Exit Price Accounting – Definition and Criticisms

Exit Price Accounting (EPA) also known as Continuously Contemporary Accounting (CoCoA) has been proposed by researchers such as McNeal, Sterling, and especially Raymond Chambers. It’s an accounting theory that prescribes that assets should be valued at exit prices and that financial statements should function to inform about an organization’s capacity to adapt.  Chambers described the entity’s capacity to adapt as the cash that could be obtained if the entity sold its assets. Chambers believed that economic survival of the entity depends on the amount of cash it can command and the balance sheet is crucial to these decisions.

Chambers used the term ‘current cash equivalents’ to refer to the amount that was expected to be generated through the orderly sale of assets. He believe that the information about current cash equivalent were fundamental to effective decision making.

Chambers stated that ‘the accounting rules used were so different in effect that comparison between companies was often quite misleading.’  One of the main arguments for  Exit Price Accounting is that it provides useful information to the users. They believe that EPA reports all profits and losses and values as determined in competitive markets and provides a true and fair financial statement that serves the purpose of the shareholders.

Other arguments that support Exit Price Accounting is the additivity function. EPA values all elements in the balance sheet and income statement at their exit prices, which, therefore, provides one consistent rule that could be applied by all or any company. It involves references to real-world examples because untestable assertions aren’t made such as depreciation.

Criticisms of Exit Price Accounting

According to Chambers model of CoCoA, if assets can’t be sold separately, they are deemed to have absolutely no value for the purpose of determining organization’s financial position. This is considered to be too extreme by many accounting practitioners and researchers. Assets such as goodwill and work-in-progress have no selling value therefore will be have no value at all in the financial statements.

Other criticisms of CoCoA are that it doesn’t consider the value in use. An asset that is held rather than sold out must be worth more to its owner than its exit price, otherwise, it would be sold. In case of specialized resources such as a blast furnace has positive value in use, but cannot be sold separately, for the purpose of CoCoA has no value.  Even though proponents of EPA argue for the additivity of exit prices, the concept of current cash equivalent doesn’t recognize the possibility of selling assets as one package. Some assets sold as a package are worth more than when sold individually in the market. This concept has been ignored in the exit price accounting.

CoCoA has also been criticized on the basis that exit prices are determined by the price that could be achieved in an orderly sale.  The sales might be at different times and won’t necessarily reflect values at balance date. Therefore, the financial statements based on these values might not be useful for monitoring the company’s management.

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