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Measurement of concepts in relation to “historical cost and fair value accounting”

Discuss about the Limitation Of Historical Cost Accounting.

The learnings of the study intend to find the measurement with the concepts associated to the historical and fair value measurement of costs. The study has encompassed several aspects associated to the benefits of the “historical” and the “fair value accounting system”. The different types of the other facets of the study is abet to discuss the various concepts for the identification of   PPE and intangibles. The learnings have identified whether the estimate “practices for PPE and intangibles” are consistent with the different types accounting standards followed in other countries. This aspect of the study is evaluated in terms of the selection of three companies based on “New York Stock Exchange”, USA, “Australian Securities Exchange” and London stock exchange.

The application of “IFRS 13 Fair Value Measurement” is applicable to the IFRSs to permit the “fair value measurement” and the exposures which offers a single “IFRS framework” for measuring costs. The fair value consideration of the exit price notion considers “fair value hierarchy” which results in market based factors rather that the measurement of the specific entities. The original issue of “IFRS 13” was done in May 2011 and is applicable to the annual period commencement or after 1st January 2013 (Bizfluent. 2018).

There have been significant types of the differences which pertain to the assessment of the elements consisting of non-current assets as per various bookkeeping models used worldwide. In some of the historical cost accounting standards, asset revaluation is not permitted. For instance, “US GAAP, PRC GAAP, German GAAP, JP GAAP and French GAAP” do not allow revaluation of the assets. In addition to this, “Spanish PGC” does not reflect the revaluation model either, however the fixed assets may not be values in terms of historical cost method as there have been specific laws identified which voluntarily reflect on the updated values for the inflated assets (Learn Accounting: Notes, Procedures, Problems and Solutions. 2016).

On the contrary country such as Australia contemplates with the revaluation model which in compliance to IFRS 13 and IASB model. This consider the models of both “historical cost and fair value model”. In terms of the evaluation of the IASB standards the fair value accounting considers “valuation of non-financial fixed assets” as per “IAS 16 Property, Plant and Equipment (PP&E)”. In addition to this, this includes “IAS 40 Investment Property” which refers to the “non-current assets” which are not held for manufacture, however it is anticipated to earn the rentals for “capital appreciation” with the consideration of leases. The importance of “IAS 38, Intangible Assets” is considered for the non-monetary assets which has no physical substance. The inclusion of “IFRS 5 Non-current assets maintained for sale” is evident with this ruling. The assets expected for sale is less than year and the same is considered for the accomplishment with a series of standards which are classified in this manner. Moreover, the treatment of these assets is not same as fixed assets (Faculty.chicagobooth.edu. 2018). 

Benefits and challenges of using “historical cost and fair value accounting for PPE and intangibles”

The benefit of applying the “historical cost” on the balance sheet for the PPE recognition is considered with the cost incurred while of purchase along with the “contracts, invoices, payments and transfer taxes”. The “historical” evaluation of “plant and equipment” is also evaluated as per the amount of the depreciation and reporting of the same in the “income statement”. The accumulation of the depreciation amount is also shown with the deductions made from the assets’ historical cost which is depicted in the company’s balance sheet. In case of historical cost, the considerations are made as per independent of asset depreciation in terms of the physical assets wear and tear in long term use of asset (Icaew.com. 2018).              

The main challenge of the historical cost on the balance sheet for the PPE and intangibles recognition is identified with non-consideration of the present values. Henceforth, the users of the “financial statements” who are willing to know the present values are at a difficulty.

The main benefit of the implementation of “IAS 16 Property, Plant and Equipment” enumerates the bookkeeping treatment for general “property, plant and equipment”. The PPE is initially recognised with price subsequently measured with revaluation model and this allows for depreciable amount to be allocated on a “systematic basis” as per the useful life. Despite of the significant benefits, “IAS 16 does” not include the portion of the assets which is considered for amortization and needs to be maintained for the recognition of the financial statements pertaining to the mineral resources and biological assets (Iasplus.com. 2018).

