The historical cost substantiate an accounting measure of value where the price of an asset on the statement of financial position is based on its original cost when the asset is acquired by an entity. The method is adequately used in the valuation of an identified asset under the accounting principles. Under the historical cost principle, an identified asset that is held on the balance sheet are measured at the historical cost even when item has significantly changed in value over time (Cairns, 2011). The historical cost basis states that an asset should be reported at its cost at the time the transaction is carried out and should encompass all the costs that necessitate the asset to be in place and ready for use.
Alternate measurement bases
Current cost encompass the reproduction cost and replacement cost (AASB, 2014). The measurement is substantively defined as the most economic cost of a given asset or of its equivalent productive capacity or the service potential.
Net Realizable Value
The working definition of the measurement base is articulated as the estimated selling price of an asset in the daily activities of an entity less the cost that have been estimated for completion and the necessary estimated costs that are required to make sale of the given asset.
Value in use
The value in use encapsulates the present value of estimated future cash flows that is expected to arise from the continuous use of an identified asset and from the disposal at the end of the useful life of the asset.
Deprival value definition describes the loss a business would encounter if it is deprived of the asset. Its articulate the lower of cost of replacement and the amounts recoverable at the date of measurement and hence the sums that can be recovered are higher than the value in use and the net realizable value.
Advantages and Disadvantages of Historical Cost Basis
The historical cost basis is straight forward to produce
The method does not record gains until they are realized
It does not indicate the current value of an asset to the business
The method does not measure the loss of vale of the asset
Advantages and disadvantages of current cost accounting method
The method addresses the difference between the current and historical cost as a consequence of inflation
The method present the challenge to the user on the reported financial information,
Advantage and disadvantage of NRV
The method takes into account the basic concept that the future worth of the asset is less than what it is worth today (Barth, 2013).
The method is not useful while comparing assets that have different worth.
Fundamental Qualitative Characteristic of Historical Cost Accounting
The method is offer relevance to the user of the financial information in that it assist in evaluating the past events by correcting the past evaluation
The method offers reliability in that it ensure the position of the asset is not overstated.
Value in use
The method ensures that the asset is accounted according to its substance and the economic reality.
The method also provides completeness in that the valuation of the asset is reliable.
Net Realizable value
The method presents a true and fair presentation on the value of the asset and hence the accurate value is presented.
The method offers relevance in that it helps in that it influences the economic decisions of the user by correctly assessing the worth of the asset.
The ideal method of the measurement base is the Net Realizable Value in that the value of an asset is present in a true and fair view thus correctly measuring the asset at its fair worth.
AASB, C. A. (2014). Consolidated Financial Statements.
Barth, M. E. (2013). Measurement in financial reporting: the need for concepts. Accounting Horizons.
Cairns, D. M. (2011). IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia. The British Accounting Review.
If you are the original author of this essay and no longer wish to have it published on the SuperbGrade website, please click below to request its removal:
- Corporate Social Responsibility in Bank of China
- How Important Diversification in Financial Industry Is? - Research Paper
- Creating Business: Food for Schools
- Leadership Function in the Banking Industry
- Savings and Investment in the Open Economy
- Expository Essay Sample on Revaluation of Assets
- Analysis Essay on Investment Risk/Return