Current Cost Accounting – Definition and Criticisms

Current Cost Accounting (CCA) attempts to provide more realistic book values by valuing assets at current market buying prices. It takes into account time-value of money and inflation. It is more complex than the traditional accounting, and it has created controversy about what adjustments are appropriate.

Unlike Historical Cost Accounting, there is no need for inventory cost flow assumptions such as last-in-first-out and weighted average. The business profit in CCA shows how the entity has gained in financial terms the increase in cost of its resources, which is ignored by historical cost accounting. Differentiating operating profit from holding gains and losses has claimed to enhance the usefulness of information being provided by CCA. Holding gains are different from trading income as they are due to market-wide movements which are beyond the control of the management. Therefore, Current Cost Accounting doesn’t rewards managers for profits from holding gains and losses which isn’t an actual profit and also gives useful information to investors.

Supporters of Current Cost Accounting are convinced that it provides more useful information than conventional accounting but still they do not agree on all issues. There is one group who believe in the financial capital concept in which the holding gains is included in the profit and the other group is those who believe in the physical capital concept. Under physical capital concept, holding gains and losses are not included in the profit and are supported by the theory of optimal resource usage that uses current costs as a measure of input opportunity cost.

Criticisms of Current Cost Accounting

Measurement errors may have reduced the usefulness of current-cost and replacement-cost data. Replacement-cost valuations of plant and equipment often include the cost of technological advances and often these advances would reduce operating costs below the level reported by historical cost. As a result, when replacement-cost depreciation is substituted for historical-cost depreciation, the cost of doing business includes the high capital cost of the advanced technology as well as the high operating costs of the older technology in use, which creates measurement errors.

The supporters of Historical Cost Accounting criticize Current Cost Accounting because it violates the traditional revenue recognition principle by recognizing increases in the value of the assets, both current and non-current, before they are sold. This is irrelevant as changes in market price don’t mean anything until the assets are sold. A non-current asset isn’t more valuable to a business just because its current cost has increased.

Another problem is the subjectivity of determining the amount of the increase in cost. There are some non-current assets that don’t have a second-hand market because it was specifically built or made for that business only. So the basis of determining the current cost must be the new asset expected to replace the old one.

Current Cost Accounting also involves a mathematical problem of additivity. This is because the figures generated from CCA aren’t of the same nature because it involves a variety of measurement models.

Leave a Reply

Your email address will not be published. Required fields are marked *