What is exit price accounting

Accounting Theory & Accountability Essay On Stock Exchange

Accounting Theory and Accountability (Godfrey Chapter 6)

Measurement – Fair Value

Part 2

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The 5 key Learning Objectives in this lecture about alternative measurements to HC

Role of Fair Value in accounting

Evaluate the traditional definitions of fair value

Key Aspects of the new definition of fair value

The nature of current cost accounting and exit price accounting

Criticisms of current cost and exit price accounting

Why these alternate models have not replaced historical cost

Changing responses to measurement issues in accounting standards

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The Focus on an Exit Price — Why?

An “exit price” embodies expectations about the future cash inflows and outflows associated with the asset or liability from the perspective of market participants at the measurement date.

It is current

It is specific

Exit price accounting

Exit price = selling price = fair market value

Has two major departures from historic cost accounting:

the values of non-monetary assets are selling prices and any changes are included in profit as unrealised gains

changes in the general purchasing power of money affect both financial capital and profits

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Exit price accounting

Represents clean surplus accounting

The income statement explains all of the differences existing between the opening and closing balance sheets

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Arguments for exit price accounting

Objectivity

market prices are relatively more objective than most believe

A measure of risk

can indicate the financial risk of purchasing an asset

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Arguments against exit price accounting

Profit concept

does not provide a meaningful concept of profit

the critical event does not relate to the performance of the firm

does not produce realistic financial reports

Additivity

violates the principle of exclusion of anticipatory calculation that it claims to reject

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Arguments against exit price accounting

The valuation of liabilities

valuing liabilities at face value and not market value is internally inconsistent

Current cost or exit price

at what stage of the operating cycle should exit price dominate asset valuation?

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A global perspective and international financial reporting standards

Current cost in the United States

an experiment but abandoned (1976 -1984)

Current cost in the United Kingdom

implemented but abandoned (1975 – 1985)

Current cost in Australia

recommended but abandoned (1976 – 1980’s)

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International accounting standards and current costs

IASB/FASB have agreed that fair value is the best measurement basis (2004)

the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction

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International accounting standards and current costs

Historic cost accounting still generally applied

Distinct movement toward current value systems

IASB moving toward exit prices (2004)

But still a mixed valuation approach

Fair value means – current market entry price, current market selling price, historic cost and discounted future cash flows

There is no mention in the standards of capital maintenance concepts

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A mixed measurement system and international standards

Market values - exit prices - are implied in the ‘fair value’ approach in international financial reporting standards

A lack of a theoretical concept of valuation, capital maintenance and profit measure, has resulted in a still mixed measurement system and a lack of consistency

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The End

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