The “IAS 38 Intangible Assets” allows for the recognition of the intangible assets amortization over the period during which more economic benefits could be derived. However, the economic benefits derived from the intangible assets are uncertain (Ifrs.org. 2018). 

“Identification of the valuation Practices as per historical cost” 

Caltex Australia

The main consolidation of the “financial report” is prepared as per the “historical cost basis except” for the “financial instruments” restrained at fair value. As per the financial statement of the company the “property, plant and equipment” are measured at “cost less accumulated depreciation and impairment losses”. In a similar way the intangible assets are acquired as per recognition of “fair value” of the assets received and recorded on acquisition. The intangibles are amortised over the remainder of the agreement term.

Identification of the valuation Practices as per fair value accounting 

The recognition of PPE in A.B. Foods is seen with the amendments which are based on the early adoption of “IAS 16 Property, Plant and Equipment and IAS 41 Agriculture”. This acquisition process is considered with the remaining minority stakes. As per the assessments made in the annual report published in 2014, the non-current biological assets decreased from £266m to £251m. This is reduced as per consolidation in the net assets amounting to £45m comprised of which £17m was attributable to “equity shareholders” and “£28m attributable to non-controlling interests”. The assessment of the intangibles and goodwill is defined as per “Business combinations” and treated as per “true and fair view override” to compensate the significants necessity pertaining to the amortisation of goodwill as per “Companies Act 2006”. The intangibles other than goodwill is invoked as per cost less accumulated amortisation and impairment charges (Pdfs.semanticscholar.org. 2018).

Identification of valuation practices for “PPE and intangibles”

The “property, plant and equipment” are seen to be noted at cost as per fair value costing. The determination of depreciation is done as per “straight line basis for buildings, leasehold” for “2 to 40 years and for machinery and equipment” for more than “2 to 15 years”.  The company is seen to perform “annual impairment” charged on the “goodwill and intangible assets” with indefinite lives. The events or charges included in the impairment is considered with the noteworthy changes in the “commercial climate, operating results and planned investments”. The changes or the events in the circumstances “may trigger interim impairment” which reviews the noteworthy changes in the operating environment, planned investment in the reporting units, divestitures as per the expected carrying value. The changes in the situations may trigger in-term impairment reviews included significant deviations business climate, operating reviews, planned investments and divestitures which may not be entirely considered as per the most conservative level of input along with the fair value measurement. 

The estimated practice for Associated British Foods PLC (Listed under FTSE 100) is following “IAS 16 Property, Plant and Equipment and IAS 41 Agriculture”. It is also determined the assessment of the intangibles and goodwill is defined as per “Business combinations” and treated as per “true and fair view override” to overcome the significants requirement pertaining to the amortisation of goodwill as per “Companies Act 2006”. Nike (Under NYSE) considers the fair value costing. The assessment of depreciation is done as per “straight line basis for buildings, leasehold” for “2 to 40 years and for machinery and equipment” for more than “2 to 15 years” The consideration of the intangible assets is taken into account with indefinite lives. Henceforth, the valuation practice for the recognition of PPE is not consistent across three companies. On the other hand, the valuation practice for Caltex Australia (ASX 200) considers the valuation with the “historical cost basis” excluding the financial instruments measured at fair value (Home.kpmg.com. 2018).

In my opinion historical cost accounting (HCA) suffers from various drawbacks. Particularly in economic environment where there is a constant increase in the prices as it is the case for most companies. In case of “inflation”, the value of money reduces and the monetary unit for the derivation of the standard amount does not have a constant shrinkage of the value. In addition to this, HCA overlooks the decline in money value and keeps adding the transactions assimilated at unlike dates and currencies based on fluctuating buying power. In addition to this, historical cost considerations may not match with the “current revenues with the current costs” of operations. In several occasions the revenues are measured in inflated currencies whereas the cost of production is seen with a mix of current and historical cost. The overstated profits may be harmful as per “over-distribution” of the “dividends”, settlement of the remuneration entitlements which the companies cannot afford.

