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Chapter 1. Introduction

Inflation assumed great political significance during the last decade. It is regarded by most people as being associated with undesirable effects and it has implications for all persons and institutions who conduct their economic activities by means of monetary units. The accounting professions in the United Kingdom and in a number of other countries have given detailed consideration to the accounting implications of inflation. Furthermore, in 1974 the U.K. government set up the Inflation Accounting Committee, with Francis Sandilands as chairman, to consider whether — and if so how — company accounts should allow for changes (including relative changes) in costs and prices. In the United States the Financial Accounting Standards Board has undertaken a similar enquiry. However, inflation is not a new phenomenon; it has been experienced by most countries at some stage in their history. Unfortunately the nature of inflation is frequently misunderstood.

Robert W. Scapens

Chapter 2. Historical Developments

The current concern about the implications of using traditional accounting methods in a period of inflation is not unique. Accountants in many countries have from time to time raised questions such as that asked in the United States by Middleditch in 1918: ‘Should accounts reflect the changing value of the dollar?’1 Such questions have generally coincided with material rates of inflation. However, in recent history periods of relative monetary stability or even deflation have generally followed periods of inflation, and the cyclical pattern has hindered the introduction of revised accounting practices. The movement towards reform during a period of inflation has frequently lost momentum with the return of relative monetary stability.

Robert W. Scapens

Chapter 3. Constant Purchasing Power Accounting I—Concepts

The Accounting Standards Steering Committee (A.S.S.C.) set out in their provisional Statement of Standard Accounting Practice No. 7 a method of preparing financial statements which includes adjustments for changes in the value of money. Although the value of money may rise as well as fall, the current conditions of continuing inflation have led to the contents of the statement being referred to as ‘inflation accounting’. However, the proposed accounting adjustments are also applicable during a period when the value of money is rising and prices are generally falling. For this reason, the term ‘price-level accounting’ may more aptly describe the nature of the statement.

Robert W. Scapens

Chapter 4. Constant Purchasing Power Accounting II—Application

Measurement of financial transactions in terms of constant purchasing power does not necessarily imply a major change in established accounting principles. Historical cost can be retained as the basis of financial reporting. However, constant purchasing power adjustments may also be applied in accounting systems based on replacement or current costs. In the case of replacement- or current-cost accounting many monetary measures will initially be expressed in C.P.P. and further adjustments will be unnecessary. Nevertheless, as will be explained in Chapter 5 and illustrated in Chapter 6, there are aspects of those accounting systems where C.P.P. adjustments may be appropriate. Despite this general applicability of measurements in constant purchasing power, the terms ‘C.P.P. accounting’ in the United Kingdom and ‘constant dollar accounting’ in the United States are generally applied to a method of historical-cost accounting in which costs are measured in C.P.P. terms. In this chapter such a method of accounting will be illustrated and discussed. Furthermore, the term ‘C.P.P. accounting’ will be used in this generally accepted manner. None the less, it should be remembered that in its widest interpretation C.P.P. accounting is not a simple alternative to current-cost accounting — the two methods are not mutually exclusive.

Robert W. Scapens

Chapter 5. Current-Value Accounting I—Concepts

Reference was made at the end of Chapter 4 to the assertion by the Sandilands Committee that the usefulness of C.P.P. financial statements will always be constrained by the deficiencies of historical-cost accounting. The introduction of concepts of value into financial statements, as recommended by the Sandilands Committee,


implies a fundamental departure from the principle of historical cost. The objectivity of historical-cost measurements has been claimed as an important advantage of traditional accounting practice. The introduction of values into financial statements has been resisted because of the suggestion that they cannot be determined objectively. The following statement by Kelly is typical of the attitude of many accountants in past years:

[To] cut loose from the moorings of historical cost would open up a Pandora’s box of confusions, annual appraisals, complications and adjustments to recorded dollar values… since objective measurements beginning with the historical cost of fixed assets would be cast aside and be superseded by subjective measurements.


Robert W. Scapens

Chapter 6. Current-Value Accounting II—Methods

In the previous chapter the concepts of current-value accounting were discussed; this chapter contains illustrations of their application. Initially references will be made to the current values of assets, without distinguishing between entry and exit values. This approach will give the illustrations more generality. However, when methods of current-cost accounting are introduced it will be necessary to define the concept of current value more precisely.

Robert W. Scapens

Chapter 7. Financial Reporting

The inflation that has occurred in many Western countries in recent years has been the primary motivating force which has encouraged accountants to consider the effects of changing prices on accounting measurement. However, inflation does not create fundamental accounting problems. As discussed in Chapter 3, inflation affects the stability of the unit of measurement normally used by accountants, but this instability can be removed by adjustments for changes in the purchasing power of money. None the less, the inflationary conditions have led to discussions of some fundamental accounting issues; in particular, the use of historical cost has been questioned. Some accountants have suggested that current values should replace historical costs in reports of financial position and performance.

Robert W. Scapens

Chapter 8. Appraisal of Capital Projects

The implications of inflation for financial accounting were discussed in earlier chapters. This focus on financial accounting is consistent with the generally accepted interpretation of the term ‘inflation accounting’. However, inflation creates further accounting problems which, if ignored, may lead to inadequate (or incorrect) accounting information. The management accountant of a business enterprise is generally responsible for the provision of information to assist managers in their decision-making. If the management accountant ignores the impact of inflation on the information he is collecting, summarising and communicating to management, the decisions taken by those managers may not be optimal. In Chapters 8 and 9 the implications of inflation for management accounting will be discussed. The provision of information for short-run operating decisions and budgetary control are discussed in Chapter 9, while this chapter is concerned with the use of discounted cash-flow methods of appraising capital projects.

Robert W. Scapens

Chapter 9. Planning and Control

An important part of a management accountant’s work is the provision of financial information required by managers within the business. Two aspects of this work are: (i) the preparation of financial plans (e.g. budgets); and (ii) the collection of control data to monitor the implementation of such plans. The management accountant undertakes an important co-ordinating and consolidating role in the planning process. Data received from various sources are collated and evaluated within the accounting department. The end product of the process is a plan for some future period. During the course of that period the accounting system should generate information about the effectiveness of the plan’s implementation. Reports comparing the actual and expected outcomes may be prepared to highlight those areas where performance varies from the plan. These reports, generally called ‘control reports’, provide managers with an indication of the areas where special attention is required.

Robert W. Scapens


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