Hisorical Cost vs Fair Value
The following are three online journals of Historical Cost and Fair Value: 1. Summary of HISTORIC COST VERSUS FAIR VALUE
In accounting historical cost is the original or nominal amount of money paid for asset rather than inflation adjusted price. In other words it is the resource given up or a liability incurred to acquire an asset. The historical cost principle states that the asset should be reported at it cost (cash or cash equivalent amount) at the time of exchange and should include all cost necessary to get the asset in place and ready for use. Fair value is the market value of asset or liability. According to GAAP(Generally Accepted Accounting Principles) it is the amount at which asset could be bought and sold in current transaction between willing parties other than liquidation sale. In fair value accounting companies are to report asset and liabilities at price they would receive if they sell the asset or pay for the liabilities. Fair value accounting is conflicting to prudence concept which requires not overestimating revenues and underestimating expenses. It believes in being conservative in recording the value of the asset and not to underestimate liabilities. The matter of contention that arises is that the interpretation of financial reports according to fair value is different to historical cost. The concern is to determine which is more true and dependable. The main justification for choosing historical cost is the accuracy of data whereas fair value believes in getting closer to the current value in market .
Historical cost is an old accounting principle since June 1979 which was used in French accounting plan project. Historical cost is truly more sure, reliable and checkable value. For asset it is the amount paid or to be paid and in case of debt it is the value of equivalents obtained in exchange of obligation or the value to be paid in cash or cash equivalents to settle the debt. But the major inconvenience is inflation which makes
In accounting historical cost is the original or nominal amount of money paid for asset rather than inflation adjusted price. In other words it is the resource given up or a liability incurred to acquire an asset. The historical cost principle states that the asset should be reported at it cost (cash or cash equivalent amount) at the time of exchange and should include all cost necessary to get the asset in place and ready for use. Fair value is the market value of asset or liability. According to GAAP(Generally Accepted Accounting Principles) it is the amount at which asset could be bought and sold in current transaction between willing parties other than liquidation sale. In fair value accounting companies are to report asset and liabilities at price they would receive if they sell the asset or pay for the liabilities. Fair value accounting is conflicting to prudence concept which requires not overestimating revenues and underestimating expenses. It believes in being conservative in recording the value of the asset and not to underestimate liabilities. The matter of contention that arises is that the interpretation of financial reports according to fair value is different to historical cost. The concern is to determine which is more true and dependable. The main justification for choosing historical cost is the accuracy of data whereas fair value believes in getting closer to the current value in market .
Historical cost is an old accounting principle since June 1979 which was used in French accounting plan project. Historical cost is truly more sure, reliable and checkable value. For asset it is the amount paid or to be paid and in case of debt it is the value of equivalents obtained in exchange of obligation or the value to be paid in cash or cash equivalents to settle the debt. But the major inconvenience is inflation which makes
References: Journal 1:Maraina Man, BogdanRavas,LainaGadua (2011).Historical cost versus Fair value. Polish Journal of Management studies, 4 (1), Retrieved December 1, 2012 from: http://www.pjms.zim.pcz.pl/HISTORIC_COST_VERSUS_FAIR_VALUE.pdf Journal 2:Dvořáková, D. Historical Costs versus Fair Value Measurement in Financial Accounting.European Financial and Accounting Journal.Vol 3, 2009,6-18, [Retrieved] November 29,2012, [from] http://efaj.vse.cz/index.php?option=com_content&task=view&id=93&Itemid=29 Journal 3: Bessong, Peter Kekung and Charles Effiong. (2012). Research Journal of Finance and Accounting.Comparative Analysis of Fair Value and Historical Cost Accounting on Reported Profit:A Study Of Selected Manufacturing Companies In Nigeria.Research Journal of Finance and Accounting.Vol 3, No 8, 2012, 132-149, [Retrieved]November30,2012, [from]http://www.iiste.org/Journals/index.php/RJFA/article/view/2832 Tearney, B. W. (2004). Continuing the normative dialog.illuminating be asset – liability theory. Accounting Horizons.