Historical Cost Vs Current Cost Accounting
Introduction
According to PAS 1, current cost is based on maintaining firms' operating capacity intact.
Current Cost Accounting was issued in November 1983.
SAP 1
Presented as the primary financial statements.
Replaced the historical cost reports.
Provided relevant reporting legislation.
Criticisms
Advocates of Historical Cost
Current cost accounting violates the traditional realisation principle.
Current cost is subjective in determining the amount of the increase in cost
Advocates of Exit Price
The information in the current cost accounting is irrelevant.
Current cost will make a difference in the amount of income reported when depreciation is charged whether to income or capital account.
Empirical Studies
Australia
New Zealand
United Kingdom
Current cost financial reports are markedly superior to historic cost reports when it comes to investment.
Historical accounting needs to bear additional cost to adjust the data.
Current cost provided relevant information than the historical cost.
Effects of usage of the current cost
Higher effective tax rates.
Larger market concentration ratios.
Lower leverage.
According to the results of the survey, it was stated that most of companies are giving negative feedback about current cost accounting.
In the long run, share returns are more linked to historical cost data than the current cost financial data.
Current cost accounting will be used for short-term returns