Government First Grade Collage of Arts,

Science And Commerce

Sira - 572137

Subject : Innovations In Accounting

Topic: CCA method and Hybrid method

Presented by,
Sangeetha U
2nd Year M.com
Reg No:P11GS22C012004
GFGCASC,SIRA-572137
 Unit 01:Accounting For Price Level
Changes

Inflation accounting is a system of accounting which purports to

records as a built in mechanism all economic events in term of
inflation accounting.
Methods Of Inflation Accounting
1) Current Purchasing Power (CPP)
2) Current Cost Accounting (CCA)
3) Hybrid method
 2) Current Cost Accounting (CCA)

 The accounting committee of U.K has issued a statement of standard accounting practice
16 (SSAP-16) relating to CCA method. The CCA approach values of assets at their cost,
the price incurred during the purchase of the fixed assets under the CCA method, both
monetary and non monetary items are restated to current values.
 “ The current cost accounting approach is similar to those accounting requirements that
apply to certain classes of investment owned by companies such as classes of investment
owned by companies such as marketable securities held for trading purpose.”
 Objectives Of The Current Cost
Accounting

Current cost accounting (CCA) aims to maintain the capital of business enterprise in terms
of its operating capability is denoted by the net operating assets of the enterprise in terms of
share holders funds.
 The objective of the current cost accounting method is to report the financial assets and
liabilities of a company of a company at their fair market value rather than historical
cost.
 To provide correct and reliable financial information based on the current replacement
cost.
 To calculate the profit without changing the historical profit.
 Objectives Of The Current Cost
Accounting

 To protect the business in the event of a normal inflationary situation.

 To keep the level of capital in a very balanced position by making the valuation of assets
in proper value based on replacement value.
 To provide realistic information to the management, investors, creditors, government and
to other interested parties.
 To prepare the financial statement at the end of the year on the basis of the current value
of such items.
 Features Of The CCA Method

 Fixed assets are shown not at their depreciated original cost but at their net replacement
value.
 Stocks are shown at their net replacement value.
 Depreciation is calculated at the current value of assets
 Gains/ losses due to the changes in the price level are shown in a separate statement
 Inventory consumed is valued at the price at the price at the date of consumption.
 Evaluation of CCA System

 It does not provide adequately for backlog depreciation

 Fails to provide funds for replacement of new types of assets
 Inadequate gearing adjustment
 Ignores gains or losses on monetary items
 Variations in accounting methods.
 Current Operating Profit

For the computation of current operating profit, the following adjustment are to made in
the current cost accounting method.
1) Depreciation adjustment
2) Cost of sales adjustment (COSA)
3) Monetary working capital adjustment (MWCA)
4) Gearing adjustment
 01. Depreciation Adjustment

 Under CCA method the replacement cost of the asset is considered for depreciation
calculation but under CCA under HCA the gross value is considered for depreciation
calculation because of this there is difference between depreciation calculated as per CCA
and as per HCA approach. It means depreciation as per HCA is comparatively lesser then
depreciate as per CCA . To adjust this depreciation adjustment need to done.
Depreciation adjustment = Dep.as per CCA – Dep.as per HCA
 Additional Depreciation :-
Whenever the depreciation is calculated based average replacement cost under CCA,
there may need of calculating additional depreciation.
 Depreciation Adjustment

 Additional Depreciation :-
Replacement value @ the end period – Average replacement value
=
Life of the asset (in year)
 Back Log Depreciation :-
When the fixed assets are revalued every year the dep. Charged in the previous years
are not sufficient due to the effect of price level changes. Such insufficient depreciation
provisions or short fall depreciation is called back log depreciation.
= Additional annual dep. (-) Dep. Adjustment. Or
= Dep.as per CCA back log period – Dep. As per HCA for backlog period
 02. Cost Of Sales Adjustment (COSA)

 The difference between current cost of sales at the end of accounting period and the
historical cost of sales (related to stock) is called COSA.
 Why COSA?
The COSA is made to charge the current value of stocks consumed in earing's the
revenue during the accounting period. The adjustment helps to show the stocks in balance
sheet at current value and also to adjust stock consumed in related to charging prices(as per
inflation).
COSA = [C-O] – Ia (C/Ic –O/Io)
Difference between opening and closing stock as per HCA (-)
Difference between opening and closing stock as per CCA
 02. Cost Of Sales Adjustment (COSA)

 Where ,
C = Historical cost of closing stock
O = Historical cost of opening stock
Ia = Average Price Index
Ic = Price index for closing stock
Io = Price index for opening stock
“ This amount credited to current cost reserve account”.
03. Monetary Working Capital Adjustment

 Due to increase in prices the working capital as per HCA may not be sufficient for
effective and profitable operation of a business , under CCA method the adjustment called
MWCA ensures additional monetary working capital requirement.
 What MWCA? :- Monetary working capital is excess of total trade debtors, bills
recevibles and payment (prepaid items ) over total trade creditors , bills payable accruals,
(o/s). MWCA represents the amount of additional finance needed for monetary working
capital as a result of changes in input prices of goods and services.
MWCA = (C-O) – Io (I /Ic – O/Io)
MWCA = Increase in MWC as per HCA – Increase in MWC as per CCA
03. Monetary Working Capital Adjustment

 Where,
C = Closing MWC O = Opening MWC
Ia = Avg. price Index Ic = Price Index for closing WC
Io = Price Index for opening WC
“ This amount debited to current cost reserve Account”.
Note:- Conversion factor when more than opening and closing index are given”.
Opening = Average Index / Opening Index
Closing = Average Index / Closing Index
 04. Gearing Adjustment

 Gearing is a ratio of borrowed capital and shareholders fund fixed assets and working
capital partly financial by borrowed capital to be repaid will not change on account of
changing price, because it is fixed by agreement.
 GA = Total current cost of adjustment * Gearing ratio
 Total current cost adjustment = Dep. adj + COSA+MWCA+FA Disposal
 Gearing Ratio = B/ B+ S*100
B = Net Borrowing
S = Equity fund of share holders
B+S = Net operating asset.
 Advantages Of CCA

 More relevant
 Provides up to date information with financial market.
 Takes inflationary adjustment into account “ Critics have argued market value revals
economic realities that are hidden by HCA”.
 Investors and creditors also prefer the market value accounting.
 In financial statement easier statement easier to view and determine whether the asset /
liability is at risk or not.
 Disadvantages of CCA

 Unreliable
“ If the information is unreliable it should not be used to make financial decisions.’’
 Volatile
 When market price of an asset or liability is not available the value is estimated(in
approach)
“ Cannot provide the same relevant and reliability in case of measuring the operation”.