Historical Cost Accounting Research Articles

On the Ethics of Fair Value Accounting: Distributive Effects, Distributive Injustice, and Implications for Social Peace

Fair value accounting is at the heart of arguably the world’s most prominent accounting standards, particularly US GAAP and IFRS. Fair value measurement has been the subject of intense debate. Among other things, it has been analyzed from an ethical perspective. However, this discussion has mainly been limited to the judgment involved in fair value measurement and the ethics of fair value in its ability to provide decision-useful information to interested parties. This study pushes the boundaries by adding a new dimension to the discussion of the ethics of fair value accounting by examining its ethics from a more systemic and societal perspective. Drawing on Austrian business cycle theory, it argues that fair value accounting facilitates certain distributive effects in inflationary monetary environments, thereby contributing to distributive injustice and potentially to social discord. In this respect, fair value accounting—in contrast to historical cost accounting—should not be considered fair or just, but unethical instead.

Inflation adjustments of financial statements: Implication to price index and performance

This paper examines the critical role of inflation accounting in adjusting financial statements to accurately reflect the impact of inflation on the economy. The primary objectives are twofold: examine the process of restating balance sheets and income statements, emphasizing the limitations inherent in historical cost accounting; and investigate the practical usefulness of price indices in identifying complex changes in the value of monetary and non-monetary assets and liabilities. It uses a systematic analysis of the restatement process, delving into the application of the Constant Purchasing Power Accounting (CPPA) method. The study used Royal Dutch Airlines Company for the years 2018-2019 financial data, including varying different inflation levels. The results of the analysis reveal that indexing revenues under the CPPA method improves liquidity, profitability, and solvency ratios. This improvement is particularly evident in the cash flow statement analysis, where corrections are minimized compared to historical cost accounting. The CPPA method appears to be a powerful solution to the limitations imposed by historical costing in inflationary environments. It is worth noting that the research reveals differences in the practical application of inflation calculations between countries, depending on economic and regulatory factors. This paper calls for continued research efforts to delve deeper into the implications of inflation for different industries, economies and financial reporting frameworks.

Historical cost vs current cost accounting method

Historical cost accounting indicates that assets, liabilities, and equity are recorded at the value of the transactions issued to acquire them. In contrast, current cost accounting (CCA), also known as present value accounting, reflects the cost required to replace an asset in the current period. This replacement cost encompasses the expenses incurred in producing a product using the current methods, materials, and specifications. Data collection was performed using qualitative research literature review. This study will illustrate the fundamental differences between historical cost accounting and the current cost accounting basis. Despite the shortcomings of historical cost accounting, there are still greater benefits obtained through it. Based on the literature review, this research finds that historical cost accounting remains relevant in decision-making.

FAIR VALUE ACCOUNTING: BENEFITS, CHALLENGES AND IMPLICATIONS FOR FINANCIAL REPORTING

This research paper delves into fair value accounting, exploring its benefits, challenges, and implications for financial reporting. Beginning with its significance and contrast to historical cost accounting, it navigates through its role in global reporting standards. The benefits of transparency, relevance and informed decision-making are weighed against challenges such as subjectivity, volatility's impact, illiquid asset valuation complexity and the potential for manipulation. The effects of fair value on financial statements, disclosure, ratios and valuation are scrutinized. The regulatory framework's intricacies, regulatory responses and global harmonization efforts are assessed. This research paper's concluding reflection underscores fair value's evolving importance in a dynamic financial landscape, emphasizing the need for on-going vigilance and adaptation.

IMPLICATIONS OF APPLYING FAIR VALUE ACCOUNTING TO MODERN FINANCIAL REPORTING

Abstract: Fair value accounting is a concept whose main goal is to provide quality information about financial status, success and cash flows in order to satisfy the informational needs of investors. By introducing this concept, the focus is placed on the balance sheet and not on the income sheet statement as was in the case of the historical cost concept. The goal of financial reporting is to show assets, liabilities and net assets in the balance sheet at fair value on the balance sheet date. The subject of research in this work is the application of fair value accounting, which will be shown on a concrete example in which equipment will be evaluated according to the concept of historical cost, and then the equipment will be evaluated according to the concept of fair value. After that, a comparison of these two concepts will be made, in order to present the financial effects of valuation on assets and liabilities. The importance of applying historical cost accounting is the correct periodization of income and expenses, while the importance of fair value accounting is the presentation of assets and liabilities according to current market prices. The elaborated moments resulted in the reconciliation and unification of these two concepts, which is realized by the hybrid model of financial reporting.

