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
considered’outsiders-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 bank’s 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
bank’s 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 bendigo’s 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, it’s 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 group’s 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