Historical Cost and Fair Value
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
Recognizing assets and liabilities in financial reports is an issue that accounting bodies try to find the best approach for. The accounting regulators look for a method that takes into account the characteristics of the financial reporting such us reliability and relevance.
Historical cost method has been used since long ago. Although this method has been criticized by many, it is still seen as a working method due to its simplicity and reduced costs.
Nowadays, there are many accounting professionals argue that other methods should be employed as the historical method is no more useful.
Fair value method is a strong alternative. The supporters of this method argue that Fair value method provides information about financial assets and liabilities that is more relevant than amounts based on their historical cost.
In this paper we will make a comparison between the two methods.
Historical cost Definition
Historical cost is a term used instead of the term cost. Cost and historical cost usually mean the original cost at the time of a transaction. The term historical cost helps to distinguish an asset’s original cost from its replacement cost, current cost, or inflation-adjusted cost. For example, land purchased in 1992 at cost of
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
Recognizing assets and liabilities in financial reports is an issue that accounting bodies try to find the best approach for. The accounting regulators look for a method that takes into account the characteristics of the financial reporting such us reliability and relevance.
Historical cost method has been used since long ago. Although this method has been criticized by many, it is still seen as a working method due to its simplicity and reduced costs.
Nowadays, there are many accounting professionals argue that other methods should be employed as the historical method is no more useful.
Fair value method is a strong alternative. The supporters of this method argue that Fair value method provides information about financial assets and liabilities that is more relevant than amounts based on their historical cost.
In this paper we will make a comparison between the two methods.
Historical cost Definition
Historical cost is a term used instead of the term cost. Cost and historical cost usually mean the original cost at the time of a transaction. The term historical cost helps to distinguish an asset’s original cost from its replacement cost, current cost, or inflation-adjusted cost. For example, land purchased in 1992 at cost of