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Cost Accounting Vs Historical Cost Analysis

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Globalization had a significant influence on accountancy (Langendijk, Swagerman & Verhoog, 2003, pp.30). Along with the improvement about both amount and scale of multi-national enterprises, the uniformity in accounting rules and practices regulated by different countries became essential. The international accounting principles are seen as an effective tool for transnational companies to prepare, consolidate and audit their financial statements which is useful for the users such as managers, investors, researchers or regulators. However, in the progress of international harmonization, there are many controversies surrounding what accounting methods should be implemented. One of those is the argument about the methods of calculating the value …show more content…

It is undeniable that historical cost accounting provides more reliable value than fair value accounting because all recorded amounts are verifiable through clear evidences such as invoices, receipts and regular vouchers. Plus, according to historical cost accounting method supporters, without the past data which was provided by historical value on balance sheet and income statements, the users of financial report cannot forecast the future financial situations of enterprises. On the other hand, comparing to the traditional historical cost accounting, fair value measurement is argued to be unreliable measurement because the information is not based on transaction. IFRS 13 refers three valuation methods: Market approach; Income approach and Cost approach. With the first technique – market approach, the measurement is based on the price of the same assets and liability in the market, if there is difference, it is necessary to make adjustments (Burton & Jermakowicz, 2014, pp. 63). The concerns about this technique are how to evaluate the similarity level of two items, and the measurement of making the adjustments if there is difference between enterprises’ items and transacted items. Especially, this issue is difficult to be solved because there are many factors affecting the market price of assets and liabilities such as the exchange currency, competition, politics, etc which diversifies according to each area. Thus, it is undeniable that this issue is more serious for the preparation of consolidated financial reports of the multi-national cooperation which have foreign branches with different financial situation in each country. The second method – Income approach is to convert the expected future amounts from cash flows and earnings from holding assets or liability to a single current amount. The techniques of this method are: present value techniques; option pricing models and the

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