Definitions of Terms

Common dollar reporting

Synonymous with general price level or constant dollar financial reporting.

Constant dollar accounting

An accounting model that treats dollars of varying degrees of purchasing power essentially in the manner that foreign currencies are treated; dollars are translated into current purchasing power units and presented in restated financial statements. Constant dollar accounting converts all nonmonetary assets and equities from historical to current dollars by applying an index of general purchasing power. Specific value changes are ignored, and thus there are no holding gains or losses recognized. Monetary items are brought forward without adjustment, and these accounts (cash, claims to fixed amounts of cash, and obligations to pay fixed amounts of cash) therefore do give rise to purchasing power gains or losses. Constant dollar accounting does not attempt to address value changes.

Current cost accounting

An accounting model that attempts to measure economic values and changes therein, whether or not realized in the traditional accounting sense. In current cost accounting financial statements, nonmonetary items are reflected at current value amounts, measured variously by replacement cost, exit value, fair market value, net present value, or by other methodologies. Current cost based statements of earnings will report as operating income the amount of resources that are available for distribution (to shareholders and others) without impairing the entity's ability to replace assets as they are sold or consumed in the operation of the business. Holding gains may or may not also be reportable as a component of income, although these are never deemed to be distributable unless the entity is liquidating itself. In a pure current cost accounting system, no purchasing power gains or losses are given recognition, but hybrid models have been proposed under US GAAP and IAS, which do recognize these as well as specific price changes.

Distributable (replicatable) earnings

The amount of resources that could be distributed (e.g., by dividends to shareholders) from the current period's earnings without impairing the entity's operating capacity vs. its level at the beginning of the period. This parallels the classic definition of economic income. It is generally conceded that current cost would provide the best measure of distributable earnings. Traditional historical cost based financial reporting, on the other hand, does not attempt to measure economic income, but rather, seeks to match actual costs incurred against revenues generated; the result in many cases is that this measure of income will exceed real economic earnings.

Economic value

The ideal measure of current value/current cost; also known as de-prival value. In practice, surrogate measures are often used instead.

Excess of specific price changes over general price level increase

A measure first introduced by the US GAAP standard on inflation accounting (SFAS 33) and usable under IAS 15 as well. This is the amount of increase in current cost of inventories and plant assets, in excess of the increase that would have occurred during the period had the change in values been at the rate of change of a broad-based market basket of goods and services.

Exit value

Also known as net realizable value, this is the measure of the resources that could be obtained by disposing of a specified asset, often for scrap or salvage value. Valuing assets at exit value is not generally valid as a measure of current cost, since value in use usually exceeds exit value, and most assets held by the enterprise will not be disposed of; however, for assets that are not to be replaced in the normal course of business, exit value may be a meaningful measure.

Fair value

Fair market value, or market value. For certain specialized properties, such as natural resources, this may be the most meaningful measure of current cost.

Fair value accounting

A now obsolete term which implies current cost or current value financial reporting.

Gains/losses on net monetary items

Synonymous with general purchasing power gains and losses.

Gearing adjustment

A term used in the proposed British inflation accounting standard, which reflects the conclusion that if an entity is financed externally (i.e., by debt), it may not need to retain resources in an amount equal to the replacement cost of goods sold and of depreciation in order to maintain existing productive capacity; sufficient borrowed funds must, however, continue to be available so that the existing degree of financial leverage (gearing) can be maintained in the future. This adjustment is not addressed by IAS 15.

Holding gains/losses

In general, the increase or decrease in the current cost of non-monetary assets (plant assets and inventories, for the most part) during a period. Notwithstanding the gain/loss terminology, such items are not generally recognized as part of income but rather as part of stockholders' equity, although practice varies. Holding gains are not distributable to shareholders without impairing operating capacity. In some models, only the excess of specific price changes over general price level changes are deemed to be holding gains/losses.


The condition in an economy in which there is such extreme inflation that historical cost financial statements become meaningless; characterized by a general aversion of the population to holding monetary assets, the conducting of business in ways that provide some protection against inflation, such as denominating transactions in a stable foreign currency or indexing to compensate for price changes, and a cumulative inflation rate over three years approaching 100%.

