In thinking about measurement in accounting, you have been introduced to the ‘Additivity Problem’. Discuss what...

In thinking about measurement in accounting, you have been introduced to the ‘Additivity Problem’. Discuss what the additivity problem is and what are the implications for the preparation of financial reports, in particular the Balance Sheet. Does this have implications for the quality of information available to the user, and the ability to compare financial reports both across time for an entity and between entities?

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Discuss what the additivity problem is and what are the implications for the preparation of financial reports, in particular the Balance Sheet.

The additivity problem relates to the logic of adding together different items thatare recorded in financial terms if the currency in question has been changingacross time in terms of its purchasing power. Historical cost suffers from the problems of additivity. The term “additivity” is used in the context ofaccounting to mean that all the numbers in financial statement, when added together, should have a sum which has the same meaning as each ofthe number taken on its own (ICAS, 1988, paragraph 6.4). In contect of balance sheet, this can pose problem when the currency rates are not stable of uniformity.

Yes it has implications as it will become problmatic for users to compare the performance of the financial reports of the current year with previous year as well as with other entities.

ekkarill92 answered 1 year ago

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