The cons and pros of fair value versus historical cost accounting and Essay

The cons and pros of fair value versus historical cost accounting and deprival value - Essay Example Financial reporting requires extremely accurate form of measurement to deliver information to lenders and shareholders who are obliged to know how wisely their money is being spent (Barth 2007). Van Zijl & Whittington (2006) reveal that the current form of measurement is increasingly emphasizing on the use of current value to replace historical costs. The principle reason behind the establishment of accounting standards was to ensure that financial information produced by organizations are accurate, reliable, complete, timely and relevant. In addition, accounting standards would ensure that organizations not only demonstrate accountability but also maintain it while meeting statutory reporting requirements such that the stakeholders are accounted for organizational financial performance to support decision making (Cooper 2007). Currently, the measurement basis for measuring amounts in financial statements includes among others historical cost, amortized historical cost, fair value an d value in use. This paper evaluates the pros and cons of fair value versus historical cost accounting and deprival value. 1.0. Current cost should be used in financial reporting Historical cost accounting works well for liabilities that are not traded; representation of liabilities for contractual business obligations like long term deferred revenue, and other complex issues of life insurance and pension liabilities (Macve 2010). However, more emphasis is given to existing stakeholders and stewardship compared to service to investors in capital market and usefulness in economic decisions emphasized by fair value approach which replaces historical costs (Whittington 2008). Historical cost accounting and deprival value characterize the conceptual framework of ASB while fair value is a recent concept that is available only for the last 20 years in FASB, the IASB and the ASB and is increasingly applied in financial reporting. Penman (2007) argues that while historical cost accounting h as been used in items whose measurement using fair value would be unreliable or expensive to quantify, fair value is considered to be informative given that it is applied within mixed measurement system. Defining and measuring current value Fair value is defined by Penman (2007) as the amount that would be obtained from selling an asset or the amount that would be given away in defrayal of a liability in a transaction deemed as methodical and between wiling and well-informed participants. As a result, fair value accounting information reflects the future and not the past, events or transactions (Whittington 2008; Barth 2006). Barth (2007) reveals that the measurement decisions are made by standard setters through focusing on the application of the definitions of elements in financial reporting and the qualitative attributes of accounting information on the basis of financial reporting objective. The use of qualitative attributes is intended at recognizing the desired measurement cha racteristics while the financial reporting objective brings out the context within which the evaluation of measurement will be evaluated (Barth 2007). 2.0. Importance of deprival value concept Van Zijl and Whittington (2006) argue that deprival value is the implying measurement at substitute cost for an asset that has a recoverable amount superior than the costs to be incurred for replacement. The value of an asset is restricted to replacement costs since the loss incurred in losing an asset