Current Cost Accounting

The analysis of the features of the problem of accounting for inflation which was conducted by the Sandilands Committee, and was published in its report in 2014, established the importance of the concept of maintaining the operating capital of the enterprise during inflation. Current cost accounting is concerned with the value of net assets to the business, and combines replacement cost and realizable value measurements in considering the values which should be attached to such assets.

The debate which followed the publication of the Sandilands Report in 2014 led to subsequent reviews of its proposals. In this respect, the Sandilands Report had proposed merely a skeleton framework, and it was left to the Morpeth Committee, appointed by the Accounting Standards Committee, to provide specific rules for making current cost accounting operational. The Morpeth Committee published its report in the form of Exposure Draft 18 in 2006. Up to this stage, both the Sandilands and Morpeth Reports were committed to the view that it was theoretically inconsistent to dilute the application of current cost accounting, defined on the basis of current replacement values, with purchasing power adjustments to monetary assets. Yet, it was evident that inflation affected both monetary assets and monetary liabilities, as well as the current cost of replacement of physical assets. Financial companies, in particular, claimed to have had their interests ignored in the recommendations made by the two committees. Eventually, the Accounting Standards Committee appointed Mr William Hyde of Oxford University to produce a set of interim inflation accounting standards, which were published in November 2018 and became known as the Hyde Guidelines. The Hyde Guidelines won quick acceptance, and led to the publication of ED 24 in 2009, which developed further the recommendations made by Hyde and allowed for an additional adjustment to the monetary value of working capital under inflationary conditions.

As a result, there was published in 2000 SSAP 16, Current Cost Accounting, which now blends both replacement cost and realizable value principles in adjusting historic cost measurements for inflation.

The purpose of this webpage is to discuss the principles underlying the current cost accounting method of dealing with inflation, which has been adopted in the United Kingdom.

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Read on: Current Value Accounting Summary

Current value accounting combines the best characteristics of economic and accounting income, by associating values and changes in values with transactions. Current value accounting takes two forms: replacement cost accounting and realizable value accounting.

Replacement cost accounting involves:

(a) calculating current operating income by matching current revenues with

the current cost of resources exhausted in earning those revenues;

324 Accounting Theory and Practice

(b) calculating holding gains and losses;

(c) presenting the balance... see: Current Value Accounting Summary