Question

Current trends in management accounting seem to focus on the accountant as a “strategic partner” in the overall success of the business strategy. The continuous evolution of technological advancements surrounding the ability to access financial and operational data on an almost real time basis is a huge asset to the accountant in the strategic partner role.

In this highly competitive business environment, company executives must have access not only to historical data regarding operations but also to predictive data for the future of the business’s needs, such as inventory, raw materials, and costs of labor. Since accounting reports are generally geared toward the guidance of generally accepted accounting principles, which has a primary focus on historical costs and reporting historical events, extra work must be done to obtain and manipulate the information available and useful to the company in terms of future predictability.

In order to resolve this need for duplicative internal work and to make financial reporting more timely, do you believe that generally accepted accounting principles should move more to a fair value and real time type reporting principles needed in a managerial accounting environment rather than historical cost? Why or why not?

Answer 1

I do not believe that GAAP should move to a fair value and real time type reporting principles rather than historical cost due to the reasons given below:

1. Historical cost is supported by proper documentation, which can be audited by any individual auditor at any time.

2. Fair value and real time accounting can present challenges to companies and users of the financial information in a way that some of the assets and liabilities may fluctuate very often. Revaluating the assets and liabilities, may create large swings in the value of those assets and liabilities. Revaluation may create temporary profit or loss, which may be misleading to the users.

3. Fair value accounting can affect the market downward. For example, if an asset has been revalued at fair value which is lower because of market conditions, the lower value of the asset may trigger higher selling of an asset at a lower price. Thus the market will go downward.