In most cases the historical cost concept does not consider the figures for the assets recorded in the financial statement at the time when they were acquired. Henceforth, they are seen to be doubtful to depict present day values as they cannot be summed up. The financial statement users will not be able to convincingly predict the “future cash flows” associated to those assets. The overstatement of the figures in many cases are seen to be taken into consideration based on the dependency on the measurement of the capital at different dates. In such a case the profit measurement may be reflected as outcome of comparing two pointless total of the capital figure which does not show the buying power of the shareholders. In addition to this the profit is usually measured by results for comparing the totals which do not reflect the figures of shareholders.

The historic cost may have misleading implications on the capability of a firm to endure to function at a given level as the assets are undervalued. The inflation and the net attainable may be adjusted to maintain the stockholders' capital as per general or consumer buying power. The consideration of historic cost may mislead the impression on the financial trends of a company and the results may be restated by adjusted to the general price levels. Due to the aforementioned drawbacks the historical cost may be abandoned (HCA 2018). 

Conclusion

The significant depictions made in the report has shown the pros of “historical cost” on the “balance sheet for the PPE” recognition is considered with the acquisition cost along with the “contracts, invoices, payments and transfer taxes”. “The historical evaluation of plant and equipment” is also evaluated as per the sum of the reduction and reporting of the same in the “income statement”. The disadvantage of “historical cost” on the “balance sheet” for the “PPE and intangibles” recognition is identified with non-consideration of the present values. The benefit of the implementation of “IAS 16 Property, Plant and Equipment” enumerates the accounting action for general “property, plant and equipment”. The “PPE” is initially recognised with cost subsequently measured with “cost or revaluation model” and this allows for depreciable amount to be allocated in a methodical basis as per the useful life. It needs to be further discerned that The IAS 38 Intangible Assets allows for the recognition of the intangible assets amortization over the period during which more economic benefits could be derived. However, the economic benefits derived from the intangible assets which are uncertain.

Reference List

(HCA), L. (2018). Limitation Of Historical Cost Accounting (HCA). [online] Accountlearning.blogspot.in. Available at: https://accountlearning.blogspot.in/2011/06/limitation-of-historical-cost.html [Accessed 25 Jan. 2018].

Bizfluent. (2018). The Disadvantages of Historical Cost Accounting. [online] Available at: https://bizfluent.com/info-12022810-disadvantages-historical-cost-accounting.html [Accessed 25 Jan. 2018].

Faculty.chicagobooth.edu. (2018). [online] Available at: https://faculty.chicagobooth.edu/valeri.nikolaev/pdf/fairvaluepaper_rast_conference.pdf [Accessed 25 Jan. 2018].

Home.kpmg.com. (2018). [online] Available at: https://home.kpmg.com/content/dam/kpmg/pdf/2015/12/fair-value-qa-2015.pdf [Accessed 25 Jan. 2018].

Iasplus.com. (2018). IAS 16 — Property, Plant and Equipment. [online] Available at: https://www.iasplus.com/en-gb/standards/ias/ias16 [Accessed 25 Jan. 2018].

Icaew.com. (2018). IFRS 13 Fair Value Measurement | IFRS standards tracker | Financial Reporting | ICAEW. [online] Available at: https://www.icaew.com/technical/financial-reporting/ifrs/ifrs-standards/ifrs-13-fair-value-measurement [Accessed 25 Jan. 2018].

Ifrs.org. (2018). IFRS . [online] Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/ [Accessed 25 Jan. 2018].

Learn Accounting: Notes, Procedures, Problems and Solutions. (2016). Historical Cost Accounting (HCA): Meaning, Benefits and Limitations. [online] Available at: https://www.accountingnotes.net/historical-cost-accounting/historical-cost-accounting-hca-meaning-benefits-and-limitations/5454 [Accessed 25 Jan. 2018].

Pdfs.semanticscholar.org. (2018). [online] Available at: https://pdfs.semanticscholar.org/d246/49949c7f82aa96d03578d930c76cb449ca8b.pdf [Accessed 25 Jan. 2018].

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