Mark-to-Market, Loan Retention, and Loan Origination

ABSTRACTWe study the effects of mark-to-market accounting (MTM) for banks following the originate-to-distribute lending model. Banks have expertise in originating loans, but it is costly for them to retain the loans on their books. We study how the accounting measurement of the retained loans affects the banks’ origination and retention decisions. We show that, relative to historic cost accounting (HC), MTM has three consequences. First, it improves the accuracy of loan measurement ex post. Second, it forces banks to retain more risk exposure on their own books. Finally, it can reduce ex ante origination efforts and lower the average quality of loans in the economy.JEL Classifications: G01; G21; G30; M41.

Implications of applying fair value accounting to modern financial reporting

Fair value accounting is a concept whose main goal is to provide quality information about financial status, success and cash flows in order to satisfy the informational needs of investors. By introducing this concept, the focus is placed on the balance sheet and not on the income sheet statement as was in the case of the historical cost concept. The goal of financial reporting is to show assets, liabilities and net assets in the balance sheet at fair value on the balance sheet date. The subject of research in this work is the application of fair value accounting, which will be shown on a concrete example in which equipment will be evaluated according to the concept of historical cost, and then the equipment will be evaluated according to the concept of fair value. After that, a comparison of these two concepts will be made, in order to present the financial effects of valuation on assets and liabilities. The importance of applying historical cost accounting is the correct periodization of income and expenses, while the importance of fair value accounting is the presentation of assets and liabilities according to current market prices. The elaborated moments resulted in the reconciliation and unification of these two concepts, which is realized by the hybrid model of financial reporting.

Fair Value Measurement and Firm Performance of Quoted Manufacturing Companies in Nigeria

This study examined fair value measurement and firm performance of quoted manufacturing companies in Nigeria. The study used data from thirty-one (31) selected quoted manufacturing companies in Nigeria for a period of 16 years that were split into eight (8) years of historical cost accounting method (2004-2011) and eight (8) years of fair value measurement valuation technique method (2012-2019). The study utilized the paired sample t-test framework in analyzing the data. Findings revealed that there are significant differences between the impact of historical cost accounting and fair value measurement valuation technique on firm performance. Thus, the study recommended among others that the Financial Reporting Council of Nigeria should focus on the compliance level of companies with fair value accounting in addition to taking necessary steps to improving the understandability and usage of fair value accounting.

Issues and Challenges of Adoption of IFRS for SMEs in Malaysia

The purpose of this research is to look into issues and challenges associated with the adoption of International Financial Reporting Standards for Small and Medium Enterprises (IFRS for SMEs) or so-called MPERS (Malaysian Private Entity Reporting System). Using keywords like "IFRS for SMEs," "MPERS in Malaysia," and so on, this study examines existing literature in the form of articles in the Emerald database, as well as press releases and publications published by the Malaysian Institute of Accountants (MIA). The MPERS version of IFRS is a shortened version of the complete IFRS. It reduces the substance of the whole IFRS by about 85%. Certain topics are excluded because they are not normally relevant to SMEs. SMEs, on the other hand, still consider IFRS for SMEs to be excessively complicated. MPERS is a performance-based standard, not a cost-based one. Almost everything must be of reasonable value. As a result, businesses owning investment properties or biological assets will have to pay extra for the valuation of these assets at fair value. For preparers, there are two major obstacles to overcome. Constant changes in standards, as well as a scarcity of skilled accountants, are also issues. Some data suggests that the decision usefulness model is inappropriate for smaller businesses. SMEs have a small number of account users, lack accounting competence to deal with complexity, and are managed by their owners. Furthermore, for SMEs, a reporting approach focused on stewardship and employing simplified historical cost accounting would be more appropriate.

