in the recent times. This section would analyse the reasons
behind such shift and the failure of IASB to stipulate an alternative to historical cost.
Discussion:
Reasons behind the shift:
The shift from historical cost to fair value could be witnessed practically in the share
market investments or investments in property or any other assets, the values of which are
derived from the condition and value of the market (Gebhardt, Mora & Wagenhofer, 2014).
For instance, it is assumed that a building purchased in 2010 for an amount of $100,000, in
which the market has cash crunches owing to the 2008 global financial crisis. The value at
which the asset would be appearing in the statement of financial position after consideration
of depreciation of 5% is $55,000 having useful life of 20 years. However, there has been
change in the market conditions in contrast to 2010. At present, the market price of the
building is $160,000.
This reflects directly that the building is not appearing in the statement of financial
position at its fair value or it is not depicting the actual values of assets and liabilities of the
organisation. For overcoming these barriers and misleading presentation, the accounting
standards have started the fair value accounting concept. The objective is to depict the actual
position of the assets of the organisation and its profitability (Van Mourik, 2014).

9CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Hence, by using fair value accounting, the organisations could record their assets or
liabilities at current market prices. More specifically, this method intends to ensure relevancy
and accuracy of financial accounting information. For instance, it is assumed that Company
A purchased multiple properties in Sydney 100 years back for $50,000. Their current market
value after appraisal stands at $50,000,000. If Company A uses the principle of fair value
accounting, then the property cost recorded in the statement of financial position would
increase to $50,000,000 for more accurate reflection of their values in the existing market
(Bauer, O'Brien & Saeed, 2014). As a result, many organisations have shifted to fair value
accounting from historical cost accounting in the recent years.
Doubt in replacing historical cost by fair value:
The conceptual frameworks have not clearly stipulated any alternative to historical
costs like fair values. The reason is that fair values could not be ascertained easily and it
could be used further for manipulating the books of accounts of the business organisations.
There might be chances where there might be different buyers for the same building
providing different rates based on their valuations or the organisation could develop fictitious
buyers for overstating its books of accounts.
For instance, problem with fair value accounting has taken place during abrupt
fluctuation of market prices, which is evident in the subprime mortgage meltdown in 2007-
2008. Owing to this meltdown, the Great Recession took place, which has resulted in decline
in real estate prices for years. Before the crisis, organisations and banks were using fair value
accounting that led to increased metric performance (Linsmeier, 2016). With the increase in
asset prices owing to the housing market boom, the computed gains have been recognised in
the form of net incomes. However, during the crisis, there was significant decline in asset
prices. Therefore, the conceptual framework has been working on an effective model so that

10CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
the fair values of assets and liabilities could be ascertained accurately appearing in the
statement of financial position (Barker, 2015).
Conclusion:
From the above analysis, it could be cited that although there has been shift from
historical cost accounting to fair value accounting over the years, the latter still suffers from
certain limitations. These include inflated profits and asset prices inherent in the housing
boom that eventually resulted in the Great Depression. As a result, the conceptual framework
is still on the search for designing a suitable model that would mitigate the deficiencies
inherent in fair value accounting.

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References:
Aasb.gov.au. (2019). Retrieved 30 March 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
Barker, R. (2015). Conservatism, prudence and the IASB's conceptual
framework. Accounting and Business Research, 45(4), 514-538.
Bauer, A. M., O'Brien, P. C., & Saeed, U. (2014). Reliability makes accounting relevant: a
comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2),
211-217.
Cheng, M., Green, W., Conradie, P., Konishi, N., & Romi, A. (2014). The international
integrated reporting framework: key issues and future research opportunities. Journal
of International Financial Management & Accounting, 25(1), 90-119.
Deegan, C. (2014). Financial Accounting Theory. McGraw-Hill Education Australia.
Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a
panacea? Market stress, incentive distortions, and gains trading. The Journal of
Finance, 70(6), 2489-2538.
Gebhardt, G., Mora, A., & Wagenhofer, A. (2014). Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), 107-116.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial
accounting. Pearson Higher Education AU.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.