Question

What arguments can be given that the historical cost framework should be abandoned?

Answer 1

• Historical cost method is used to record assets at historic cost/acquisition price and liability at expected original value rather than current market price of assets and liability. This method is also accepted in Generally Accepted Accounting Principles (GAAP) & International Financial Reporting Standardards (IFRS). This is a simple method to record assets and liability and it is easy to verify the assets from records under this method for all stakeholders as well. However, the user of financial statements also will not get the clear picture of financial position to check the solvency of organisation in this method because asset and liability are not adjusted with currrent market price. As per latest accounting standards, Fair Value method is required to be followed rather than historic cost method for some items which may significantly changed during the year like financial assets however for non financial assets, there is a choice available between any method for recording assets and liabilities.