Current Development In Accounting Thought For Historical Cost Essay.

Three Alternatives of Historical Cost Accounting

Discuss about the Current Development in Accounting Thought for Historical Cost.

Accounting is considered as one of the major processes for the success of the business organizations. The main aim of this essay is to analyse and evaluate three different aspects of the accounting process (Scott, 2015). The first part of the essay sheds light on three major alternatives of historical cost accounting for the companies. The second part of the essay identifies the major users of accounting within the conceptual framework of Australian Accounting Standard Board (AASB) and International Accounting Standard Board (IASB). It also discusses about the implication of this identification on the future of accounting measurement. The last part of the essay discusses about the major advantages of accounting process developed from conceptual framework.

Under the process of Historical Cost Accounting, the measurement of the value of the assets and liabilities is done based on the original and nominal cost of the assets and liabilities at the time of acquisition. There has been the development of many alternative methods of historical cost accenting in order to overcome the loopholes of this process. The following discussion shows the description of three alternative methods of historical cost accounting.

Constant Purchasing Power Accounting (CCPA): IASB introduced the process of CCPA as a major alternative of the traditional historical cost accounting and the application of this accounting process can be seen under hyper-inflationary environment (Rodrigues, Schmidt & dos Santos, 2012). Under CCPA, the accountants measure the financial capital maintenance in the units of constant purchasing power (CPP) in terms of consumer price index (CPI) at the time of low inflation. At the time of high inflation and hyperinflation, the accountants can use the measurement in daily indexed unit account. There are three major underlying assumptions in this model (Whittington, 2014). As per the first assumption, accrual basis of accounting is used for the recognition of events and transactions. The second assumption supports the going concern assumption of the companies. As per the third assumption, the measurement process of CCPA in units of all constant real value non-monetary items can automatically remedies the erosion of stable measuring unit assumption. Business organizations can apply CCPA for the purchase of their plant and machinery (Henderson et al., 2015). For example, on 1 January 2010, a company purchased a plant for $6000000 and the CPI was 150. On 1 January 2015, the CPI index was 200. Thus, the cost of the plant in 2015 would be $8000000 ($6000000*200/150). Based on the above example, CCPA can be considered as viable alternative of historical cost accounting. Under historical cost accounting, the company would not consider the changes in the price of the plant where CCPA consider the deviation in changes in the price of the plant over the years. Thus, CCPA is a viable alternative.                 

Constant Purchasing Power Accounting (CCPA)

Current Cost Accounting (CCA): Current Cost Accounting (CCA) is also considered as another major alternative of historical cost accounting and CCPA. It needs to be mentioned that CCA was introduced to overcome the criticism of CPPA (Schaltegger & Burritt, 2017). With the application of the process of CCA, the accountants become able to recognize the change in the individual price of the assets and liabilities due to the change in general price level. Under the process of CCA, the development and interpretation of the financial statements are done in such a manner so that they can reflect the change in price of the assets and liabilities. There is not any consideration of retail price index under CCA as the valuation of assets is done in the current cost basis under CCA. There is a basic assumption under CCA (McCarthy et al., 2012). As per this assumption, the valuation of the stocks is done based on FIFO (First In First Out) basis. The main objective of CCA is the reporting of the assets and liabilities in the financial statements based on fair market price. Business organizations can apply the process of CCA for the valuation of their assets. For example, the book value of a plant is $8000000; but the fair market value of the same plant is $5000000. Thus, under the process of CCA, the company will consider the latter due to fair market value. For the reason of considering all the changes in the price of the assets, CCA can also be considered as a viable alternative of historical cost accounting (Chambers, 2014).

Exit Price Accounting (EPA): Exit Price Accounting (EPA), also known as Continuously Contemporary Accounting (CoCoA) is a major alternative of historical cost accounting (Fischer & Marsh, 2013). As per EPA, the companies should do the valuation of their assets based on their exit price so that the financial statements can show the ability of the companies to adapt. There are three major assumptions of EPA. The first assumption states that the companies exist to increase their wealth. As per the second assumption, the company’s ability to adapt the changing environment determines the organizational success (Djafri, Taleb & Bouteldja, 2014). As per the third assumption, the capacity of adaption can be best reflected by the monetary value of assets and liabilities. Thus, it can be seen that EPA takes into account the changes in the value of the assets and liabilities as the motive of this system is to report the value of asset in fair market value. For this reason, EPA can be considered as a viable alternative of historical cost accounting (Fields, 2016). 

