Relative measurement errors in valuing plant and equipment under current cost and replacement cost

Article Abstract:

Relative measurement errors in the valuation of plant and equipment may have reduced the utility of data generated by current-cost and replacement-cost accounting. Replacement-cost accounting evaluations of plant and equipment under Accounting Series Release No. 190 generally include the costs of technological innovations that typically reduce operating costs below those of historical costs. Measurement errors are the result of the replacement of historical-cost depreciation with replacement-cost depreciation, which necessitates the inclusion of the substantial capital costs of the technological innovations and the high operating costs of the previous technology still in use. A study of 75 firms that reported both current-cost and replacement-cost depreciation to examine relative measurement errors reveals that measurement errors are smaller in current-cost depreciation than in replacement-cost depreciation.

Research, Cost accounting

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An empirical examination of the potential measurement error in current cost data

Article Abstract:

The Financial Accounting Standards Board seeks empirical data on the accuracy of price indexes for calculating machinery and equipment current costs in compliance with their Statement number 33. Recent research has shown that measurement error in current cost estimates seems to dominate the potential data content of Statement number 33 disclosures. The sign, magnitude, and sources of Producer Price Index (PPI) alternative specificity levels are investigated. Statistical analyses are used to examine PPI estimates' distributional properties. Results suggest that measurement error tends to be an overstatement of new current costs. The principal sources of measurement error seem to be errors in product mix and pricing, as well as inadequate adjustments for change in quality.

Standards, Analysis, Financial Accounting Standards Board, Price indexes, Producer Price Index

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