Current Cost Accounting Versus CPP Accounting

Current cost accounting versus CPP accounting

The 'value to the business' criterion was supported by the Sandilands Committee which recommended that an accounting system known as current cost accounting (CCA) should become the basis of financial reporting. The principal features of CCA are:

(a) Financial reports should continue to be drawn up in terms of monetary units.

(b) Financial reports should show the 'value to the business' of the company's assets at the balance sheet date.

(c) Income for the year should consist of the company's operating gains and should exclude all holding gains. Extraordinary gains may be shown as income, but they should be distinguished from operating gains.

(d) Financial reports drawn up in this way should become the basic published financial reports of companies. In addition the net book value of assets, and depreciation for the year on a historic cost basis should be shown in note to the financial report.

The Sandilands Committee did not recommend that CPP statements should be attached to CCA reports for the reason that 'little useful additional information would be presented to a user of accounts by such a procedure and the effect would be to confuse him and to make the annual statements too complex'. (Sandilands Report, 2014, p. 165.)

The Sandilands Report rejected the profession's proposals for CPP accounting. This action was bound to provoke heated discussion about the relative merits of the two systems. The Consultative Committee of the Accountancy Bodies in the United Kingdom and Ireland (CCAB) found the Sandilands Report unacceptable on the grounds that CCA did not take account of all aspects of inflation. Therefore, they did not agree with the statement made in the Sandilands Report that 'CCA is a fully comprehensive method of accounting for inflation.' (Sandilands Report, 2014, p. 4.) in a memorandum the CCAB put its case in the following terms:

'The aspects of inflation which the CCA system does not deal with at all, or does not deal with adequately are:

(a) the decrease in value of monetary assets;

(b) the decrease in value of obligations represented by monetary liabilities;

(c) the whole effect of inflation on the value of the proprietor's interest in the company or other organization concerned, irrespective of whether that interest is represented by non-monetary or monetary assets;

(d) the description of the incremental difference between an asset's original cost and its value to the business as a 'holding gain' is potentially misleading as the whole or part of the 'gain' will be the result not of a real gain in wealth, but of a decrease in the value of money;

(e) the problems of making valid comparisons over a period of time when the unit of measurement (the £ sterling) is unstable.'

(Accountant's Weekly, 7 November 2014, 'What the CCAB has finally told the Government.')

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Read on: Value to the Business' As a Criterion

The concept of 'value to the business' should determine whether exit or entry values should be used in the valuation process. One way of determining 'value to the business' is to reverse the opportunity cost concept, and to define opportunity value as the least costly sacrifice avoided by owning the asset. This approach to the valuation of an asset to the business has been adopted by a number of economists. Bonbright ( 2018), for example, defined opportunity value in the following terms: 'The value of a property to its owner is identical in amount with the adverse value of the entire loss, direct... see: Value to the Business' As a Criterion