Page 37 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes 2.4.2 Current Cost Accounting Method (CCA) Method

This method attempts to measure the effect of individual rates of price changes on all assets and
liabilities, i.e., stocks, plant and machinery, investments, loan, creditors and so on. It recognises
that there may be great differences in the rates of inflation of various items and by using specific
indices for items or groups of items the method attempts to match the current cost of assets used
against current income generated by them in more meaningful manner. The chief objective of
this method is to ensure that operating capital is maintained at the current price level. Assets are
valued at current cost, considering specific price index of the relevant asset and not general price
index as is used in the Current Purchasing Power Method. Profits under this approach are
computed on the basis of what the cost would have been on the date of sale rather than actual
cost.

Notes Features of CCA method
The main features of the CCA method are as follows:
Meaning: The method requires each item of financial statements to be restated in
terms of the current value of the item. No cognisance is taken of changes in the
general purchasing power of money. Assets are shown in terms of what such assets
would currently cost.

Objectives: The method seeks to ensure that adequate provision/adjustments are
made for the maintenance and replacement of the operating assets of the company,
at least at the minimum physical levels at which the enterprise can operate efficiently,
not only for the year under the review but also for the future.

Adjustments/provisions: In order to achieve the objectives stated above, the
following adjustments/provisions are usually made.

Revaluation Adjustment: The fixed assets are shown at their “value to the business”
and not at their depreciated original cost. “Value to the business” means the amount
that the company would lose, if it were deprived of the assets.

Net current replacement value: This refers to the money now required to buy a new
asset of the same type as an existing one less an amount of depreciation that recognises
the fact that the true replacement of the asset would not be a new asset, but an asset
that has the same remaining useful life as the existing asset.

The following is the process of converting the historical cost based financial statements into the
financial statements prepared taking into account inflation factor using the current cost
accounting method:
(a) Valuation of Fixed Assets
(b) Depreciation Adjustment
(c) Cost of Sales Adjustment
(d) Monetary Working Capital Adjustment
(e) Gearing Adjustment.

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