Question

how the interpretation of current value based financial statement would differ from using historical cost based account

Answer 1

Under historical cost based method, the price of assets reflected in the balance sheet will are based on the initial price that was paid to acquire the asset. Whereas, current value records the current market price of the asset or liability in the balance sheet.

Historical based accounting is more conservative and easy to calculate and reliable as the prices are know during the purchase. However, it may not be very useful. The current market value of a land purchased 50 years ago will worth a lot more than indicated in the balance sheet.

When companies prepare financial statements based on current value accounting, it is known that the priced will fluctuate from time to time compared to when historical cost based accounting is used. The value of items recorded using historical based accounting are less volatile as they ar erecored at a lower rate. In fair value based accountiing, the values change form time to time, thus a higher volatility.

In historical based accounting, financial securities such as bonds are always carried on the balance sheet at the acquisition price paid by the entity. Thus, from one period to another there will be no volatility in the prices of bond. On the other hand, with fair value accounting, the price of bond. is adjusted with accordance to the market price at a given time. This will have a significant impact in the balance sheet.