Fair Value Vs Historical Cost Accounting

2033 Words 8 Pages
The fair value and historical cost are fundamental approaches of accounting. They bring up major changes in the financial status of the entities. The main objective of financial reporting is to provide information on assest and liabilities about the particular entity, which helps it to make useful financial decision. The fair value (FV) is a common among accounting and finance professionals. Today the majority of the investors and creditors prefer FV. On the other hand these policy and decision makers lost interest in historical cost (HC) because it became old fashioned and doesn’t keep up with current market. Nowadays everyone wants to see the actual values on the balance sheet, “one of the major financial statements that gives a snapshot …show more content…
According to the CommercEducation blog titles “Historical cost vs. market (fair) value” dated April 15, 2011 states “market value accounting reveals economic realities that are hidden by historical cost accounting.” Unlike historical cost, fair value limits a company’s ability to manipulate its reported net income. The gains or losses from assets and liabilities are reported in the period at which they occur. For instance, the Savings and Loan Crisis (S&L) scandal. This scandal was a big hit to make American realize that historical cost leads to a web of political corruption. The thrift managers of S&L commit fraud against depositors by using high interest rates and lent the money to their allies without a collateral. They hide the setback by showing losses gradually through negative net income. If S&L has used the fair value method, the investors and regulators would have been disclosed with the condition of S&L and not have lost a huge amount of …show more content…
According to the journal of Accounting and Finance title “Fair Value Versus Historical Cost: Which is actually more ‘Fair’?” (Kaya, 2013) states that “The understandability advantage is obtained simply by the longstanding common practice and the verifiability advantage by historic cost accounting since the information is certain to be confirmed by several independent evaluators since the purchase price is fixed and easily determined.” Like what kaya said, historical cost is very reliable. Unlike fair value, historical cost has no room for doubt. Historical cost uses its original cost. So we don’t have to care about the uncertainty that comes with the current market price. The amount can be verified by looking at the past years

Related Documents