Question

Historical Cost or Current Market Values?

One of the principles underlying U.S. accounting is the Historical Cost approach, under which assets are presented on the balance sheet at their value at the time of acquisition regardless of how long assets have been used. In recent years, however, more and more financial statements users have questioned this approach, asking if accuracy would be better achieved if selected assets and liabilities were valued at current market values. It could lead to more accurate financial reporting. Or it could lead to chaos.

1. Build an argument against requiring current market values on the balance sheet.
2. Build an argument against using historical cost.
3. Which of the two arguments do you find most convincing?

Answer 1

Solution

a. If assets will be recorded in balance sheet at current market value it shall be subject to manupulation of accounts and financial statements . It is not possiible in case of every assets to ascertain its current market value exactly in such case possibility of bias arises and it may results in distorted information . Here chances of manupulation also arises .

b. Historical cost is price paid for asset , with time market cost may change but asset shall be recorded in financial statements at historical cost only . This will result in incomplete information because financial statements are showing historical cost whish is not valid for current time .

c The most convincing argument is argument against requiring current market values on balance sheet(option a) beasuse doing so will give rise to manupulation which shall effect users decisions . More over if assets are not shown at current market values whish shall result in incomplete information this shortcoming can be eleminated by disclosing current market values in footnotes to financial statements .

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