Question

Question 2 - 750 words

In 1973 Professor Ray Chambers ("Where company reports fail- Prof Chambers", 1973)* said that the ‘financial reports of companies failed to give a fair idea of financial positions and profits’ What did Chambers mean by this statement? Critically evaluate whether Chambers preferred alternative system, Continuously Contemporary Accounting (CoCoA), provides a realistic solution to the problems he identified.

*"Where company reports fail- Prof Chambers" (1973). Australian Financial Review, p. 30. (See Deegan, 2014, p. 192 for the full articule).

Answer 1

‘financial reports of companies failed to give a fair idea of financial positions and profits”---Chambers meant that the purchasing power of money does not remain constant , but the financial reports are prepared based on the historical costs. Hence the financial reports do not reflect fair value of assets and profits.

Inflation, change in exchange rate, technological evolution etc changes the value of assets held and conventional system of accounting do not account for these changes.

Continuously contemporary accounting or CoCoA suggests that the financial statements are prepared based on current dollar value. The assets should be shown in statements at net realizable value at current prices.

This system will reflect accurate financial position and income for the year.

CoCoA advocates fundamental changes in accounting system from historical cost based system to exit price based system

This system will reflect economic reality and force the management to adapt to changing technology and economics.

The difficulties in adopting CoCoA is that the fair value of assets may be volatile.

Moreover the fair value measurement of assets may require subjective judgement which is likely to bring conflicting opinion with auditors.

Moreover, the internal value of some assets to the organization may be different than the market value