Bridge over ocean
1 March 1978 Financial Analysts Journal Volume 34, Issue 2

Current Value Accounting Neglects Liabilities

  1. James A. Largay
  2. J. Leslie Livingstone

When the accountant attempts to deal with inflation in financial statements he encounters two quite separate problems. General price level adjusted (GPLA) statements address the first—the changing general purchasing power of the monetary unit of account. Current value accounting methods (such as replacement cost) address the second—the significant differences between current and historical costs of specific balance sheet items.

Although GPLA accounting accommodates changes in the purchasing power of principal of debt, it ignores both the current market price of the debt and current interest rates. In theory, replacement cost accounting reflects long-term debt in terms of both current market value and current interest cost. But in practice, replacement cost accounting ignores debt, focusing exclusively on assets.

The impact of inflation on liability accounting is likely to be substantial. Compared to the numbers required for reporting changes in the market value of assets, however, the numbers required for reporting debt are readily ascertainable. Thus their omission in replacement cost accounting is not only surprising, but also unnecessary.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.