Historical Cost and Fair Value - 1733 Words

Abstract This paper is written for the accounting theory course as a course project. This paper discusses the differences between the historical cost accounting approach and the fair value accounting approach. The discussion will focus on the debate on using which accounting approach. We begin by stating the definitions of both concepts and discussing them thoroughly, then we state the main advantages of the two approaches followed by comparison between them. The last section of this paper discusses the disadvantages of each approach, including the main criticism points against them. In the end, we draw a conclusion on the best approach to be used in the Accounting profession based on the previous discussion. Introduction†¦show more content†¦When fair values are estimated using unadjusted or adjusted market prices, they are referred to as mark-to-market values. If market prices for the same or similar positions are not available, then firms must estimate fair values using valuation models. FAS 157 generally requires these models to be applied using observable market inputs (such as interest rates and yield curves that are observable at commonly quoted intervals) when they are available and unobservable firm-supplied inputs (such as expected cash flows developed using the firm’s own data) otherwise. When fair values are estimated using valuation models, they are referred to as mark-to-model values. Advantages of Historical Cost Supporters of Historical Cost Accounting argue that this method has several advantages that make it popular. Some advantages are discussed below. * Historical cost is based on actual, not merely possible, transactions. It is the acquisition price of the assets. The managers only have to record all the assets and liabilities at their acquisition price. Hence they are measured and reported objectively. Historical cost is therefore basically verifiable. Thus, this minimizes the risk of manipulation of figures by the managers. * Historical cost has survived the test of time. Most users of accounting data believe that accounting income is useful and that it constitutes a determinant of the practices and thought patterns of decision makers. * Historical cost is an easierShow MoreRelatedHistorical Cost vs. Fair Value695 Words   |  3 Pagesuseful to investors, creditors and others in making rational economic decisions. One accounting issue that has been debated on a lot is the historical cost method versus the fair value measurement. The historical cost method has been the basis of GAAP accounting for the past decade but has slowly been disappearing. Today it is starting to be replaced by the fair value method of accounting. When choosing a valuation method, it seems that there is a tradeoff between the two fundamental qualities of accountingRead MoreFair Value And Historical Cost Controversy2400 Words   |  10 PagesFair Value versus Historical Cost Controversy Over the past several years, there has been a growing controversy over the accounting issues of fair values and historical cost. The basis of this controversy revolves around which one of these principles is the most accurate. There are many different viewpoints on this issue. Many accounting professionals believe that fair value is just as accurate as the historical cost principle, while others believe that the historical cost is more reliable. TheRead MoreFair Value vs. Historical Cost Accounting1188 Words   |  5 PagesDifference between historical cost and fair value accounting In order to make the most profitable and rational decisions entity’s stakeholders have to evaluate organisation’s financial statements. Today’s world of rapidly changing prices has made it difficult to estimate what something is actually worth. Thus leading to debates at what price – historical costing price or market value – assets and liabilities should be reported. Therefore, before making any evaluations about reported transactionsRead MoreComparative Analysis Of Fair Value And Historical Cost Accounting On Reported Profit1659 Words   |  7 PagesTitle: Comparative Analysis Of Fair Value And Historical Cost Accounting On Reported Profit: A Study Of Selected Manufacturing Companies In Nigeria. (BESSONG, 2012) Study the importance of historical value and fair value cost accounting on reported profit. The study discussed how fair value accounting and historical cost accounting will have effect on the reported profit. However it is said that key objective of any business is to earn profit and it is also equally important to report the profitRead MoreThe principle of historical cost is still used in accounting when there is a large measure of agreement that it is inappropriate. Discuss.1226 Words   |  5 PagesSynopsis. Historical Cost Accounting is a traditional valuation method as it reflects only on the past cost of the asset, however in the contemporary business environment companies must remain flexible and transparent. This belief has lead to the creation of several other valuation methods, due to word constraints I have focused primarily on Fair Value Accounting as an alternative to Historical Cost Accounting. Although Fair value accounting is a theoretically superior valuation methodology, thereRead MoreAdvance Issues In Accounting1743 Words   |  7 Pagesi.e. historical costs based on the measurement of assets and liabilities at purchase price /costs which is incurred at the moment of the purchase, and the fair value measurement method which is based on market prices. The basis of accounting measurement is considered to be undertaken in the following methods: †¢ Historical Cost †¢ Fair Value †¢ Realisable value †¢ Value in use †¢ Current Cost All the above measurement bases forms the part of accrual accounting. It is measured when the cost is incurredRead MoreThe Impact Of Fair Value Accounting On Real Estate Companies1497 Words   |  6 PagesTHE INFLUENCE OF FAIR VALUE ACCOUNTING ON REAL ESTATE COMPANIES : BASED ON HONG KONG LISTED COMPANIES (PROPOSAL) BY ZHANG MUDI DEBBIE 12250511 ACCOUNTING CONCENTRATION GAO JIAYI CINDY 12250295 ACCOUNTING CONCENTRATION An Honours Degree Project Submitted to the School of Business in Partial Fulfillment of the Graduation Requirement for the Degree of Bachelor of Business Administration (Honours) Hong Kong Baptist University Hong Kong January 2016 Table of Content Read MoreThe Impact Of Fair Value On Financial Reporting Essay1529 Words   |  7 Pagestoday’s time in the world of accounting is fair value. However, one common point of confusion is the scale of businesses affected by fair value, and when fair value came onto the scene. According to Robert Herz and Linda MacDonald â€Å"...the use of fair value in financial reporting is not new. In fact, it has been in place for decades, principally for financial assets. But even then, fair value is not required for all assets.† (2008) The idea of using fair value measurements goes back at least to the 1930’sRead MoreAccounting Theory 41063 Words   |  5 PagesFair value or false accounting 1. How are assets and liabilities measured under IAS 39? Answer: According to IAS 39, Financial Instruments: Recognition and Measurement, financial instrument are to be stated at their ‘fair value’- defined as ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’. ‘If the market for a financial instrument is not active, an entity establishes a fair valueRead MoreAccounting Treatment Adopted By The Elements Of The Financial Statement Influences Accounting Information Produced Essay1669 Words   |  7 Pagesfinancial report, particularly the use of mixed measurement methods that involving historical cost and fair value model. This report evaluates the choice to use single measurement type or mixed measurement method by discussing the strengths and drawbacks based on prior studies. Furthermore, this report gives highlights of the impacts of fair value in the financial institution. Keywords: Measurement, Fair Value, Historical Cost Introduction Purpose. The objective of this report is responding to a recently