Historical cost accounting has been a controversial method that experienced many unfavorable judgments over a period of clip. particularly since it considers the acquisition cost of an plus and does non acknowledge the current market value. Merits and demerits of this method are as follows.

The most obvious advantage of HC accounting is objectivity. It is a preponderantly nonsubjective system. which records the original cost of an point when it was purchased. Under historical cost accounting there is no room for use and “the information is supported by independent documental grounds. such as bill. statement. check stub. reception or verifier. ”(Elliott and Elliott:43) Any other method for entering minutess would be less aims since the sum being recorded would depend on single point of position and is assorted from different people.

Second. being compared with most other methods. historical cost is an easier and cheaper manner of rating. In regard that the original cost is one that already existed and could non be amended. which is easy to find and can be verified. Therefore. it requires less appraisal for comptrollers to enter the informations and easier for hearer to inspect them later. In add-on. ” as a footing of fact. it is verifiable and to that extent is beyond dispute” . ( Alexander and Nobes:180 )

Another important advantage of it is dependability. which is one of the cardinal features of fiscal coverage. as examined in the IASB’s Framework. As a past value. for most assets historical cost is more faithfully determined than other current rating such as just value. This measuring can guarantee that there are non extra benefits to users. ( Alexander and Nobes:181 )

Unfortunately. as every coin has two sides. HC accounting besides can non avoid holding drawbacks. The chief disadvantage exists in the subsequent yearss after acquisition. “The continued coverage of historical cost based values does non reflect any alterations in market value. “ Therefore either IASB regulations or US GAAP are non based on the HC rule univocally. Actually. the measuring theoretical account used by these criterions. like IFRS. is a mixture of historical costs. market values. cyberspace realizable values and discounted present values. (Walton and Aerts:76)

Furthermore. although HC accounting method is dependable. the job mentioned above lead to another disadvantage—lack of relevancy. which is besides a critical feature of fiscal coverage for determinations shapers. As we know. doing determinations usually requires appraisal of the hereafter. peculiarly the anticipation of hard currency flows. ( Alexander and Nobes:181 ) . However HC method is based on the past values. and hence can non supply the most relevant information for the hereafter. It may non be the best usher to the future public presentation. fiscal position and investing potency. ( Alexander. Britton and Jorissen:867 )

In add-on. although this method is preponderantly nonsubjective. it can be broke by some particular state of affairss. owing to alternate definitions of gross and costs and the demand for estimations. Gross and cost could be determined harmonizing to a pick of standards. For case. “although stock lists are valued at the lower of cost or cyberspace realizable value. the cost will differ depending upon the definition adopted. like first-in-first-out or last-in-first-out cost. ”

Assetss are frequently subjected to reappraisal. In an economic system of altering monetary value degrees. the historical cost system has been compromised by a sensed demand to repeat the transporting value of those assets that comprise a big proportion of a company’s capital employed such as land and edifices. (Elliott and Elliott:44)

Mention:
B. Elliott and J. Elliott. 2009. Fiscal Accounting and Reporting. 13rd edition. FT Prentice Hall. Essex D. Alexander. A. Britton and A. Jorissen. 2007. International Financial Reporting and Analysis. 3rd edition. Thompson Learning. London. P. Walton and W. Aerts. 2006. Global Financial Accounting and Reporting: Principles and Analysis. Thomson Learning. London D. Alexander and C. Nobes. 2004. Fiscal Accounting: An International Introduction. 2nd edition. FT Prentice Hall. Essex