Critical examination of the various bases of asset valuation and their implications for income measurement

Ashton, Raymond (1980) Critical examination of the various bases of asset valuation and their implications for income measurement. Doctoral thesis, University of London: London Business School.

Abstract

The scope and coverage of this thesis can be divided into two distinct parts. The first part examines and reviews the various alternative accounting systems which have been proposed in the literature and recognisec as alternatives to HCA; the second part is a case study, based on the experlence of Dutch companies who have implemented one of the alternative accounting systems - RCA. The literature survey shows that each of the alternative accounting systems has strengths and weaknesses but that RCA, or CCA as it is known in the UK, is the system which commands most support. However, very little is known about the use to which management will put this information or its effect on reported profit. In the chapters dealing with the Dutch experience the Dutch literature was examined to see how similar or otherwise their system of RVA is to CCA. It was found that the original theory implicitly assumes identical replacement but that in practice the system is very similar to CCA. The replies to the questionnaire that was sent to companies participating in the survey showed that:- i) RC rates were used to evaluate divisional and group performance; ii) RCs were used in the compilation of budgets and standard costs; iii) the accuracy of the RC data was open to question because of the lack of available and reliable indices; iv) very little account was taken of technological change and changes in a firm's product-mix. In the chapter which examined the effect of RCA on reported profit it was shown that the effect on individual companies varied sub~tantially. The effect of RCA on five ratios was also examined. Wlth the exceptlon of the dividend cover there was very little change in the rankings of the ratios when these were compared on a HC and RC basis. The last relationship that was examined was between each company's share price on three different dates, and shareholders' funds on both bases. It was found that the null hypothesls of no difference between the various combinations could not be rejected. The results of this survey have formed the basis of a larger project, now underway, into the use and effect of RCA on companies in the United Kingdom.