Disadvantages of Current Purchasing Power (CPP) Method

Disadvantages of Current Purchasing Power (CPP) Method

Current Purchasing Power (CPP) is a form of accounting that measures profit after allowing for the maintenance of the purchasing power of the shareholders’ capital. It is a generally accepted accounting system, hence maintaining its use will not lead to drastic changes in accounting practice.

Disadvantages of Current Purchasing Power (CPP) Method –

Following are some major points for the criticism of the CPP method:

(1) CPP method considers only the changes in general purchasing power. It does not consider the changes in the value of individual items.

(2) It is not generally favored by the business or professional community.

(3) CPP method is based on a statistical index number that can not be used in an individual firm.

(4) Various studies show there is not a great deal of demand for price-adjusted information.

(5) It is very difficult to choose a suitable price index.

(6) CPP method fails to remove all the defects of the historical cost accounting system.

(7) People are used to preparing and reading historical cost accounting reports, hence there would be a need to re-educate them about the strengths and limitations of current purchasing power accounting—this might be costly.

(8) The use of the general price index for the CPP method is questioned. While the general price index deals with consumer goods, business is interested in the price movement of producer goods.

(9) Changing in price is a never-ending process hence it becomes difficult every time to reinstate the figures of the company and present the financial statements.

(10) Inflation accounting is a complicated process and it involves too much calculation and the data gathering process. In times of deflation, the depreciation cost will be on the lower side hence it does not reflect the true picture.

CPP accounts only for changes in the general price-level and does not account for changes in the specific price-level. If the general price index has increased, many specific price changes will be running at a lower level than the general index, whilst many others will be running at a higher level. In fact, the purchasing power of money should be related to those items on which money is intended to be spent.