Current Cost Accounting (CCA)

Accounting refers to the process to communicate the financial information about the business entities to the different users. Thus, it can be observed that accounting information has major impact on the financial decision-making process of different users. In the conceptual framework of IASB/AASB, there is mention of the users of accounting. As per this framework, there are two types of users of accounting; they are Internal Users and External Users. The following discussion shows the description of these users of accounting:

Internal Users or Primary Users: The internal users of accounting are discussed below:

Management: It needs to be mentioned that management of the companies is the major users of accounting. The managements of the business organizations are in need of the accounting information in order to measure the performance of the business. Accounting information related to the profitability, liquidity, efficiency and others shows the management with the actual financial position so that effective strategies can be developed (Schaltegger & Burritt, 2017).

Employees: As per the accounting conceptual framework, employees are considered as major internal users of the accounting information. For the purpose of judging the future of the remuneration of the companies, the employees need accounting information on the profitability of the companies. Employees need accounting information to assessing their job security (Edwards, 2013).

Owners: Owners of the businesses are most important internal users of the accounting of the companies. Business owners need the accounting information of the companies for the analysis of the viability and profitability of their investments. They also need accounting information for the determination of any future course of actions (Weil, Schipper, & Francis, 2013). 

External Users or Secondary Users: The external users of accounting are discussed below:

Creditors: Creditors are considered as one of the major external users of accounting. The main reason for which the creditors need accounting information is the determination of credit worthiness of the business organizations as the creditors set the terms of credit based on the results of credit worthiness analysis. For this reason, it is necessary to get accounting information on the financial health of the companies. The major types of creditors in the business organizations are suppliers, lenders, banks and others (Horngren et al., 2012).  

Tax Authorities: Tax authorities are considered as another major external user of accounting. It is required for the tax authorities to determine the financial position of the business organizations. It helps the tax authorities in determining the credulity of the business organizations to pay the required amount of taxes (May, 2013).  

Exit Price Accounting (EPA)

Investors: It is required for the investors of the companies to ascertain the financial position of the business organizations so that they can take effective investment decisions. For this purpose, the investors need accounting information on various aspects like profitability, liquidity, efficient, debt position and others. Thus, they can be considered as the major external users (Henderson et al., 2015).    

Customers: Customers are also considered as another major external user of accounting information. It is required for the customers to assess the financial position of the companies to maintain a stable source of supply in long-term basis (Sharma & Panigrahi, 2013). 

Regulatory Authorities: The financial regulatory authorities require the accounting information in order to be ensured that the company has adopted the correct accounting standards.

From the above discussion, it can be seen that the conceptual framework of IASB and AASB provided details about the users of accounting. In this context, it needs to be mentioned that there are some major implications of this identification of the users of accounting for the future of accounting measurement. In this process, the involvement of fair value and historical cost accounting can also be seen (Sharma & Panigrahi, 2013). It is an important aspect that both the internal as well as external users of accounting need the most relevant information for their different purposes. It needs to be mentioned that the process of historical cost accounting does not take into consideration all the changes in the value of the assets and liabilities over the years. Thus, under the process of historical cost accounting, the users will not be able to get the most relevant accounting information. However, in case of fair value accounting, it can be observed that this accounting process takes into account all the changes in the value of the assets and liabilities of the companies. Thus, it needs to be mention that it is required for the IASB and AASB to consider the effect of both historical coat accounting and fair value accounting while further identifying the users of accounting. It is recommended to the conceptual framework of AASB and IASB to consider the adoption of the strategy of fair value accounting for the future development in the identification of users of accounting measurement (Henderson et al., 2015). 

The presence of accounting process can be seen resulted from the development of conceptual framework. In this context, it needs to be mentioned that this accounting process has some major advantages. This type of accounting system has been developed from the conceptual framework of IASB. The first advantage is that with the help of this accounting system, the accountants become able to resolve different kinds of tough accounting problems (Jorissen et al., 2012). With the assistance of this accounting system, the accountants become able do the analysis of different types of accoutring issues. Thus, it can be said that the adoption of this accounting helps the business organizations in the decision-making process. In case of the complex financial reporting issues, the business organizations become able to get the basis of reasoning to solve these issues. For this reason, the accountants become able to narrow down all the alternatives so that they can reach to the correct solution of these problems. Thus, it can be said that this accounting process helps the accountants financial managers in bringing greater efficiency and consistency in dealing with different kinds of financial accounts of the companies. Apart from this, it needs to be mentioned that the accounting developed by the conceptual framework provides a guiding principle for the board of directors in the decision-making process (Henderson et al., 2015).

