A more nuanced version of replacement cost, reflecting those situations where it would not be rational to replace a resource used by the business, was available in the form of ‘value to the owner’ (also referred to as ‘value to the business’ and ‘deprival value’), a concept usually attributed to Bonbright (1937). This is equal to replacement cost when it is rational for the business to replace, which will be whenever the replacement cost is less than the amount that the business expects to earn from selling the resource (net realisable value) or from using the resource on an ongoing basis in the business (‘economic value’, usually measured as the present value of incremental net cash inflows from using the resource). If it is not rational to replace the resource, then the resource is valued at net realisable value or economic value, whichever is greater. This approach to valuation is equivalent to opportunity cost, but it suffers from the practical difficulty that some or all of the three measurement bases (replacement cost, net realisable value and economic value) may not be easily observable, and all of them may involve some element of estimation. 4.3.3. The quest for accounting principles Theoretical ideas in accounting often reflect the economic background against which they are developed. In the late 19th century, the growth of the corporate economy in the UK and USA gave rise to a demand for external financial reporting. This came against a background of long-term deflation, where the use of current values rather than cost-based measures for assets was perceived as introducing an undesirable element of volatility into profit determination. The 1920s were a period of inflation, when historical costs were increasingly out of date as indicators of asset values. The 1930s, on the other hand, were a time of economic depression, when investors and financial regulators reacted against what was seen with hindsight as the excessively optimistic financial reporting of the 1920s. This led to both a ‘mainstream’ and a ‘minority’ reaction. In the USA, the American Accounting Association published a short document containing various ‘accounting principles’ (AAA, 1936). This
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