Accounting for Effect of Price Level Changes

Accounting for Effect of Price Level ChangesIn SFAS 33, the evaluation of research and professional pronouncements on the subject of “accounting for the effect of price-level changes” is traced by the two inflation accounting models: historical cost/constant dollar and current cost.

The two models are discussed below-

  1. Constant-Dollar (or general price-level) Accounting (CDA):

Constant-dollar accounting is advocated by those who want to deal with the effects of the decline in the purchasing power of the currency and who prefer the financial concept of capital.

  • It is focused on the measuring unit.
  • It retains the historical accounting model but changes the unit of measurement to a constant dollar.
  1. Current-Cost Accounting (CCA):

Current-cost accounting is advocated by those who want to focus on changes in specific prices affecting a firm’s operations and who are concerned with the maintenance of the physical capital of the enterprise.

  • Current-cost accounting focuses on the attribute being measured.
  • It changes the historical accounting model because it is felt unsatisfactorily with the problem of price changes.

The FASB, in SFAS 33, included both in its experimental approach for financial reporting and price changes.

From the above discussion, the FASB subsequently decided to eliminate the constant-dollar accounting disclosure requirements in favor of disc.losure under only the current-cost accounting model.

However, both models are useful to an understanding of the issues of accounting for price changes.

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