Impact on Financial Statements

Impact on Financial Statements

Sources: (Robinson, 2020)

Source: Own Creation, (Robinson, 2020)

Historical cost accounting is used for property, plant and equipment, investment properties and intangibles ( identifiable and finite-lived intangibles only ). The formulas for calculation and their impact on the income statement is discussed below.

The PP&E, including land under this method, is tested for impairment. If the assets' carrying value (balance sheet-BV) is greater than the recoverable amount, the Asset is said to be impaired. The impairment loss is reported on the income statement. But the loss recoveries are not allowed under the historical cost method. The recoverable amount of the asset is measured as follows:

Investment properties have a similar accounting process of recognition and value assessment, where impairment losses are carried to the profit and loss statement. Under the historical cost method, US GAAP does not provide a clear definition of investment properties as reported (Robinson, 2020).

The identifiable and finite intangibles are stated on the balance sheet at the amortized cost like the PP&E and the amortization charges are reported on the income statement like depreciation expense in case of PP&E. The identifiable infinite intangibles are not amortized but are checked for impairment under the historical cost method. These intangible assets are created in acquisitions where the excess purchase price is allocated to goodwill after certain allocations to fixed assets and finite intangibles. No revaluations of the goodwill are allowed under the US GAAP accounting system. The goodwill created during an acquisition process can be defined as follows.

Source: (Robinson, 2020)

The marketable securities on the balance sheet under financial assets constitute debt and equity securities, derivatives, and loans (specific to financial institutions where loans are assets on the balance sheet), and their values are based on the market prices (Robinson, 2020; Zack, 2009). Under the historical cost method, loans and notes receivables and unlisted equities are reported at historical cost. In contrast, the debt securities held until the term matures are registered under the amortized cost method. ASC 820 provides fair value measurement for trading, available for sales securities including the derivatives – where all realized gains are reported on the income statement. In contrast, unrealized gains/losses from trading securities are reported on the income statement, unrealized gains from AFS securities are reported in other comprehensive income in shareholder's equity, and unrealized gains from HTM are not reported at all.

Table 1 Fair Value and Historical Cost Measurements Base – US GAAP