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Fair Cost Accounting Vs Historical Cost Essay

809 Words4 Pages

Recently, accounting standard-setting body such as the IASB have focused on the issue of how assets and liabilities should be measured (Penman, 2007, p.33). This issue is related to the fair market value accounting as an alternative method against historical cost accounting. The fair market value of an asset (liability) is the amount at which that asset (liability) could be bought or sold (incurred or settled) in a current transaction between willing parties. Historical cost accounting is based on actual transactions, the recorded amounts are reliable and verifiable. This paper describes this measurement concepts and compares them.
Even if one is sympathetic to the arguments against fair value accounting, it does not automatically follow that historical cost accounting would be better, although many opponents of fair value accounting implicitly or explicitly assume so. At times, fair value accounting may not provide relevant information, but in many cases, (amortized) historical costs do not provide relevant information either. Historical costs do not reflect the current fundamental value of an asset either fair value accounting does not prevent firms from providing additional information, including management’s estimates of fundamental values (Laux, …show more content…

According to Penman (2007, p. 36) in the fair value accounting method the primary vehicle for conveying information to shareholders is the balance sheet. It satisfies the valuation objective and the income statement provides information about risk exposure and management performance. In the historical cost method the income statement is the primary vehicle for conveying information about value to shareholders. This method does not report the present value from the balance sheet, it rather reports the progress that has been made by recording the value added

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