financial accounting theory （rmit university,craig deegan）--chapter4规范会计理论-物价变动会计为例

Financial Accounting TheoryCraig Deegan,Chapter 4Normative theories of accounting - the case of accounting for changing prices Slides written by Michaela Rankin,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.2,Learning Objectives,In this chapter you will be introduced to some particular limitations of historical cost accounting in terms of its ability to cope with various issues associated with changing pricesa number of alternative methods of accounting that have been developed to address problems associated with changing pricessome of the strengths and weaknesses of the various alternative accounting methods,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.3,Learning Objectives,Evidence that the calculation of income pursuant to a particular method of accounting will depend on the perspective of capital maintenance that has been adopted,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.4,Limitations of historical cost in times of rising prices,Historical cost assumes money holds a constant purchasing powerthree components of the economy which make the assumption less valid than when historical cost was developed:specific price level changes (shifts in consumer preference; technological advances)general price level changes (inflation)fluctuation in exchange rates,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.5,Limitations of historical cost in times of rising prices - continued,problem of relevance in times of rising pricesassets current value may be different from historical costproblem of additivitycan overstate profits in times of rising prices, with distribution of profits leading to an erosion of operating capacityincluding holding gains which accrued in previous periods in current years income distorts the current years operating results,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.6,Support for historical cost accounting,Predominant method used today so tended to maintain support of professionif not found useful business entities would have abandoned it,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.7,Definition of Income,The maximum amount that can be consumed during the period while still expecting to be as well off at the end of the period as at the beginning of the period (Hicks, 1946)consideration of well-offness relies upon a notion of capital maintenancedifferent notions of capital maintenance will provide different perspectives of income,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.8,Capital maintenance perspectives,Financial capital maintenanceperspective taken in historical cost accountingpurchasing power maintenancehistorical cost accounts adjusted for changes in the purchasing power of the dollarphysical operating capital maintenance,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.9,Development of accounting for changing prices,Research initially related to using price indices to restate historical costs to account for changing pricesliterature then moved towards current cost accountingthe basis of measurement changed to current values not historical values,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.10,Current purchasing power accounting,Also called general purchasing power accounting; general price level accounting; constant dollar accountingbased on the view that in times of rising prices, if an entity were to distribute unadjusted profits based on historical costs, in real terms the entity could be distributing part of its capital,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.11,Calculating indices,A price index is used when applying general price level accountinga price index is a weighted average of the current prices of goods and services related to a weighted average of prices in a prior period (base period)eg. Australian Consumer Price Index (CPI)can use a general or specific price index,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.12,Performing current purchase power adjustments,All adjustments are performed at the end of the periodadjustments are applied to historical cost accountsmonetary and non-monetary assets considered separatelyvalues of monetary assets do not change as a result of inflationliabilities generally considered monetary items,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.13,Performing current purchase power adjustments - continued,In times of inflation, holders of monetary assets will lose in real termsthe assets have less purchasing power at the end of the period relative to the beginning of the periodholders of monetary liabilities gain, given the amount they have to repay at the end of the period is worth less than at the beginning,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.14,Performing current purchase power adjustments - continued,No change in purchasing power arises from holding non-monetary assetsnon-monetary assets are restated to current purchasing power so no gain or loss is recognisedpurchasing power gains or losses are included in income for the period,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.15,Movements in net monetary assets,Must identify changes in net monetary assets as a result of revenues or expensesin times of rising prices there will be a loss in purchasing power of cash received during the yearmore expenses are able to be paid earlier in the year as more cash required for expenses incurred later in the year,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.16,Advantages of current purchasing power adjustments,Relies on data already available under historical cost accountingno need to incur cost or effort to collect data about current asset valuesCPI data also readily available,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.17,Disadvantages of current purchasing power adjustments,Movements in the prices of goods and services included in a general price index (CPI) may not reflect specific price movements in different industriesinformation generated under CPPA may be confusing to usersstudies of share price reactions failed to find much support for decision usefulness of CPPA data,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.18,Current cost accounting,Based upon actual valuations not adjusted historical cost differentiates between profits from trading and holding gainsholding gains can be realised or unrealisedincome perspective adopted will determine whether holding gains or losses treated as income,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.19,Treatment of holding gains or losses,Financial capital maintenance perspectiveholding gains or losses can be treated as incomephysical capital maintenance perspectiveholding gains or losses can be treated as capital adjustments,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.20,CCA under physical capital