Exit-Price Liabilities: An Analysis of the Alternatives.

Abstract ABSTRACT: Liability valuation in an exit-price accounting system is an unsettled issue even though the subject has been extensively debated. In this article, a theoretical structure, based on Sterling's wheat trader model, is developed to show that market prices should be used. The assumptions of the wheat trader model may be restrictive, but they will be later relaxed in this paper to show that the conclusions are more widely applicable. Chambers's arguments against the use of market prices are examined to show that they do not invalidate the conclusions. This paper concludes with the suggestion that, if market price valuations of liabilities were generally adopted, a ratio of current interest cost to equity could be used as an alternative performance measure to the traditional debt to equity ratio.