| dc.description.abstract | Accounting for price-level changes is a current controversial
issue in the accounting profession. It has attracted both'
practicing accountants and academicians in recent years.
The writer of this thesis is not an exception to such an
an attraction. The thesis is built an the basis of the following
hypotheses:
1. Conventional historical-cost accounting is deficient in
'providing relevant and up-to,date information to the users of
financial statements. This is particularly so when prices of goods
and services are not stable.
2. During a period of rising prices, the original costs and
the depreciated book values of fixed assets are understated at
any given point in time. The depreciation of fixed assets,
calculated on the basis of their understated values, is therefore
less than normal. Hence, less depreciation is charged to earnings,
this resulting to over statement operating profit , As
a result of the excessively stated net profits, same firms tend to
exaggerate the dividends paid to shareholders and some of these
dividends are effectively paid out of capital rather than income .Also,
the overstated net protists are excessively taxed by the Government.
The end result is that less profits are retained by companies for
future asset replacements and expansion.
3. The overstated profits during a period of rising prices
tend to attract demands for higher wages by labour unions. This
process encourages further inflation
4. Financial information provided by financial statements
can be improved tremendously if a new accounting system, which
reflects the effects of price changes on business, is introduced
to replace conventional historical-cost accounting.
The above four hypotheses are examined in a fairly detailed
manner in this thesis. The thesis is divided into five chapters.
Chapter One introduces the contents of the thesis. In this chapter,
it is revealed thar.at general rise in prices is a world-wide
phenomenon, and that this trend has been observed since the end of
the Second World War. Because this upward trend in prices has been
persistent. for long, and because it still continues, the term
"Inflation" has been chosen to describe the trend.
The introductory chapter also gives an over-view of recent
developments in the accounting profession with regard to inflation
accounting. It is shown that Britain, Australia and United States
are in the forefront in the discussion of this controversial
subject of accounting.
Chapter Two starts by giving a brief discussion of the
objectives of financial statements. It is stated that financial
statements act as a vehicle for conveying financial information
to the users of those statements. To achieve this objective
effectively the financial statements should be updated to show
the current values of assets, and the depreciation of fixed assets
should be based on these current values. The Chapter also presents
the characteristics of historical-cost accounting, which m8J~s
a fundamental error by assuming that the value of a shilling is ..
constantly maintained regardless of changes in the general level
of prices. The Chapter also contains illustrative examples of
the inadequacies of historical-cost accounting when prices are
unstable.
Chapter three is the largest chapter. It looks at the two
proposed approaches to inflation accounting, namely, price level
accounting and current-value accounting Price-level accounting
uses an appropriate general price index to restate the data in
the historical-cost financial statements so as to reflect current
changes in the general level of prices. Every figure in both
balance sheet and income statement is updated using the general
price index. This updating can formally be stated as follows:
Historical cost (of asset7
of acquisition (of asset,
etc) Price Index at date
) / of preparing the /\
ete) financial statements.
. Price index at date
Current value accounting aims at stating the current values of
financial items at the date of preparing the financial statements"
This system values the financial items using any of the three
options illustrated below:
Current Value Accounting
Net-Realizable- Present-Value
Cost Value Accounting.
Accounting.Replacement-cost accounting' values assets with reference to
their market replacement costs In other words, values the assets
at the costs of replacing them if the :fin' were to be
deprived of them. This method assumes that a firm is a going
concern, and that therefore the firm has to I~place its assets
once they are worn cut. 'Net-realizable-value accounting' values
assets with reference to their net resale values, after giving
allowance for the incidental resale expenses. Thus, unlike the
replacement-cost concept, the net-realizable-value concept is
based on e:d.t value. Both valuation bases are, however, market validated
bases. 'Present-value accounting' values assets at
their existing value to the firm. It discounts the expected future
benefits of each asset in order to determine the present value of
the asset.
Both ?rice Level Accounting and Current Value Accounting
are dealt with in Section I of Chapter Three, and they are
contrasted at the end of this Section. Section II of Chapter
Three examines the historical developments within the accounting
profession in regard to inflation accounting. It is shown that the
United Kingdom, Australia and New Zealand, United States, and
Canada have made remarkable contributions to the theoritical discussion
of inflation accounting. The United Kingdom and Australia have, in
addition, made courageous moves towards implementing current~value
accounting, Both countries plan to start implementing current value
accounting by the middle of this year, 1977.
Also in this Chapter Three , it is revealed that the developing
countries have made negligible contributions towards inflation
accounting. It is my hope that such countries will soon follow in
'the footsteps of the United Kingdom and Australia.
Chapter Four focuses its attention on the accounting
practices of companies here in Kenya.T'he views of various local
financial manager-a and those of the companies studied are presented
in this Chapter ,it is reported that historical-cost accounting
dominates in our local financial reporting.The general view of
our local companies is that inflation accounting is necessary, but
these companies are not decided on which system should replace
historical-cost accounting. It is their contention that current-value
accounting should be accepted and implemented at some future date.
They, however, fear introducing the system in the near future
because they feel they do not have accountants qualified enough to
prepare inflation-adjusted accounts.
Finally, Chapter five provides a summary of' the thesis. This
Chapter also gives brief conclusions based. on the current
developments in the accounting professions questionnaire used
by the author in carrying out a survey on the local financial
reporting is also represented in this chapter. | en |
