Historical Cost Model: No Longer Adequate for Accounting in the 21st Century

Topics: Future, Generally Accepted Accounting Principles, Balance sheet Pages: 2 (746 words) Published: November 13, 2008
It has been argued that the current form of accounting that we use, the historical cost model, is no longer adequate for accounting in the 21st century and that it should be replaced with a more appropriate model such as the present value model. Those with this opinion argue that the historical cost model is irrelevant because it doesn’t account for inflation, consists of different acceptable accounting methods, the lack of recognition of the fair value of the organization and the fact that the model is based on a stable dollar as the unit of measurement. I believe that even with the aforementioned reasons, the historical cost model provides the most accurate financial statements for the end user because they are both accurate and verifiable financial statements.

An accounting model that has been suggested as a replacement of the historical cost model is the present value model. Under certainty, this model argues that we can predict future interest rates and cash flows with absolute certainty. This model allows organizations to value their assets and liabilities at the present value of their cash inflows and outflows. This would provide financial statements that accurately state the fair value of the organization. Given the information above, the present value model seems to be a fitting replacement for the historical cost model. However, there is a problem with the present value model because of uncertainty as it is highly unlikely that interest rates will ever remain constant for a given period of time. Supporters of the present value model agree with this argument and have developed a way to account for the changing interest rates. Under uncertainty, the present value model is adapted so as to incorporate probabilities of each possible outcome of the future economy. This has been argued to be an effective solution because if the complete sets of outcomes are defined, every possible future event will be accounted for. Again a problem arises in that...
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