Fair Value vs Historic Cost - 4348 Words

Review of Business Information Systems – First Quarter 2013 Volume 17, Number 1 Fair Value Accounting vs. Historical Cost Accounting Paul Jaijairam, Bronx Community College, City University of New York, USA ABSTRACT This paper reviews fair value accounting method relative to historical cost accounting. Although both methods are widely used by entities in computing their income and financial positions, there is controversy over superiority. Historical cost accounting reports assets and liabilities at the initial price they were exchanged for at the time of the transaction. Conversely, fair value accounting quotes the prevailing price in the market. Nevertheless, while both methods of accounting affect financial statements, the†¦show more content†¦Determining the true market value of an asset is sometimes controversial, especially for assets that do not have active and liquid markets. By definition, the fair value does not need the existence of an active market. In case of market inexistence, IASB offers guideline that looks at the type of assets or liabilities. For instance, for property, plant and equipment, depreciated replacement cost is recommended if market based evidence is unascertainable. For biological assets (animals and plants), IASB suggest the use of discounted present values of future cash flows (Weetman, 2011). Later, FASB introduced FASB ASC 820 – Fair Value Measurements and Disclosures (SFAS 157) (Zyla, 2010). The main aim of this statement is to offer additional guidance and information on issues that relate to fair value and its measurement. FASB ASC 820 – Fair Value Measurements, in technical terms, does not bring in any new accounting principle rather it provides financial analysts and auditors with â€Å"additional information on how the FASB intends fair value to be measure in any instance it is required in financial reporting† (Zyla, 2010). The FAS 159 – the Fair Value Option(FVO) on Financial Assets and Financial Liabilities – brings in the fair value option that a company may use in their first and successive measurements of their particular financial liabilities andShow MoreRelatedThe Financial Accounting Standards Board581 Words   |  2 Pagescompanies as a result. Fair Value vs. Historic Costing Historic cost accounting means requiring all financial statement items be based on original cost (Thompson, 2007). Fair value reporting means that the financial statement item is recorded based on its current value. In general, fair value reporting would only apply to derivatives and other assets with similarly fluctuating market values. However, it could be applied to things like fixed assets or inventories as well. Cost accounting accommodatesRead MoreAccounting Systems At The International Level1387 Words   |  6 Pagesextensive disclosures to the public since they have more access to information. 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