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Wednesday, 8 September 2010

The Historical Cost Debate

The Historical Cost Debate

The Historical Cost Debate is the debate over the last 100 years or so about the exclusive use of Historical Cost for all accounting purposes. The accounting profession has realized for a very long time that financial reports based on Historical Cost for all economic items do not fairly represent a company’s results and operations. As a result of this debate the pure Historical Cost Accounting model has been improved and changed dramatically during this time, so much so, that today we have a huge volume of IFRS where under variable items are not all valued at HC but at, e.g. fair value or the lower of cost and net realizable value or market value or recoverable value or present value, etc. This debate has thus been a very valid and successful debate regarding the valuation of variable real value non-monetary items.

Unfortunately, the stable measuring unit assumption is still an IASB-approved option that everyone uses for the valuation of most constant items (excluding salaries, wages, rents, etc) during low inflation and deflation. Fortunately, the option of measuring financial capital maintenance in units of constant purchasing power during low inflation has been approved by the IASB in the Framework, Par 104 (a) in 1989. Unfortunately, no-one uses it during low inflation or deflation for the various reasons explained on this blog.

Copyright © 2010 Nicolaas J Smith