Purchasing Power And Models
Historical-cost-constant purchasing power records and carries forward assets at the cost of acquisition, and it assumes that their values have not changed since acquisition. The historical approach does not consider inflation or deflation in the economy. Entities using the historical-cost model disregard the changes in general price levels or increase in the prices of recognized assets and liabilities (Edwards, 2013). The model has many flaws, but the guidelines issued by accounting frameworks on each asset allow for three accounting approaches: physical capital maintenance, financial capital maintenance, and constant purchasing power. The IFRS guidelines on the constant purchasing power model prevent monetary items from being adjusted since they are already at the latest value. They also prevent the adjustment of items already adjusted for the net realizable, current market, or fair value. Thirdly, the guidelines allow the adjustment of nonmonetary items for the general pricing index, including the depreciable fixed assets, intangible assets, owners’ equity, and change to equity to be restated based on the general price index (Christensen, 2013). All income statement items are adjusted based on the change in the general price index.
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Current-cost model is an accounting model that restates all nonmonetary items recorded based on the historical cost in an entity’s financial reports by applying a general price index prevailing at the end of an accounting period. The current-cost method allows for more accurate reporting of a firm’s financial position. This method aims to report a company’s financial assets and liabilities and their fair market value (Rayman, 2013). When using the current-cost model, any change in the fair market values of balance sheet items is charged to the income statement; this is believed to lower the perceived profitability of the company.
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References
Christensen, T. C. (2013). Advanced financial accounting. McGraw-Hill.
Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting). Routledge.
Rayman, R. A. (2013). Accounting standards. Routledge.
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Question 
Historical-Cost-Constant Purchasing Power And Current-Cost Models
Discussion Prompt
- Briefly describe the historical-cost-constant purchasing power and current-cost models. How are they similar? How do they differ?
Purchasing Power And Models
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