maintenance approach,Advocated by Edwards and Bellvaluations based on replacement costsoperating income represents realised revenues less the replacement cost of assets in questiongenerates a measure of income that represents the maximum amount that can be distributed, while maintaining operating capacity intact,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.21,Adjustments using Edwards and Bell approach,Adjustments usually made at year endhistorical cost accounts used as basis of adjustmentsoperating profit calculated by using replacement costs holding gains excluded in calculating current cost operating profitnot available for dividends,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.22,Adjustments using Edwards and Bell approach - continued,BUT holding gains are included in calculating business profitbusiness profit shows how the entity has gained in financial terms from the increase in cost of its resourcesDepreciation of non-current assets based on the replacement costas with CPPA no restatement of monetary assets required,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.23,Advantages of current cost accounting,Differentiating operating profit from holding gains and losses can enhance the usefulness of information providedholding gains different to trading income as due to market-wide movements that are often beyond managements controlbetter comparability of various entities performance,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.24,Criticisms of current cost accounting,Replacement cost of assets may not be the same for all firmssome firms may not choose to replace the assetif the entity requires replacement assets it may be more efficient and less costly to acquire different assetsreplacement cost does not reflect what the asset would be worth if sold,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.25,Criticisms of current cost accounting - continued,Often difficult to determine replacement costsallocating replacement cost via depreciation is still arbitrary as with historical cost accountingChambers (1995) claimed products of CCA were irrelevant and misleading,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.26,Continuously Contemporary Accounting (CoCoA),Proposed by Chambers as well as othersbased on valuing assets at net selling prices (exit prices) at balance dates on the basis or orderly salesreferred to as current cash equivalentChambers argued that key information for decision making relates to capacity to adapt,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.27,Continuously Contemporary Accounting (CoCoA) - continued,Statement of financial position (balance sheet) considered to be the prime financial statementshows the net selling prices of the entitys assetsprofit directly relates to changes in adaptive capitaladaptive capital reflected by the total exit values of assets,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.28,Capacity to adapt,Chambers approach focuses on new opportunitiesthe ability of the entity to adapt to changing circumstancesthe ability of the firm to go into the market with cash for the purposes of adapting oneself to contemporary conditionsassumes the objective of accounting is to guide future actions,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.29,Definition of wealth under CoCoA,Present (selling) price is seen as the correct valuation of wealth at a point in timepast prices are a matter of history so not relevant to current actionsprofit is tied to the increase (or decrease) in the current net selling prices of the entitys assetsno distinction between realised and unrealised gains - all gains are treated as part of profit,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.30,Definition of wealth under CoCoA - continued,Profit is the amount that can be distributed, while maintaining the entitys adaptive ability (adaptive capital)abandons notion of realisation in terms of recognising revenuerevenues are recognised at point of purchase or production rather than sales,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.31,Capital maintenance adjustment,Unlike CCA there is an adjustment to take account of changes in general purchasing power (inflation adjustment)capital maintenance adjustments form part of the periods income with a corresponding credit to a capital maintenance reserve (part of owners equity)calculated by multiplying net assets by the proportional change in a general price index over the period,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.32,Advantages of CoCoA,By using one method of valuation for all assets (exit values) the resulting numbers can be logically added together (additivity)no need for arbitrary cost allocation for depreciation as gains or losses on assets are based on movements in exit price,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.33,Criticisms of CoCoA,If implemented CoCoA would involve a fundamental shift in financial accountingrevenue recognition points and asset valuationscould lead to unacceptable social and environmental consequencesrelevance of exit prices questioned if we do not expect to sell the assets,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.34,Criticisms of CoCoA - continued,assets of a specific nature considered to have no value under CoCoA because cannot be separately disposed ofCoCoA ignores the value in use of an assetquestioned whether appropriate to value all assets at exit prices if the entity is a going concerndetermining exit prices for unique assets introduces subjectivity into accounts,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.35,Criticisms of CoCoA - continued,CoCoA requires assets to be valued separately rather than as a bundletherefore would not recognise goodwill as an assetvalue of assets sold together can be very different from separate sale,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.36,Demand for price adjusted accounting information,Limited evidence that stock markets react to current cost and CPPA informationlittle or no share price reaction to price adjusted accounting information foundresults may have been due to limitations with research methods used reaction to other information released at the same time could not be distinguishedusers may have obtained information from other sources prior to release of annual reports,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4.37,Demand for price adjusted accounting information- continued,Surveys of managers find limited corporate support for current cost accountingcost, limited benefits from disclosure, lack of agreement as to approach are considerationssurveys of users indicate information not helpful, not used and information does not tell users anything newfindings interesting given the extent of voluntary disclosure by corporations,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,4