Abstract This article describes how measurement error in estimating the current cost of fixed assets has impaired the validity of the inflation accounting experiment. Measurement error is an important reason that research results to date indicate that the data are not widely used by financial analysts or incorporated in stock prices. As a consequence, despite seven years of experimentation, we still do not know the extent to which current cost data can be useful. The first section of this article discusses the U.S. Financial Accounting Standards Board Statement 33. The next two sections describe the various methods for measuring the current cost of fixed assets and the nature of measurement error that can occur with each method. The fourth section presents survey data summarizing the measurement methods used in practice. The fifth section examines how certain provisions of Statement 33 may have led to the use of methods that results in measurement error. Moreover, due to measurement errors caused largely by inadequate adjustments for technological change, the current cost data reported in accordance with Statement 33 have not provided a valid test of the usefulness of current cost accounting. The direction of measurement error is ordinarily an overstatement of the cost of plant and equipment. Depreciation is generally overstated because of the overstated cost, as well as the short useful lives used by most firms. The extent of measurement error may be substantial for firms employing older assets, particularly assets in the high-technology industries.
Swanson et al. (Tue,) studied this question.