CVA

Advantages and disadvantages:

 Provides more information in that it splits the total profit into holding gains and operating profit.
This permits better appraisal of earlier actions and provides more useful data for decision-
making purposes.
 By permitting holding gains to be excluded from reported profit, it allows for a proper
maintenance of operating capacity -the business substance'.
 It provides a balance sheet based on current value, on figures relevant to the date of the
balance sheet.
 It Is consistent with accounting concepts -if holding gains are excluded from reported profit it is
more prudent than HC.
 Holding gains are recognized and reported when they occur.
 Comparisons over time, and performance analysis, are more valid and meaningful.
 It is practicable, it has been shown to be feasible in practical application.

Disadvantages

 It requires more subjectivity (or arbitrary choice between different available indices). It is
therefore less 'auditable'.
 It requires the use of replacement cost figures for assets that the firm does not intend, or
perhaps could not possibly, replace.
 It still fails to give an indication either of the current market value of most assets in their present
state or of the business as a whole.
 It fails to take account of general inflation, of changes in the purchasing power of money.

CPP

Advantages

 All necessary figures are stated or restated in terms of a common measuring unit (CPPunits).
This facilitates proper comparison.
 It distinguishes between gains or losses on monetary liabilities and assets, on the one hand, and
'real' gains or losses through trading activities, on the other.
 It requires only a simple objective adjustment to HC accounts. Easily auditable.
 It is easy to convert HCA into CPP accounts ;The conversion is objective and verifiable as it is
based on an inflation measure applied universally.
 It corrects time lag errors (particularly on inventories and depreciation) in the income
statement.
 It facilitates comparison between companies and understanding of trends (e.g. of sales and
profit) if all years are expressed in the same purchasing power.
 It measures profit after maintaining shareholders’ capital in real terms. As it shows real gains
and losses on monetary items, users of the accounts can assess the financial management policy
Disadvantages:

 CPP accounts are still based on HCA rather than current values. Any subjectivity problems
associated with HCA remain.
 The balance sheet does not provide up-to-date asset values nor does the income statement
have up-to-date charges for assets consumed.
 There may be problems in interpreting/explaining the figures. The education problem when
measuring units change is often overlooked (compare lbs v. kilos, inches v. centimetres,
fahrenheit v. centigrade). Part of the education problem is getting users to appreciate that
companies typically have monetary working capital for operations and therefore will report
purchasing power losses on those items.
 The difficulty of finding the appropriate index: Some argue that inflation is unquantifiable (but is
it better to be partly right than completely wrong?) Some say the RPI is inappropriate because
companies buy, for example, things like plant and machinery not goods such as clothing, food
and television sets (which determine the RPI). But are we trying to measure the income of the
company as a separate entity, or the income of the shareholders? If the latter, the RPI is
relevant, because shareholders are concerned with their ability to buy goods and services in
general. Others say the RPI is not representative of the effect of inflation on the shareholder
group. But empirical tests of the heterogeneity hypothesis suggest that the impact of inflation
on different groups is very similar (note that the heterogenity hypothesis states that changes in
different individuals’ purchasing power are not captured by changes in a general index).
 Does the focus on maintaining purchasing power of shareholders’ funds give the most
meaningful concept of profit?
 It fails to give any sort of meaningful 'value' to balance sheet items, although it gives the
impression to non-accountants that it has done precisely that.

FSCVA:

Advantages:

 Provides more information in that it splits the total profit into real realized and real unrealized
holding gains, long term and short term monetary gains and operating profit. This permits better
appraisal of earlier actions and provides more useful data for decision-making purposes.
 FSCVA combines the advantages of CVA and CPP by restating the CVA accounts into CPP.
 It indicates whether the company’s financial capital (the shareholders’ funds) is maintained in
real terms
 FSCVA adjusts the holding gains (real and realised) by eliminating from profit any appreciation in
asset values which is purely fictitious and measuring only real realised/real unrealised holding
gains and losses This accords with its rationale of measuring changes in shareholders’ real
capital
 All the items are indexed to the date of stabilization,ie,31st December providing for more
meaningful comparison.
  Comparisons over time, and performance analysis, are more valid and meaningful since all data
is indexed to year end and all numbers are adjusted for general and specific price rises ,as the
case may be.

Disadvantages:
 It requires more subjectivity (or arbitrary choice between different available indices). It is
therefore less 'auditable'.
 It is more complicated than CPP and CVA since it is a combination of both methods.
 It uses replacement cost figures for assets that the firm does not intend, or perhaps could not
possibly, replace.
 It fails to give any sort of easily understandable 'value' with clear practical implications to
balance sheet items, although it gives the impression to non-accountants that it has done
precisely that.
 The challenge of finding the ideal index in CPP holds here too. Some argue that inflation is
unquantifiable (but is it better to be partly right than completely wrong?) Some say the RPI is
inappropriate because companies buy, for example, things like plant and machinery not goods
such as clothing, food and television sets (which determine the RPI). But are we trying to
measure the income of the company as a separate entity, or the income of the shareholders? If
the latter, the RPI is relevant, because shareholders are concerned with their ability to buy
goods and services in general. Others say the RPI is not representative of the effect of inflation
on the shareholder group. But empirical tests of the heterogeneity hypothesis suggest that the
impact of inflation on different groups is very similar (note that the heterogenity hypothesis
states that changes in different individuals’ purchasing power are not captured by changes in a
general index).

DEPRIVAL VALUE

Advantages and disadvantages of deprival value

SG-Pg 56 and 57