L.

o 1
Three main income and capital mesurement systems .
The study of accounting practice normally starts with a consideration
of the range of techincal issues relating to recording and reporting
financial or economic activity. However, the basic technical processes
have changed very little since the double entry accounting system
was described by pacioli in the fifteenth century. Over the years that
followed and with increased momentum during the industrial
revolution. Especially after the wall stret collapse in 1929, the
traditional historical cost system was not systematically codifed as the
fundamental basis for measuring capital, and for recording and
reporting the economic and related activities of an entity, until the late
1930s. In the 1960s, several alternative system were the developed that
challenged historical cost as the fundamental accounting system. The
first was an updated cost system that proposed to measure the current
costs of resource usage and to value capital at current buying prices.
The second applied current selling prices.

There were two basic current buying price systems. In 1961, edwards
and bell proposed a system of current cost accounting in the theory and
mesurement of business income. Because the system was based on
current market costs., it can be regarded as the first methodical
presentation of a fair value accounting system. The edwars qnd bell
system was based on the concept of financial capital maintenance but ,
as illustrated in the second version of current cost that uses physical
capital maintenance , the choice of the capital concept significantly.
Affects the derived measure of profit the second mayor system used
selling prices or exit value to derive mesures of income and capital .
Support for different versions has varied, and the chaptes goes on to
outlinr and describe the adventages and disadventages of each
accounting system. We also note that the systems have attained varying
support in a global context and recent internationl accounting standards
partially incorporate each system within the notion of fair value.

Lo. 2.

The rationale for historical cost came from several sourcess with the
most influential a book by paton and littleton, introduction to corporate
accounting standards. We rely on their book for many of the arguments
for the theoritical support historical accounting today.
objective of accounting
1. With the growth of the corporation over the last cemtury
and helf , accounting information took on grater
significance as a source of information about firms . One
reason for this is that the corporate form for a large business
caused a separtion of business ownership and control.
Absentee owners do not posses first hand knowledge of
the operations and conditions of the firm and, therefore,
must depend to some extent on accounting reports for
information. The large comapmy also has made evident that
the firm has an indentify of its own, separate and distinct
from owners, creditors and all others interested parties.
Although owners and creditors supply the funds to the
bussines entity, they are in most cases consideredoutsiders-
and have no special access to the records and accounts of
the entity. Accountability, therefor , is seen to be the most
critical objective of reporting function. In particular, the
stewardship function of manajers was seen as the focus of
attention of accountants in reporting to external parties.
Owners and creditors are concern6upon the assumption that
a fiduciary management is reporting to absentee investors
 who have no independent means of learning how their
representatives are discharging their stewardship.
The hsitorical cost stewardship objective emphasises a
Conservative contractual relationship between a firm and those
who provide resources to it by making management accountable for the
input of assets to operations and the subsequent outputs on the net value
of equity from operations. Thus, the income statement is the key
communication mechanism.
Critics of historical cost argue that reporting only income ( that
matches inputs on an historical cost basis) with no recognition of the
changing value of assets and liabilities is misleading and results in
incorrect dividend policies. This is because there may be losses or gain
simply from holding assets(or liabilities), and this should be
recognised when evaluating performance on a reguler basis. Instead,
under the historical cost view, changes in assets values are basically
ignored until the asset is sold or disposed of by sale or write off/ write-
down. That is , a transaction must occur in order for the accounting
even to be recognised. These valuation issues are a repeated theme in
the literature . In summary , under historical cost theory , determining
the residual net value of the firm is not of any high importance.
The effect of asset provisioning on earnings
Bendigo boss makes small provision for big mis exposure

Bendigo and adelaide banks decision to book a paltry $20 million

provision against a messy and litigious exposure to the collapsed
management investment scheme great southern will undoubtedly come
back to haunt it.
In a market update before its annual profit results next week, the banks
new boss mike hirst reserved 3 per cent of the $556m in loan exposures
against bad debts, while the total arrears are 22 percent. Using as much
spin as possible, hirst did his best to play down the risk in this exposure
on the basis that the credit quality of these loans was very strong. By
very strong. He meant about 80 percent of great southern investors
earned more than $100.000 a year, 60 percent were professionals and
75 percent had a loan size of less than $250.000
The problem with this is, by its own admission in slide 8 of the
presentation titled strategic arrears, it is bendigos wealthiest investors
who are causing it the most grief by not paying back their loans. The
presentation shows that investors with the net assets to loan value at
drawdown of greater than five times are in arrears with the bank to the
tune of $52m, compared with $4,6m for the least wealthy investors, or
those with net assets to loan value at drawdown of less than two times.
What this means is, the richest are playing hardball and basically telling
the bank to get nicked. Given great southern collapsed in may, and
more and more low firms are preparing class actions on behalf of
investors, its a nightmare scenario. If these investors , plus others, are
able to challenge the validity of the loans in the hands of great southern,
then the bank has a $550 m problem on its hands.
The write offs (announced) yesterday will reduce the groups net profit
by almost 16 per cent. It said cash earnings per share would be 63 c for
2009, which means the second half EPS is 19c compared to 44 c in the
first half.

Capital in profit
In order for historical cost profit to be determined, the accounting entity
must first retain the same amount of capital (assets minus liabilities)
that it had at the beginning of the period whwre all assets