Inventory profits

The overstatement of income resulting from charging cost of sales at historical levels instead of at replacement costs; during periods of rapid inflation, historical cost based income will exceed real, economic earnings (distributable or replicatable earnings); this is partly the result of inventory profits. Not all entities are affected similarly. Those using LIFO costing will be less severely affected, and entities having faster inventory turnover will also have less inventory profits.

Monetary items

Claims to, or obligations to pay, fixed sums of cash or its equivalent. Examples are accounts receivable and accounts payable. If constant dollar accounting is employed, net monetary assets or liabilities will create purchasing power gains or losses in periods of changing general prices, since such fixed claims to cash or obligations to pay cash gain or lose value as the general purchasing power of the currency grows or shrinks.

Net present value

The future cash flows that will be generated by operation of an asset, discounted by a relevant factor such as the opportunity cost of capital, to an equivalent present value amount. This is a surrogate measure for economic value (deprival value) that is useful in certain circumstances (e.g., determining the future net cash flow of income producing real estate). For other assets, such as machinery, this is difficult to compute because future cash flows are difficult to forecast and because the assets are part of integrated processes generating cash flows that cannot be attributed to each component.

Net realizable value

Generally used in accounting to denote the amount that could be realized from an immediate disposition of an asset. Also known as exit value. Net realizable value is sometimes used for current costing purposes if the asset in question is not intended to be held beyond a brief period.

Nonmonetary items

Items that are not claims to, or obligations to pay fixed sums of cash or its equivalent. Examples are inventories and plant assets. When constant dollar accounting is employed, all nonmonetary items are adjusted to current dollar equivalents by application of a general measure of purchasing power changes. If current cost accounting is employed, nonmonetary items are recorded at current economic values (measured by replacement cost, deprival value, etc.); nonmonetary equity accounts may be explicitly adjusted or the necessary balancing amounts can be imputed. Holding gains and losses result from applying current cost measures to nonmonetary items.

Price level accounting

See Constant dollar accounting.

Purchasing power accounting

See Constant dollar accounting.

Purchasing power gains/losses

The economic benefit or detriment that results when an entity has claims to fixed amounts of cash (monetary assets) or has obligations to pay fixed sums (monetary liabilities) during periods when the general purchasing power of the monetary unit is changing. An excess of monetary assets over monetary liabilities coupled with rising prices results in a purchasing power loss; an excess of monetary liabilities results in a gain. These are reversed if prices are declining.

Realized holding gains/losses

Holding gains/losses can be realized or unrealized. If an appreciated item of inventory is sold, the holding gain is realized; if unsold at period end, it is unrealized. Historical cost based accounting does not recognize unrealized holding gains/losses (with some exceptions), and realized holding gains/losses are merged with other operating income and not given separate recognition. Use of the term holding gain/loss was prohibited by the inflation accounting standard under US GAAP and is not addressed by IAS 15.

Recoverable amount

The amount that could be obtained either from the continued use of an asset (the net present value of future cash flows) or from its disposal (exit or net realizable value).

Replacement cost

The lowest cost that would be incurred to replace the service potential of an asset in the normal course of the business.

Replicatable earnings

See Distributable (replicatable) earnings.

Reproduction cost

The cost of acquiring an asset identical to the one presently in use. The distinction between reproduction cost and replacement cost is that operating efficiencies and technological changes may have occurred and the nominally identical asset would have a different productive capacity. Typically, replacement costs are lower than reproduction costs, and use of the latter would tend to overstate the effects of inflation.

Unrealized holding gains/losses

Holding gains or losses that have yet to be realized through an arm's-length transaction.

Value in use

Also known as value to the business, this is defined as the lesser of current cost or net recoverable amount.

Wiley Ias 2003(c) Interpretation and Application of International Accounting Standards
WILEY IAS 2003: Interpretation and Application of International Accounting Standards
ISBN: 0471227366
EAN: 2147483647
Year: 2005
Pages: 147 © 2008-2017.
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