Valuation of Current Cost Accounting

A debate has been ongoing in the accounting literature for the past several decades regarding the relative merits of historical cost versus current cost information for financial reporting. Historical cost reporting involves recording assets and liabilities at their acquisition cost. Under this system, revenues and expenses are generally recognized on the basis of transactions with outsiders. This means that changes in the value of assets and liabilities are not recognized, or recorded in the books, until sold. The method has severe drawbacks reflecting the true status of business operations. The situation is espectially worse during high inflationary times when historical cost is no longer adequate because the cost figures of prior years are not comparable to current cost amounts. Current cost reporting, on the other hand, involves preparation of financial statements that recognize changes in the value of assets and liabilities at the time they occur. This means that income reported for a firm includes both realized gains and losses (stemming from external transactions) and unrealized gains and losses (recognizing changes in market values). The objective of current cost accounting is to maintain capital in terms of operating capacity or the ability to provide goods and services at the same level at the end of a period as the beginning. This thesis is to review and evaluate the merit of this latter approach and its usefulness to management and investor decision making