5.

18
Some strengths of historical cost accounting would include the following:

Information generated by the historical cost accounting system seems

to be demanded by the market whereas various studies have indicated
that price level adjusted information is not in great demand.

It is a generally accepted accounting system, hence maintaining its use

will not lead to drastic changes in accounting practice, which in turn
could cause a variety of social and economic consequences.

People are used to preparing and reading historical cost accounting

reports, hence there is no need to re-educate them about the strengths
and limitations of historical cost accounting.
Some weaknesses of historical cost accounting would include the following:

The assumption that the purchasing power of the dollar remains

constant is simplistic and flawed.

Information generated through historical costs accounting suffers from

the additivity problemit is argued that it makes little sense to add
together the costs of assets acquired in different time periods.

Historical cost accounting relies upon arbitrary cost allocations (for

example, in relation to depreciation) which may have little
correspondence to the actual changes in an assets values.

Historical cost accounting can lead to an overstatement of profits in

times of rising prices and this overstatement can cause a reduction in
the operating capacity of the entity because an excess amount of
dividends might be distributed (because historical cost accounting
relies upon a financial capital maintenance perspective).

Historical cost accounting data is of limited relevance to current

decisions.

Historical cost accounting assists an organisation to manipulate its

profits given that the decision to dispose of a non-current asset can
directly lead to the recognition of gains on disposal, even though those
gains actually related to prior periods. The decision to sell an asset
might be made in an effort to offset other losses that will be recorded.

5.20
Some strengths of current purchasing power accounting would include:

Current purchasing power accounting is relatively simple and

inexpensive to apply and does not require collecting data about
replacement costs or market values. Information about movements in
general price indices would be easily available.

Relative to historical cost accounting, it can reduce the possibility of

paying excessive dividends, which in turn could reduce the operating
capacity of an entity.
Some weaknesses of current purchasing power accounting would include:

It is not generally favoured by the business or professional community

and hence any attempts to put it in place could be thwarted.

Tied to the above point, various studies show there is not a great deal of
demand for price-adjusted information.

People are used to preparing and reading historical cost accounting

reports, hence there would be a need to re-educate them about the
strengths and limitations of current purchasing power accountingthis
might be costly.

It assumes one price index applies to all assetsthis is a very

simplistic assumption.

Because one price index is generally applied to all assets, the adjusted
values of the assets may show little correspondence with their actual
values (whether this be in terms of replacement or market values).

Tied to the above point, the reported values may cause some confusion
report users may think that the values represent current values.

It still relies upon arbitrary cost allocations, for example, in the form of
depreciation.

5.23
Chambers believed that the most relevant information for decision making is
information about the current cash equivalents of the entitys resources. To determine
the strategies that an organisation can implement at a point in time it was necessary in
Chambers view to know the current cash equivalents. According to Chambers, other
valuation approaches, for example those based on historical costs or replacement
costs, were irrelevant to decision making and could actually be misleading.
While Chambers was a vocal advocate of valuations based on market values it
must be appreciated that his method of accounting was not embraced by the
accounting professions or by business entities. This in itself indicates that

many other people did not agree with Chambers. As noted within the chapter,
there are a number of potential problems associated with valuing items on the
basis of their net-market values. For example, not all assets will have a readily
available market price, and further, some assets might not have a market
outside an organisation, yet they can generate economic benefits when used
within an organisation. Chambers preferred approach to accounting would
indicate that assets which cannot be sold separately have no valueto many
people this in itself would be misleading. As another example, the accounting
profession treats goodwill as an asset. Chambers would argue that goodwill is
not an assethence there is another difference of opinion. Whether something
is irrelevant and misleading is really a function of a number of considerations,
including perceptions about the role of accounting and the related information
needs of financial statement readers. Different people will have different
perceptions about what is relevant and what is not.
5.24
Edwards opposes the use of exit prices to value all assets on the basis that an entity,
operating as a going concern, would not be expected to dispose of all of its assets at a
point in time. Further, if an entity is expanding, the notion that they would dispose of
all of their assets is even more questionable.
Edwards, an advocate of using replacement costs, suggests that in some
circumstances the use of exit values might be appropriate when they are less
than the replacement costs of an asset and the firm has taken a definite
decision not to replace the asset or even the function it performs. As we can
see, Edwards approach to valuation admits the possibility that a consideration
of managements intention at a point in time might influence a decision as to
how an asset will be valued. This in itself could introduce some problems as
allowing such considerations to influence asset valuation could introduce
issues associated with biases and manipulations. A change in intention would
lead to a change in valuationwe can imagine that Chambers would oppose
such a possibility. Also, if some assets are valued at replacement costs and
others at exit prices then we again will encounter problems associated with
additivity.
5.26
There could be many reasons why organisations lobbied in support of methods of
accounting such as CCA and CPPA. These reasons could include:

The organisations might have been ignorant of the studies relating to

user demands for CCA/CPPA information or, alternatively, they might

simply have thought that the studies were wrong and that people would
use such information.
Perhaps the organisations in support of CCA/CPPA information
believed that if people did not currently demand such information the
reason might have been that they were unfamiliar with it and that once
it was made available they would see the benefits of its use.
They considered that historical cost information was misleading.
Organisations might have supported the alternative valuation
approaches because of political benefits the approaches might have
generated. For example, if the methods led to a reduction in reported
profits then this reduction in reported profits might provide some
justification to argue for reductions in corporate tax rates.
Following on from the above point, if an entity reports lower profits
then this might reduce the degree of political scrutiny aimed at the
organisation. Managers of politically sensitive firms (perhaps because
they are considered to be monopolistic) might have seen particular
benefits in the introduction of methods of accounting that produce
reduced reported profits.