METHODS OF ACCOUNTING FOR CHANGING PRICES

Under general purchasing power, adjusted net income are focuses on maintaining the
purchasing power of contributed capital and under current cost, adjusted net income focuses on
maintaining the productive capacity of physical capital.
From the journal Accounting for Changing Prices: The Value Relevance of Historical Cost, Price
Level, and Replacement Cost Accounting in Mexico written by Elizabeth A. Gordon, they have
investigates the value relevance of historical cost, price level and replacement cost accounting
using a sample of Mexican firms from 1989 to 1995. In this case, they have address on
between two distinct aspects of changing prices which is the change in the general price level,
and the change in the value of specific non-monetary assets.
From the research, they have conduct with two hypothesis.
H1- test relative value relevance of historical cost, general purchasing power, and current cost
accounting
H2 - test of incremental value relevance of purchasing power and current cost accounting.
Result: It is confirm the expectation that reconciliation between historical cost and purchasing
power accounting and the adjustment between Purchasing power and current cost accounting
are positively and significantly with the annual return.
The result from the analysis shows that purchasing power accounting and current cost
accounting adjustment are relevant under historical cost. Results indicate that replacement cost
adjustments are relatively and incrementally relevant beyond both historical cost and price level
measures while price level adjustments are incrementally value relevant beyond historical cost
measures during the period examined. These results imply that price level and replacement cost
accounting earnings and changes in earnings are timely, in the sense that they summarize a
firm's current performance.

APPENDIX 1
EXAMPLE: RELATIONSHIP AMONG HISTORICAL COST(HC), GENERAL PURCHASING
POWER (GPP), AND CURRENT COST ACCOUNTING (CCA)

Above, Table 1 shown that account is already adjusted with historical cost, general purchasing
power and current cost accounting value.
To adjust from historical cost to general purchasing power, we should make sure that all
balances and transaction are adjusted to a common currency. We look on balance Sheet, first
step are identify monetary and non-monetary items. Monetary item in this example is cash and
debts. Cash and debts are already valued in the year end so, the firm is no need to be adjusted.

Non-monetary items is Plant, Property & Equipment and Capital and they need to be adjust
because of they not evaluate in ending of year.
1000 x (150/100) = 1500
**difference between HC value and PL value
1500 1000 = 400
(should be same on adjustment of non-monetary assets)
Income Statement

To adjust sales = use 150/125 (average)

Depreciation = 150/100 (same exchange rate use for PPE)

Monetary gain
500 x (150/100) 500 = 250
250 + (-40) = 210 (value on IS)

Adjusted from General Purchasing Power to Current Cost Accounting

Replacement cost for PPE is 1,120 (1400-280)

Adjustment of revaluation is include on equity under result of holding non-monetary

items.

the difference b/w PL and RC is 80, same with difference b/w PL and RC non-monetary
asset