Prepared by Arabella Volkov University of Southern Queensland

References Text – Chapter 8 Exit price accounting

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: the background to the reporting of exit price accounting the concept and advantages of adaptive behaviour

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: the criticisms of exit price accounting the difference between value in use and value in exchange the movements away from strict historical cost accounting in international accounting standards

In support of Exit Price Accounting Providing useful information MacNeal’s argument –Current accounting principles an outgrowth of ‘primitive conditions’ that have largely ceased to exist

In support of Exit Price Accounting Providing useful information: MacNeal divided accounting history into three phases: 1st era, 12th to 17th century –accountant to provide information to the owner-manager about the total costs incurred in ventures and projects

In support of Exit Price Accounting MacNeal (continued) 2nd era, 18th to 19th century –Business firms more established, less transaction risk Third era, 20th century onwards –Separation of ownership from control –External financial reports required

In support of Exit Price Accounting MacNeal: Marketable assets at market price (exit price) Non-marketable, non-reproducible assets at historical cost Occasional non-marketable, non-reproducible assets at historical cost

In support of Exit Price Accounting Adaptive decision making Chambers’s comprehensive proposal –‘continuously contemporary accounting (CoCoA)’ –adaptive entity engaged in buying and selling goods and services –need knowledge of the cash and current cash equivalents of net assets –financial position determined with market values

In support of Exit Price Accounting Adaptive decision making Chambers: …the single financial property which is uniformly relevant at a point of time for all possible future actions in markets is the market selling price of realisable price of any or all goods held

In support of Exit Price Accounting Relevant and reliable information Sterling’s argument the problem of income measurement is one of valuation information content of valuation method decision usefulness

In support of Exit Price Accounting Sterling Model to predict the consequences of currently available alternative courses of action For the wheat trader, three decision problems are posed: –The continuing decision to enter and stay in the market –The continuing decision to holder either cash or wheat –The evaluation of past decisions

In support of Exit Price Accounting Sterling: items relevant to decisions The expected future price of wheat expected future price of other alternatives The present selling price of wheat present buying price of other alternatives

In support of Exit Price Accounting Sterling: items relevant to decisions (continued) The price at the last evaluation The quantity of wheat and money at the last evaluation The present quantities

In support of Exit Price Accounting Sterling's conclusions: Present market method of valuation is: –Relevant to all users –Reliable –Empirically meaningful –Additive, in the sense that the sum of the parts is equal to the independent measurement of the whole

In support of Exit Price Accounting Other advantages Additivity (Chambers) Allocation (Thomas) Reality (Real world examples) Objectivity (Parker) A measure of risk

Criticisms of Exit Price Accounting Profit concept –Exit price does not provide relevant data fro matching –Bell…current cost advocate Additivity –Chamber’s assumption of a gradual and orderly liquidation Other weaknesses –Chambers… implies that liabilities must be legally enforceable

Value in Use versus Value in Exchange Adam Smith –Distinction between value in use and value in exchange) Value in use assesses long-term solvency Value in exchange assesses short-term liquidity Exit value accused of ignoring value in use Valuation difference arises when there are market liquidity/efficiency problems

A Mixed Measurement System & International Standards Miller and Loftus –Market price or current value information makes financial statements more relevant IAS uses a mixture of valuation methods Miller & Loftus: piecemeal approach and lack of consistency Theoretical basis for valuation measurements unclear

Summary MacNeal, Chambers & Sterling arrived at the same conclusion: –that current exit prices should be used to better meet user information needs Exit price financial statements are allocation free and better relate to the real world Miller and Loftus have pointed out –the accounting standards have taken a piecemeal approach to valuation

Key Terms and Concepts Exit price accounting Adaptive behaviour Value in use Value in exchange Additivity Allocation Reality Objectivity Profit concept Piecemeal

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