英语论文网

Christian (2009) suggests that historic cost accounting has a set of problems worse, than the problems with the fair value accounting. Christian (2009) argues that the historical cost model lacks of transparency and do not reflect the current value of an asset either. The strongest argument against historical cost accounting is it does not provide information that irrelevant to investors. Critics have pointed out the following significant flaws & disadvantages in historical cost accounting: Historical Cost Accounting values can relate to transactions that could be a year old or 10 years old. So, the acquisition value may be out of date and thus balance sheet represents out of date values.(Williamson: 2003) Historical cost accounting is only interested in cost allocation and not in the value of an asset. So, it discloses the acquisition cost of an asset and its depreciation in the following year, but ignores the possibility that the current market value of the asset may be higher or lower than the disclosed amount.

Historical Cost Accounting has also flaw in terms of inflation. It is based on the assumption that the purchasing power remains same over a period of time. But in reality, an asset purchased at the current point of time may be more expensive in future due to inflation. Historical cost financial statements are unadjusted for this inflation. As a result, in the time of high inflation, profits are inflated and thus the tax bill tends to increase. Hague and Willis (1999) argue, when an entity’s financial instruments are concerned, the historical cost prices reflect both new and old interest rate and an out of date assessment of the amounts, timing & uncertainty of future cash flows. Intangible assets acquired outside of business combination (internally generated e.g. Goodwill) are not reported in historical financial statements.

Historic cost accounting measure assets in the balance sheet by reference to their original cost and liabilities are entered at their monetary value irrespective of when the debt is due to be repaid. From this point of view Niall (1993) argues that the problem caused by historic cost accounting arises because costs and values may change between the time of original purchase and the time of sale of the finished goods. The concept of continuity requires that the stock of raw materials used in production will be replaced and new fixed assets will be purchased when the old ones expired. Nail (1993) argues that this process requirement makes historic cost accounting so misleading in the time of inflation.

Shim & Larkin (1998) show the deficiencies of historical cost financial statements through this illustration: A company reports its inventory on the balance sheet at a historical cost of $ 10,000. The fair market value (FMV) of this inventory may be is only $7,000. On the other hand, a corresponding current account payable of $10,000 appears as a liability on the credit side of the balance sheet. It is likely that the 'FMV' of the liability is at or near $10,000. From an historical cost perspective, the debit balance (Inventory) and the credit balance (accounts payable) are offsetting. However, from a market value perspective, the debit balance of $7,0本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。