historical cost accounting and fair value acounting

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The use of historic cost accounting and fairvalue accounting have been one of the most debatable topics in recent years. Inorder to differentiate between them it is necessary to understand what are they. Historic cost accounting is an approach to accounting using asset values based on the actual amount of money paid for the asset with no inflation adjustment while fairvalue accounting refers to the value of an asset or liability using an arms length transaction between unrelated, willing and knowledgeable parties.

Introduction


Another difference between them is that under historic cost accounting entries are made only when an actual transaction arises while under fairvalue accounting measurements are updated periodically even in the absence of explicit transactions.
In historic cost accounting reported amounts can be calculated based on internally available information about prices in past transactions, without reference to outside data whereas fairvalue method requires current market prices to determine reported amounts, which may require estimation and can lead to reliability problems.
In accordance with risk management, the fairvalue method easily reflects the most risk managed strategies while the historic cost method requires complex rules to attempt to reflect the most effect of most risk managed strategies.
There has been a shift in the economic situation around the world and henceforth, we see ...
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