Historical Cost and Fair Value

Managerial accounting is essential for decision making. Making the best choice depends on the manager's goals, the anticipated results from each alternative, and the information available when the decision is made (Schneider, 2012). The different techniques associated with managerial accounting are very helpful in the decisions that need to be made. In order to truly understand decision making with managerial accounting one must first discern exactly what managerial accounting means and some of the techniques associated with it. The definition of managerial accounting will be discussed along with the techniques of cost management techniques, budgeting, and quality control.

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. The facts about each of these valuation methods will be researched and explained throughout this research document, as well as the different viewpoint about which method is the most accurate and reliable.

Abstract: The choice between fair value and historical cost accounting is the subject of longstanding controversy among accounting academics and regulators. Nevertheless, the market based evidence on this subject is very limited. We study the choice of fair value versus historical

Historical record: One of the early objectives of historical cost accounting was stewardship. This meant that financial reports were a report on how well management had safeguarded the

In the past, historical cost measures were mainly used for reporting as they are reliable. However, historical cost is only relevant upon acquiring the asset and becomes irrelevant as time passes. On the other hand, fair value-based reporting, which accounts for changes in fair values, can produce balance sheet figures that provide a better reflection of the company’s value. This is also why accounting bodies are moving towards fair value accounting (FVA).

a. Outline the objective and the principles of a theory that prescribes fair value accounting.

In other words, it means the information provided by the company can actually affect the decision making of information users and satisfied the needs of information users. Compared with other accounting methods, fair value accounting can get a more accurate disclosure of a company’s cash flow, and better reflect the company’s operation ability, solvency and financial risk assumed. So that the users of financial report can be better informed of the entity’s financial position and operating performance, to help them to make the right decision. As fair value accounting provides information about current market conditions, it is the most relevant measure for assets and liabilities. For one thing, fair value accounting measure can obtain intangible assets in to financial reports, such as intellectual property rights, human recourses and goodwill etc. make the information of financial report more complete to reflect the financial position, profitability and the ability to face risk. For another, fair value represents the present value of future cash flows, so investors just need the fair value of assets or liabilities and estimates the market interest rate, they could calculated the expect value of assets or liabilities in a certain point in future. Moreover, fair value accounting is a market-based accounting, so it more relevant to the decision making.

The International Financial Reporting Standards (IFRS) also defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. According to these definitions, fair value is an unrealistic, idealized qualitative value. The current market value is a quantitative value and it does not fully reflect the value of assets when the markets are not

As alluded in the introduction, the role and effective use of costing techniques may vary depending on a certain number of contextual variables and objectives. This section explores these variables and thus provides a critical assessment of the roles and uses of the techniques.

Under the historical cost model assets are initially reported at the cost incurred on their acquisition. Subsequent to initial recognition, this cost may be allocated as an expense to reporting periods in the form of depreciation or amortization for certain assets, as the service potential or ability to generate economic benefits provided by such assets are consumed over their useful lives.

Cost and management accounting is an integral element in preparation of an entity’s financial reports. Cost accounting consists of various branches, including; job and process costing, absorption costing, traditional costing and activity based costing. An efficient costing system allows managers and other users of financial reports to make decisions to better the company, in reducing and streamlining costs, to improve overall profits. The way in which managers achieve this can be a rigorous and time consuming task, however, if a costing system can be perfected, productivity and general cost reduction can be achieved and an overall more efficient operation of the business will ensue. This essay will critically discuss factors in which a business consider in deciding on a costing system to implement and operate when establishing a costing system. In this article I will describe the different methods of costing, explain why I believe activity based costing is the most efficient method, and provide a real world example to support my claim.

The one of the advantages is the historical cost can be verified. The cost of purchases at date of acquisition is documented with contracts, invoices and payments. It is useful in matching the changes in profits or expenses relating to the asset purchased, as well as determining the past opportunity costs. With historical cost accounting, managers have the resources to forecast the future operational costs. On the other hand, FASB has decided to use the historical cost principle because it is reliable and objective. It is also easy to use and understand. The disadvantages of historical cost accounting include that it does not evaluate the current market value. It does not really tell the financial users how much the assets are currently worth. Furthermore, historical cost accounting does not record the opportunity cost of using the old assets. It does not record the loss in real value of assets as a result of inflation or the gain in real value of assets as a result of deflation. It is claimed that it is not useful for financial information users to compare the corporate’s performance over time. Lastly, the financial information in historical cost concept presents an old interest rate and outdated

In order to determine and take a dispassionate view about what lies beneath the surface of accounting figures, a financial analyst has to make use of different management accounting techniques. Cost techniques have a precedence over the other techniques since accounting treatment of cost is often both complex and financially significant. For example, if a firm proposes to increase its output by 10%, is it reasonable to expect total cost to increase by less than 10%, exactly 10% or

The known systematic and scientific accounting was first introduced by Luca Pacioli a.k.a “Father of Accounting” in 1494 where he recorded transactions in double entry accounting system. After the industrial revolutions in 18th Century, hundreds of manufacturing industries were established which led to numerous and complex transactions, thus recording and interpreting this data proved essential to be efficient and effective in drawing decisions. The traceable cost accounting implemented in practice was by textile mills, railroads and steel manufacturing industries as they handled large volume of transactions and planning was a key for success and estimating profitability. To this point, businesses only focused on the (direct) cost side of

In terms of determining the value of monetary for each specific element that is to be recognized and placed in the various financial reports, numbers of measurements are applied in different situations, for example: under the Current Cost model, the assets that put in the progress of production are valued at the actual or estimated cost depending on the time the work takes place (International Accounting Standards Board 2010, 4.54). The most commonly used model in preparing any financial statements is Historical Cost and it is usually adopted with the combination of other cost models which would massively improve the efficiency and effeteness of recording (International Accounting Standards Board 2010, 4.56).