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.