Introduction to current value accounting cva in

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Introduction to current value accounting (CVA) In current value accounting, the balance sheet and income statement show current values in place of historical cost of assets. One problem is which current values should be used: Replacement cost? (And how should that be defined?) • Net realisable values? Present value (sometimes called ‘economic value’)? Deprival value (sometimes referred to as ‘value to the business’ or ‘value to the owner’). Each valuation method will be investigated. 13 We will also explore a combined CVA/CPP system of accounting and consider two capital maintenance concepts: operating (or physical) capital maintenance financial capital maintenance in money terms. Replacement cost accounting (RCA) In RCA, all the assets are entered in the financial statements at the cash- equivalent value of what it would cost the organisation to replace them (also known as entry costs ). There may be a choice of three possible ‘replacement costs’: 1. Reproduction cost : the amount that would currently have to be paid to purchase an asset identical to the one currently owned (i.e. like-with-like ). 2. Cost of replacing with best alternative asset (i.e. one best suited to perform the function of the existing asset, adjusted for depreciation). This has the advantage of allowing for the possibility that technological change has rendered the existing asset obsolete. 3. Replacement of service potential tries to measure the cost of replacing the services provided by the existing asset. It does this by adjusting the above(2) for operating advantages or disadvantages compared with the existing asset. An issue with the RCA is that if the company has no intention of replacing (because the capital budget shows replacement is not worthwhile), or cannot replace, is the figure of any relevance?. This will be discussed later. Net realisable value (NRV) Using NRV, the value of an asset is the estimated amount that could be raised from its sale (net of selling expenses); this is also known as the exit value . For example, consider a vehicle bought for £24,000, with an expected life of four years, a nil residual value and a straight-line depreciation policy. At the end of the first year the HCA net book value is £18,000 (£24,000 – £6,000). If the vehicle’s NRV at the end of the first 12 The heterogeneity hypothesis states that changes in different individuals’ purchasing power are not captured by changes in a general index. 13 All of these bases of valuation are further discussed in Whittington (1983), pp.115–31.
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91 Financial reporting 84 year was £19,500 then the balance sheet carrying value is £19,500 and the depreciation charge is £4,500 (£24,000 – £19,500). The arguments in favour of this basis are that it: measures the economic sacrifice made by continuing to hold and use the asset enables users to compare the return earned with the return available on investing those funds elsewhere reflects the adaptability of the company.
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  • Winter '15
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  • Balance Sheet, ........., International Financial Reporting Standards, international Accounting standards Board, international Accounting standards

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