Question

2. Critically assess current value (replacment cost) accounting.

Answer 1

Replacement cost refers to the amount which a company or business must spend currently in order to replace its essential assets. The replacement cost doesn't remain constant and may fluctuate due to the reason of market value of asset or the cost required to make the asset in workable condition. While calculating the replacement costs, the company must account in for depreciation costs.

Current value or replacement cost accounting is the accounting which takes place at the current value of the assets and liabilities at which they can be sold or purchased in current market at current time period. The main motive of using this method of accounting is to provide the users of financial statements the information about the assets and liabilities of the company at current value and during current market conditions. Current value also proves useful when there has been a long period of excessive inflation. Under these conditions, the historical values at which assets and liabilities took place in balance sheet will likely be much lower than their current values. However, the disadvantages of this method are more than the advantages.

• It poses a great threat to the businesses which have already recorded their assets at their original value. As there value may differ sharply if recorded on current market value.
• The time taken to accumulate current value information, increases cost and time taken to prepare financial statements.
• It may be often difficult or even impossible to gather information about certain assets or liabilities.
• Some current information may only be based on guesses which doubts the reliability of the information.
• There is scattered acceptance of current value accounting and it may only be adopted if law say so.