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Friday, 29 June 2012

Historical Cost Debate

Historical Cost Debate

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The Historical Cost Debate is the debate over the last 100 years or so about the use of Historical Cost for accounting purposes. The entities realized a long time ago 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 was improved and changed dramatically during this time, so much so, that today we have a huge volume of IFRS where under variable real value non–monetary 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. IFRS mainly refer to variable items.

Unfortunately, the stable measuring unit assumption is still an IFRS–approved option that is used for the valuation of most constant items (excluding annual measurement of salaries, wages, rents, etc. in units of constant purchasing power) during inflation and deflation. Fortunately, the option of measuring financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) was approved in IFRS in the original Framework (1989), Par. 104 (a).


Entities value variable items in terms of IFRS when they implement both the traditional HCA model and when they measure financial capital maintenance in units of constant purchasing power during inflation and deflation applying CIPPA. The stable measuring unit assumption is implemented under HCA. It is not to be implemented under financial capital maintenance in units of constant purchasing power (CIPPA). The net monetary loss or gain is calculated and accounted whenever monetary items are not inflation-adjusted daily during the current financial period under financial capital maintenance in units of constant purchasing power. The net constant item loss or gain is calculated whenever constant items are not maintained constant during the current accounting period under financial capital maintenance in units of constant purchasing power (CIPPA).

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.