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Constant Purchasing Power Accounting

1.Identify and describe three (3) alternatives to Historical Cost Accounting (HCA). In your description, outline the underlying assumptions of each alternative and provide examples of how each method could be applied in practice. Critically evaluate whether any of these alternatives represent a viable alternative to historical cost accounting.

2.Identify the main users of accounting referred to within the AASB/IASB conceptual framework. Does the identification of particular users within the conceptual framework have implications for the future of accounting measurement? In your response you will need to consider the implications of the identification of particular users on the use of fair values and historical cost accounting.

3.Outline the advantages for accounting that could result from the development of conceptual frameworks. Refer to the following journal article:

Hines, R (1989), "Financial accounting knowledge, conceptual framework projects and the social construction of the Accounting profession". Accounting, Auditing and Accountability Journal, 2(2), pp. 72-92.

Who does Hines believe has the most to gain from the development of conceptual frameworks? Compare and contrast the views of Hines with the advantages you identified in part a.

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 :

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).

  • 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).

Current Cost Accounting

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:


1st Jan 2017($)

31st Dec 2017($)













Retail price index numbers ($):

Jan1, 2017


Dec 31, 2017


Average for the year


Calculation of purchasing power gain or loss



Conversion factor($)

Adjusted ($)

Net assets as at Jan 1, 2008

Add: increase in monetary receipts

Less: increase in monetary liabilities

Net assets/  liabilities:














Gain of purchasing power= $ 8750 – $5000 = $3750

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.

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.

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 holding gains or losses can be treated as income.
  • The holding gains and losses can be treated as adjustments to capital.

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.


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 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).

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 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).

Fair Value Accounting

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.

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.

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.

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 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.

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


Borio, C., Erdem, M., Filardo, A., & Hofmann, B. (2015). The costs of deflations: a historical perspective.

Brown, S. S., & Wang, H. (2016). After growing by an average of 10 percent annually over three decades, China’s economy emerged as the world’s second largest in 2012. In December 2014, the International Monetary Fund (IMF) claimed that on a purchasing power parity basis, China’s GDP had already surpassed that of the United States. Meanwhile, China’s international financial clout seems to have increased as well. Its official foreign reserves reached almost US $4 trillion in 2014, the largest in the world by far. Its net foreign assets .... Enter the Dragon: China in the International Financial System, 191.

Chaudhry, A., Coetsee, D., Bakker, E., Varughese, S., McIlwaine, S., Fuller, C., Rands, E., de Vos, N., Longmore, S. and Balasubramanian, T.V., 2015. Conceptual Framework. 2015 Interpretation and Application of International Financial Reporting Standards, pp.29-37.

David, B., Wolfender, J. L., & Dias, D. A. (2015). The pharmaceutical industry and natural products: historical status and new trends. Phytochemistry reviews, 14(2), 299-315.

Díaz, S., Demissew, S., Carabias, J., Joly, C., Lonsdale, M., Ash, N.,  & Bartuska, A. (2015). The IPBES Conceptual Framework—connecting nature and people. Current Opinion in Environmental Sustainability, 14, 1-16.

Fiske, D. W., & Maddi, S. R. (2016). Functions of varied experience.

Gebhardt, G., Mora, A., & Wagenhofer, A. (2014). Revisiting the fundamental concepts of IFRS.

Glaser, B. G., & Strauss, A. L. (2017). Discovery of grounded theory: Strategies for qualitative research. Routledge.

Grossi, C., Aryan-Zahlan, D., Jaradat, O., Arulmoli, A., Sloop, R., Alamir, R., & Varatharaj, R. (2016). Seismic Upgrade of a Historical Wharf at the Port of Los Angeles. In Ports 2016 (pp. 441-450).

Jessen, F., Amariglio, R. E., Van Boxtel, M., Breteler, M., Ceccaldi, M., Chételat, G., ... & Glodzik, L. (2014). A conceptual framework for research on subjective cognitive decline in preclinical Alzheimer's disease. Alzheimer's & dementia: the journal of the Alzheimer's Association, 10(6), 844-852.

Kakwani, N., & Son, H. H. (2016). Global poverty estimates based on 2011 purchasing power parity: where should the new poverty line be drawn?. The Journal of Economic Inequality, 14(2),

Krasner, S. D. (2014). Approaches to the state: Alternative conceptions and historical dynamics.

Kakwani, N., & Son, H. H. (2016). The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business Research, 45(5), 572-601.

Scholten, R., Lambooy, T., Renes, R., & Bartels, W. (2017). Accounting for Future Generations. Does the IFRS Framework Sufficiently Encourage Energy Companies to Reflect on Climate Change in the Valuation of Their Production Assets, Taking into Account the New Initiative of the Task Force on Climate-Related Financial Disclosures? An Exploratory Qualitative Comparative Case Study Approach.

Smieliauskas, W., Craig, R., & Amernic, J. (2017). GAAP as Ineffective Legal Defense of Financial Reporting: Implications for Truthfulness, Auditability, and the IASB's Proposed 2015 Conceptual Framework.

Stolowy, H., & Breton, G. (2014). Accounts manipulation: A literature review and proposed conceptual framework. Review of Accounting and Finance.

Thompson, B., & Daniel, L. G. (2016). Factor analytic evidence for the construct validity of scores: A historical overview and some guidelines.

Tracey, E. (2015). Discussion of ‘Conservatism, prudence and the IASB's conceptual framework’by Richard Barker (2015). Accounting and Business Research, 45(4), 539-542.

Walton, P. (2018). Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, 1-7.

Whittington, G. (2016). Accounting and economics. The New Palgrave Dictionary of Economics, 1-6.

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