“Unreliable Accounts: How Regulators Fabricate Conceptual Narratives to Diffuse Criticism” by Karthik Ramanna: A Comment on Ideological Capture

Abstract Karthik Ramanna in ‘Unreliable accounts: How regulators fabricate conceptual narratives to diffuse criticism’ considers how the Financial Accounting Standards Board (FASB) justified a conjunctural break from historic cost accounting (HCA) to Fair Value Accounting (FVA). Karthik’s paper explores how the US Financial Accounting Standards Board (FASB) legitimized the introduction of fair value accounting (FVA). This fundamental reorientation of financial reporting practice can, he argues, be understood within a framing device: conceptual veiling. Firstly, the FASB is (suspected to be) captured by the interests of investors and capital market actors. Secondly, the FASB needed to construct new narratives to enable this reorientation in accounting practice and this was achieved with changes to the governing conceptual framework. An alternative framing device is offered in this review, that of the financialization of company financial reporting and implications for company viability as opposed to a capital market efficiency perspective. Financialized accounting facilitates the valuation of a range of asset classes to a market value. These asset valuations are speculative in nature. FVA accounting imports speculative capital market risk onto company balance sheets and this can threaten company financial stability and viability for a going concern.

Fair value accounting: epistemic commitment and resistance

ABSTRACT This study responds to calls for additional research on how accounting prescriptions are being operationalised with a specific focus on fair value accounting by individual practitioners. Detailed interviews are carried out to evaluate how accountants understand and resist fair value accounting. The nature of resistance is used to distinguish between proponents of historical cost accounting and flexible adherents to fair value accounting. Contrary to expectations, the former do not reject fair value accounting outright but see it as playing a complementary role when fair value disclosures support historical cost accounting. Resistance is only evident when fair value movements are recognised in financial statements and takes the form of technical and conceptual objections. Departures from accounting standards are, however, avoided with the result that historical cost advocates are reluctant but obedient adopters of fair value accounting. Flexible adherents also resist fair value but the nature of their resistance is procedural or operational. Without a clear commitment to either regime, legalistic and superficial application of accounting standards becomes more common. Consequently, flexible adherents pose a greater risk to auditors, regulators and standard setters than do “dissidents” advocating for historical cost accounting. Overall, the study highlights the interconnection between the level of commitment to well-established accounting knowledge templates and resistance rather than treating these as separate theoretical perspectives. The results demonstrate that resistance is not specific to certain groups of accountants but is both dynamic and systemic. How resistance manifests itself has important implications for the understanding and application of accounting prescriptions.

“Taking Diversity Into Account”: Real effects of accounting measurement on asset allocation

In the wake of the financial crisis, accounting issues have caught the attention of both economists and regulators. Fair value accounting has indeed been charged of amplifying the procyclicality of the banking system. Real effects of accounting are therefore to be taken into consideration when discussing the issues raised by the crisis. We develop a theoretical model to study what the real effects of accounting on financial institutions’ investment decision are. Doing so, we show that fair value accounting may incentivize banks to underinvest in long-term risky assets, while historical cost accounting may incentivize them to invest too much in those assets. At first sight, bank accounting thus appears as a choice between bad and worse. We show that this is not necessarily the case. More precisely, if financial institutions are subject to different accounting rules depending on their time horizon – i.e. long-sighted financial institutions are subject to historical cost accounting while shorter-sighted financial institutions are subject to fair value accounting – the inefficiencies associated with both accounting rules may be softened.

Investment and Contagion Tradeoffs Between Fair Value and Historical Cost Accounting

Investment and Contagion Tradeoffs Between Fair Value and Historical Cost Accounting

Could the next Indonesian income tax law adopt to the concept of income under IFRS

This study has two purposes. The first is to explore the implementation of income concepts under current income tax law (UU PPh) before and after the convergence of International Financial Reporting Standards (IFRS) in Indonesia. The second is to explore whether the new UU PPh could adopt the notion of income under IFRS. By using a qualitative approach, this study concluded that before and after IFRS convergence, the income definition under current UU PPh has never changed since its first 1983 enactment. Such condition has resulted in some income tax issues based on the ability-to-pay principle and realisation doctrine. The main problem relates to the realisation principle as part of the historical cost accounting system, whereas accounting income refers to the mark-to-market, ignoring realisation rules. The second conclusion is that the income concept under the next UU PPh can partially apply the accounting income concept because it still needs the realisation principle.

