Current Value Accounting

5283 Words Aug 25th, 2008 22 Pages
Current Value Accounting and Its Influences on Accounting Environment

Wei Cui


Current Value Accounting is one of the hot spots of accounting researches. Three prevailing current value accounting methods are present value method, current entry price method and current exit price method. All these methods aim at adjusting the book value of assets and liabilities so that the information will not be distorted by the changing prices. The theoretical roots of these methods are similar and they can be taken as options to deal with the issue of capital maintenance and income recognition under a changing price environment. It is found current value accounting affects accounting
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Where: the present value at time 0 the present value at time 1 = in come from the asset for the first year expected net cash flow in year j appropriate discount rate estimated life of the asset Although present value method is theoretically correct, due to the high subjectivity of variable estimation, ‘the practical importance of that kind of information seemed to have dropped from sight’. (Stewart, Claudio & Janek 1995, p.83)

1.2 Current Entry Price Method

Current entry price, known as replacement price, can be defined as ‘the amount of cash or other consideration that would be required to obtain the same asset or its equivalent’ (Ahmed & Stewart 2002, p.422). Three issues can be identified from this conception. First, current entry price method complies with the “going concern” principle. With the consumption of assets, managers need to plan the fund to replace the current assets with new ones in order to keep the firm ordinarily running. Second, this method focuses on the maintenance of productive capacity of the assets. Replacement doesn’t mean to keep the physical image of an asset unchanged but to make the asset keep on producing a stable cash flow for the firm. At last, the current entry price measurement needs a reliable reference for the evaluation process. That is, there should be an active market for the firm to get the new assets at fair prices.
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