Chnage in Prices

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ACCOUNTING FOR THE EFFECTS OF CHANGING PRICES

PREPARED FOR THE INSTITUTE OF ACCOUNTANTS IN ENGLAND AND WALES (ICAEW)

AUTHOR: EDWARD DAVIS (CHARTERED ACCOUNT)

EDWARD DAVIS ACCOUNTANTS

31ST OCTOBER 2011

INTRODUCTION

This report is in regards to your monograph Measurement in Financial Reporting (2006) and is the major source in helping me base my recommendations. I have analysed the validity of numerous measurement bases used in financial reporting. The key issue regarding the report is the effect of price changes on such measurement bases. I have decided to adhere to the Accounting Standards Board (ASB) current reporting measurement basis that enables a varied view to reporting requirements. ASB does not highlight a certain measurement basis as it suggests a varied approach considering factors such as the type of entity/institution. The validity of Historic Cost Accounting (HCA) is definitely a key issue as it is based on past figures which to an extent are not relevant and also draws attention to the point, whether it provides an accurate view, as it does not provide information on unrealised income. However it is the most frequent method used. Furthermore Current Cost (CCA) and Current Purchasing Power (CCP) are also considered inappropriate, and therefore the best approach would be the varied measurement basis, with further research to improve its effectiveness.

OVERVIEW OF PRESENT CIRCUMSTANCE

Due to factors such as globalisation which has lead to rapid improvements in the efficiency of technology, development of new industries and competitiveness within markets. Alongside the growing presence of leasing and share based payments, there has been an expanding focus on financial reports and this has given rise to the issue of appropriateness, of using traditional measurement approaches and their effectiveness. Factors such as inflation have also lead to the re-evaluation of measurement methods, with...