1. Prepared by Arabella Volkov University of Southern Queensland

2. Criticisms of Historical Cost Accounting Objective of accounting –Does the model fulfill the stewardship role? Information for decision making –The model may lack relevance for decision making Basis of historical cost –Going concern assumption

3. Criticisms of Historical Cost Accounting Matching of revenues to expenses Notions of investor needs –Distortion of or concealment of important company disclosures Historical cost under attack –Increasing use of other valuation models

4. Summary Advantages and disadvantages of the historical cost system The objective of accounting Relevance v. reliability

5. Key Terms and Concepts Historical cost model Costs attach theory Historical cost valuation Alternative models Historical cost accounting

6. Where to get more information Other courses Accounting handbook List books Articles Electronic sources

7. Criticisms of Current Cost Advocates of historical cost –CCA violates realisation principle –Subjectivity of increase Advocates of exit price –Cost implies opportunity cost –Allocation problem (Thomas) –Current operating profits could be poor predictors of future profits (Lemke) –Additivity problem (Chambers)

8. In support of Current Cost Recognition principle –Holding gains should be recognised if there is objective evidence of a price change Objectivity of current cost –Depends upon visibility of market price item

9. In support of Current Cost Technological changes –Is profitability expected to be higher with new technology? Current cost v. exit price –Current cost is the normal valuation method

10. In support of Current Cost Comparison of the results with historical cost

11. In support of Current Cost Empirical studies Australia United States New Zealand United Kingdom Research related to the IFRS

12. Empirical Evidence Capital markets research –Supplementary current cost data not useful –Not value relevant for stock prices –Financial capital not used for valuation Watts & Zimmerman alternative interpretations of results Financial asset current costs appear to have more value relevance

13. Summary Proponents of CCA believe it provides more useful information. –Financial capital concept –Physical capital concept This view is not supported by empirical studies. –Watts and Zimmerman offer four alternative interpretations Companies argue the cost of providing CCA information outweighs any benefit.

14. Key Terms and Concepts Current cost Holding gains and losses Business profit Physical capital Recognition principle

15. Where to get more information Other courses List books Articles Electronic sources