Like other standards, historical cost accounting standard has some benefits and limitations for the investors, appraisers, and accountants. Some of the essential benefits and limitations are;
The historical cost method is objective – where assets and liabilities are recorded at their purchase price.
The historical cost methods provide reliability, and there is less space for manipulation. The purchase is documented through receipts & vouchers etc.
The historical cost method provides a robust system to evaluate management performance through profitability ratios such as gross, operating, and net profits.
The historical cost method provides a reliable investment assessment and analysis system for the investors - as they can track the firm's current performance and forecast future growth with less variability and more confidence. The less volatile return measurement ratios such as ROE, ROA, ROIC, EVA help the investors to make an efficient economic decision whether to invest or not in the security or lend to the firm.
Due to its at-cost presentation of net assets, the historical cost method provides a clear understanding of the firm's current financial position. Suppose the values are not measured at cost. In that case, it's difficult for appraisers, analysts to estimate the firm's value – as due to consistent period to period impairments, write-ups (downs) for financial and non-financial assets' actual value of the assets and firms are lost.