Major Users of Accounting

Moreover, the inclusion of this accounting system is majorly helpful in the reduction of any kind of influence or biasness in the accounting process of the companies. For this reason, it can be observed that in the absence of this accounting system, the decisions of the management of the companies will be different due to the potential presence of biasness or influence. Another major aspect is the increase in financial credibility (Murphy & O’Connell, 2013). The use of this accounting system developed from conceptual framework provides credibility in the process of financial reporting and the accountants become able to increase this credibility of financial reporting. Hence, this particular aspect helps both the preparers and users of the financial statements of the companies as this accounting system bring internal consistency in the whole accounting process. Most importantly, it needs to be mentioned that this accounting system helps the users of the financial reports in the process of better understanding the accounting information; they also become able to understand the limitations of this accounting information (Zhang & Andrew, 2014). This particular accounting provides the accountants and users of the financial statements with a frame of reference so that they can understand the results of the financial statements of the companies. Thus, from the above discussion, it can be seen that the accounting system developed from the conceptual framework has major benefits for the companies, accountants and the users of the accounting information.                                                   

In the provided article named, ‘Financial Accoutring Knowledge, Conceptual Framework Projects and the Social Construction of the Accounting Profession’, the author has sheds light on different aspects of the accounting profession (Hines, 1989). In this article, the author has mentioned that the professional practices have the power to solve different kinds of complex problems in the field of accounting. In the discussion of this article, it can be seen that the accounting professionals depend a lot on the accounting knowledge for different kinds of accounting problems (Hines, 1989). In this study, the author has mentioned about some specific skills required by the accountants while performing various operations in the accounting process; they are diligence, honesty, integrity, recording skill, bookkeeping skill, accuracy, orderliness, negotiation and many others. In the above discussion, it has been mentioned that the main advantage of the accounting system developed by conceptual framework is that it helps all the parties like the users, accountants, management of the companies and others (Hines, 1989). Thus, for all these reasons, it is required for the accounts to possess all the above-mentioned qualities along with effective accounting knowledge. Thus, based on the above discussion, it can be seen that the author of this article believe that both the users and accountants of the companies will be largely beneficial from the development of conceptual framework (Hines, 1989).                  

Internal Users

Conclusion

From the above discussion, it can be seen that there are three major alternatives of historical cost accounting; they are Constant Purchasing Power Accounting (CCPA), Current Cost Accounting (CCA) and Exit Price Accounting (EPA). The above discussion also shows that there are two types of users of accounting; they are external users and internal users. It can be seen that all these users need accounting for different purposes like investment decision-making, to know about the financial condition of the companies and others. From the last part of the report, it can be seen that the accounting system developed by conceptual framework has major advantages for the users, companies and accountants.

References

Chambers, R. L. (Ed.). (2014). An accounting thesaurus: 500 years of accounting. Elsevier.

Djafri, O., Taleb, M. A., & Bouteldja, A. (2014). Reforming the International Accounting Standards IAS/IFRS: A Need to Recover the Financial Stability?. Mediterranean Journal of Social Sciences, 5(15), 141.

Edwards, J. R. (2013). A history of financial accounting (RLE Accounting) (Vol. 29). Routledge.

Fields, E. (2016). The essentials of finance and accounting for nonfinancial managers. AMACOM Div American Mgmt Assn.

Fischer, M., & Marsh, T. (2013). Biological assets: Financial recognition and reporting using us and international accounting guidance. Journal of Accounting and Finance, 13(2), 57.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

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

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D., & Tan, R. (2012). Financial accounting. Pearson Higher Education AU.

Jorissen, A., Lybaert, N., Orens, R., & Van Der Tas, L. (2012). Formal participation in the IASB's due process of standard setting: a multi-issue/multi-period analysis. European Accounting Review, 21(4), 693-729.

May, G. O. (2013). Financial accounting. Read Books Ltd.

McCarthy, D. P., Donald, P. F., Scharlemann, J. P., Buchanan, G. M., Balmford, A., Green, J. M., ... & Leonard, D. L. (2012). Financial costs of meeting global biodiversity conservation targets: current spending and unmet needs. Science, 1229803.

Murphy, T., & O’Connell, V. (2013). Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law” of accounting. Accounting, Organizations and Society, 38(1), 72-91.

Rodrigues, L. L., Schmidt, P., & dos Santos, J. L. (2012). The origins of modern accounting in Brazil: Influences leading to the adoption of IFRS. Research in Accounting Regulation, 24(1), 15-24.

Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts and practice. Routledge.

Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Sharma, A., & Panigrahi, P. K. (2013). A review of financial accounting fraud detection based on data mining techniques. arXiv preprint arXiv:1309.3944.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Whittington, G. (2014). 14 The LSE Triumvirate and its contribution to price change accounting. Twentieth Century Accounting Thinkers (RLE Accounting), 34, 252.

Zhang, Y., & Andrew, J. (2014). Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), 17-26.