Question

Recent pronouncements of the FASB indicate that the FASB is moving away from historical cost accounting toward the use of current, or fair value.

a) you are expected to present arguments either for or against the statement “that historical cost is more relevant than current value”. You must support your position with references to the conceptual framework and to concepts of capital maintenance where appropriate.

Note: Argument should be 1 page in length and post a new post to this question.

Answer 1

Answer

Historical cost accounting approach for recording assets and liabilities has traditionally been used for centuries in bookkeeping. Through this approach, the assets are recorded in the balance sheet at their purchase price and adjustments made for depreciation or reassessment etc. However, in the past few decades, it has been a gradual step to use the right or current value approach for accounting for the property.Under IFRS, fair prices are often used for financial assets and obligations. Through this approach, property and liabilities are recorded at their current market prices.

Based on accounting whether there is a major role to play in investment decisions and managerial actions of historical or current value. US generally acceptable accounting principles (GAAP) and international financial reporting standards are widely used in fair accounting approach, for example, in the accounts relating to employee stock options, derivatives and hedge, goodwill loss testing and financial assets.Finance theory supports the proper concept through its concept that financial markets provide effective and reliable solutions.

Some examples that use fair value reporting on a large scale include investment banks, where asset managers have prepared balance sheets based on present value for risk management objectives. In addition, GAAP defines profits on the basis of fair value for better recognition of profits, especially in the era of rising prices, the measure of loss of goodwill is again based on fair value.Leasing, share-based payments, complex financial instruments such as the emergence of each new business model, each new fresh challenges - leaseholding assets, changes in interest rates, share-based acquisitions, long-term liabilities, defined benefits pension plans, which have no special cost. At the time, emphasize the need for future value. The historic cost method of reporting makes a difference because it is not designed to solve such future transactions.

Another argument in favor of a fair price accounting basis is a huge inequality between the historical value of an asset and the current value. The value of the property purchased almost 15 years ago could be worth several times more value for re-evaluation of value.

The concept of capital maintenance is another major area that is affected by the adoption of historical cost or current value to a large extent. The concept of physical capital maintenance promotes the current value base of measurements, while the concept of financial capital maintenance does not emphasize the use of any specific accounting basis.However, in the beginning of the invested resources, the issue of investing in price difference and eliminating the value of resources invested requires a fair price measurement basis.