Current value accounting
/What is Current Value Accounting?
Current value accounting is the concept that assets and liabilities be measured at the current value at which they could be sold or settled as of the current date. This varies from the historically-used method of only recording assets and liabilities at the amounts at which they were originally acquired or incurred (which represents a more conservative viewpoint). Both Generally Accepted Accounting Principles and International Financial Reporting Standards have been moving in the direction of requiring more current value accounting, so that fewer assets and liabilities are still recorded on the balance sheet at their original costs.
Advantages of Current Value Accounting
The reason for using current value is that it provides information to the readers of a company's financial statements that most closely relates to current business conditions. This is a real concern when reviewing the financial statements of older companies that may have assets and liabilities on their books from many years in the past, but is less of an issue for newer companies where this is not the case. It is a particular problem when a business has older inventory or fixed assets whose current values may differ sharply from their recorded values.
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Current value is also of use when there has been a prolonged period of excessive inflation . Under these conditions, the historical values at which assets and liabilities were recorded will likely be much lower than their current values.
Disadvantages of Current Value Accounting
Though current value accounting has been presented here as generally a good concept, it suffers from the following problems:
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Accounting cost . It takes time to accumulate current value information, which increases the cost and time associated with the production of financial statements.
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Availability of information . It can be difficult or impossible to obtain current value information about some assets and liabilities.
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Accuracy of information . Some current value information may be based less on facts and more on guesses or poorly-founded estimates, which impacts the reliability of the financial statements in which this information is included.
Given the issues noted here, there is not a high degree of acceptance of the current value concept, unless a company is forced to use it by an accounting standard .
Terms Similar to Current Value Accounting
Current value is also known as replacement cost or current dollar accounting.
