Business, Legal & Accounting Glossary
A method of valuing assets and liabilities which takes account of changing prices, as an alternative to historical cost.
The notion of current value accounting states that assets and liabilities should be measured at the current value at which they may be sold or settled as of the current date. This differs from the traditional technique of simply documenting assets and liabilities at the quantities at which they were bought or incurred (which represents a more conservative viewpoint). Both Generally Accepted Accounting Principles and International Financial Reporting Standards are mandating more current value accounting, so that fewer assets and liabilities are still shown on the balance sheet at their original costs.
The justification for adopting current value is that it gives readers of a company’s financial statements with information that is most closely related to current business situations. This is a legitimate concern when evaluating the financial accounts of older companies that may have assets and obligations on their books from many years ago, but it is less of a concern for newer companies that do not have such assets and liabilities. It is especially problematic when a company has older inventory or fixed assets whose current values change significantly from their reported values.
When there has been a prolonged period of severe inflation, current value is also useful. Under these circumstances, the historical values at which assets and liabilities were recorded are likely to be significantly lower than their present values.
Though current value accounting has been presented as a generally sound idea, it has the following flaws:
Given the concerns raised here, the current value concept is not widely accepted, unless a corporation is required to use it by an accounting standard.
present value
actual value
cash value
present worth
current values
Current value accounting is the concept that assets and liabilities be measured at the current value at which they could be sold or settled as of the current date.
Current value measurement bases included fair value, fulfilment value, and value in use. The difference between those three was that fair value had a market participant perspective, whereas fulfilment value and value in use were entity-specific measurements.
Market value is the company’s value calculated from its current stock price and rarely reflects the actual current value of a company. The reason for this is that the market value reflects supply and demand in the investing market, how eager (or not) investors are to participate in the company’s future.
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This glossary post was last updated: 7th January, 2022 | 0 Views.