Question

Explain the preferred use of historical cost as the basis for recording property and equipment and intangible assets?

Answer 1

Historical Cost is recording the asset at its acquisition Cost along with costs involved in installing the asset and putting it to use.

Historical Cost is arrived easily.

It has documents to support.It can be verified easily.

It is Conventional Method of recording of assets and easily understandable to all users.so it is free from bias

It is considered as highly relaible as it is verified independently with base documents supporting it

Calculation of depreciation is easier

Property Plant and equipment are different for different enterprises.Some establishments use a unique and specially designed Property Plant and Equipment for its manufacturing purposes and hence arriving at fair value of PPE at the end of balance sheet date is tougher as the same kind of PPE and its Fair market value will not be available in the market.

Marking it to market value is tougher in case of huge PPE so HIstorical cost is preferred as fair value changes and amount is not readily available in the market and increase in value(unrealised fair value gains )can be eliminated as it can never be actually realisable

PPE are not frequently bought and sold to mark it using fair value technique .It is used in the long run and depreciation will eventually reduce the value of asset according to its wear and tear

Intangible Assets

Intangible assets like purchased goodwill cannot be recorded using fair value technique as it is unique for every business for which there is no fair market value and also it has to be amortised over a certain period

Intangibles like copyright License etc will have definite useful life.Such asset is amortised over such useful life.So historical cost of recording the same serves the purpose

Most of the Intangibles are unique and has definite useful life which doesnot have a comparable market value .Examples for Unique Intangibles are Brand and Intangibles such as Trademark,Franchisee rights have a definite life

Both PPE and Intangibles do not have comparable active market to arrive at fair market valueaccounting to be used in recording every year.So historical cost is preferred