Template for Bachelor thesis in International Business
Historical Cost Accounting System
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Fair Value Accounting US GAAP VS IFRS
Historical Cost Accounting SystemThe historical cost accounting (Cost method) is based on "Entry Price" as it is the price that is exchanged for the Asset at the time of a specific transaction (acquisition) against its future benefits. Therefore, this entry price of the assets includes the purchase price of the asset plus delivery and installation cost (Robinson, 2020) in the case of Property, Plant & Equipment (PP&E). The problem with the information is whether it is recorded at the transaction time (at cost or historical value) or the current value based on the available transaction in the liquid market (Palea, 2013; Robinson, 2020). Many field specialists have argued that the historical cost accounting method is good at explaining the historical value of the assets but fails to predict the future value of the assets. Thus marking assets to fair value forms the basis for adopting the current market value regime under fair value accounting (Palea, 2013; Ramtohul, 2013). The value recorded on the balance sheet is reported at amortized cost, which is equal to transaction price minus accumulated depreciation, asset impairment, amortization, and depletion. Like all accounting systems, the historical cost method also has pros and cons, which are explained to better understand both accounting systems. Figure 3 Fair Value Accounting Application Source: Own Creation, (Robinson, 2020) The historical cost accounting system is allowed under both IFRS and US GAAP accounting systems. The financial assets or instruments can be found on both sides of the balance sheet. They provide a claim of financial assets of one entity and a financial liability and equity investment of another firm (Robinson, 2020). The non-financial assets include property, plant & equipment (PP&E), Investment properties, and Intangibles (including identifiable and un-identifiable) and are considered long-lived assets, as shown in figure 4. Download 383.21 Kb. Share with your friends:
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