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Prepared by Arabella Volkov
University of Southern Queensland
References
• Text – Chapter 8
Exit price accounting
Learning Objectives
At the conclusion of this lecture, you
should have an appreciation of:
• the background to the reporting of
exit price accounting
• the concept and advantages of
adaptive behaviour
Learning Objectives
At the conclusion of this lecture, you
should have an appreciation of:
• the criticisms of exit price accounting
• the difference between value in use and
value in exchange
• the movements away from strict
historical cost accounting in
international accounting standards
In support of Exit Price
Accounting
Providing useful information
• MacNeal’s argument
– Current accounting principles an
outgrowth of ‘primitive conditions’
that have largely ceased to exist
In support of Exit Price
Accounting
Providing useful information:
MacNeal divided accounting
history into three phases:
• 1st era, 12th to 17th century
– accountant to provide information
to the owner-manager about the
total costs incurred in ventures and
projects
In support of Exit Price
Accounting
MacNeal (continued)
• 2nd era, 18th to 19th century
– Business firms more established, less
transaction risk
• Third era, 20th century onwards
– Separation of ownership from control
– External financial reports required
In support of Exit Price
Accounting
MacNeal:
• Marketable assets at market price
(exit price)
• Non-marketable, non-reproducible
assets at historical cost
• Occasional non-marketable,
non-reproducible assets at historical
cost
In support of Exit Price
Accounting
Adaptive decision making
• Chambers’s comprehensive proposal
– ‘continuously contemporary accounting
(CoCoA)’
– adaptive entity engaged in buying and selling
goods and services
– need knowledge of the cash and current cash
equivalents of net assets
– financial position determined with market
values
In support of Exit Price
Accounting
Adaptive decision making
Chambers:
…the single financial property which is
uniformly relevant at a point of time for
all possible future actions in markets is
the market selling price of realisable
price of any or all goods held
In support of Exit Price
Accounting
Relevant and reliable information
Sterling’s argument
• the problem of income measurement
is one of valuation
• information content of valuation
method
• decision usefulness
In support of Exit Price
Accounting
Sterling
• Model to predict the consequences of
currently available alternative courses
of action
• For the wheat trader, three decision
problems are posed:
– The continuing decision to enter and stay in the
market
– The continuing decision to holder either cash
or wheat
– The evaluation of past decisions
In support of Exit Price
Accounting
Sterling: items relevant to decisions
• The expected future price of wheat
• expected future price of other
alternatives
• The present selling price of wheat
• present buying price of other
alternatives
In support of Exit Price
Accounting
Sterling: items relevant to decisions
(continued)
• The price at the last evaluation
• The quantity of wheat and money at
the last evaluation
• The present quantities
In support of Exit Price
Accounting
Sterling's conclusions:
Present market method of valuation is:
– Relevant to all users
– Reliable
– Empirically meaningful
– Additive, in the sense that the sum of the
parts is equal to the independent
measurement of the whole
In support of Exit Price
Accounting
Other advantages
• Additivity (Chambers)
• Allocation (Thomas)
• Reality (Real world examples)
• Objectivity (Parker)
• A measure of risk
Criticisms of Exit Price
Accounting
• Profit concept
– Exit price does not provide relevant data fro
matching
– Bell…current cost advocate
• Additivity
– Chamber’s assumption of a gradual and
orderly liquidation
• Other weaknesses
– Chambers… implies that liabilities must be
legally enforceable
Value in Use versus Value in
Exchange
Adam Smith
– Distinction between value in use and
value in exchange)
• Value in use assesses long-term solvency
• Value in exchange assesses short-term
liquidity
• Exit value accused of ignoring value in use
• Valuation difference arises when there are
market liquidity/efficiency problems
A Mixed Measurement System
& International Standards
• Miller and Loftus
– Market price or current value information
makes financial statements more relevant
• IAS uses a mixture of valuation methods
• Miller & Loftus: piecemeal approach and
lack of consistency
• Theoretical basis for valuation
measurements unclear
Summary
• MacNeal, Chambers & Sterling
arrived at the same conclusion:
– that current exit prices should be used
to better meet user information needs
• Exit price financial statements are
allocation free and better relate to the
real world
• Miller and Loftus have pointed out
– the accounting standards have taken a
piecemeal approach to valuation
Key Terms and Concepts
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Exit price accounting
Adaptive behaviour
Value in use
Value in exchange
Additivity
Allocation
Reality
Objectivity
Profit concept
Piecemeal
Where to get more
information
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Other courses
List books
Articles
Electronic sources