Could the next Indonesian income tax law adopt to the concept of income under IFRS

This study has two purposes. The first is to explore the implementation of income concepts under current income tax law (UU PPh) before and after the convergence of International Financial Reporting Standards (IFRS) in Indonesia. The second is to explore whether the new UU PPh could adopt the notion of income under IFRS. By using a qualitative approach, this study concluded that before and after IFRS convergence, the income definition under current UU PPh has never changed since its first 1983 enactment. Such condition has resulted in some income tax issues based on the ability-to-pay principle and realisation doctrine. The main problem relates to the realisation principle as part of the historical cost accounting system, whereas accounting income refers to the mark-to-market, ignoring realisation rules. The second conclusion is that the income concept under the next UU PPh can partially apply the accounting income concept because it still needs the realisation principle.

Economic income, historical costing income and conservatism

The paper intends to contribute at the debate on the ‘Evolutionary Advantage of Cost Accounting and Conservatism’ (Accounting, Economics and Law: A Convivium, 2019. 9. issue), founded on Braun’s study (2016) about The Ecological Rationality of Historical Costs and Conservatism. Moving from the IASB Conceptual Framework (2013) it stresses the renewed interest in income concept. The economic financial crisis of 2008-9 stimulated discussions between the traditional ‘received view’ of ‘cost-revenue approach’ (historical cost accounting) and ‘balance-sheet approach’ (‘current values’ and ‘present values’, that is ‘economic values’). Revaluations of assets, liabilities and owners’ equities are consistent with the cost-revenue model as well as the discounting future income flows in order to reach sustainable economic income magnitudes and sustainable economic capital values.
 The whole function of the information system is related to decision-making and control: the ‘accountability concept’ is crucial in this regard and is part of the process for predicting future ‘economic financial situations’. Certainly historical cost is relevant part of accountability valuation; the future economic results can be better predicted by a long past segment of outcomes from all the entity activity, ‘operating incomes’ and ‘capital gains and losses’. These principles drive in the direction of historical costing (and conservatism) integrated, through ‘revaluations’, with other different methodologies, typically ‘current values’ and ‘present values’, in a unitary systematic comprehensive framework, according to economia aziendale (entity economics) school of thought.

Effects of inflation accounting on organizational decisions and financial performance in South African retail stores

The inflation accounting technique allows a business to show or have a sensible picture of their gains due to present cost coordinates with present revenues. Thus, the effects of inflation accounting on organizational decisions and financial performance of Kwa-Zulu Natal retail stores were evaluated in this study. The study used a quantitative research method. A total of 161 completed questionnaires were received from respondents in the selected 20 listed stores in Kwa-Zulu Natal. Thus, the Exploratory Factor Analysis and linear regressions were employed in this study. The empirical study reveals how inflation accounting significantly impacts organizational decisions and financial performance of the retail business with such coefficients (F (1, 159) = 49.269, p < .0005; F (1, 159) = 28.959, p < .0005). The findings of this study highlighted positive relationships between the variables that were used. Thus, the study recommends that retail stores always consider inflation changes and apply inflation accounting techniques to make adjustments to produce more accurate results in their financial statements. Heated discussions now surround the basis of financial performance measurement via historical cost accounting. This influences their decision making and financial performance positively.

Unreliable accounts: How regulators fabricate conceptual narratives to diffuse criticism – A response to Karthik Ramanna

Abstract Karthik Ramanna’s article titled “unreliable accounts: How regulators fabricate conceptual narratives to diffuse criticism” provides a critical insight into how Fair Value Accounting (FVA) was incorporated into the conceptual framework for general purpose financial reporting. Karthik reveals that the installation of FVA into the FASBs constitution can be understood through a framework: conceptual veiling. In this framework, the FASB is captured within the logics of financial market economics, assuming investors and capital market actors are best served by financial disclosures that reflect market valuations. Captured by these interests, the FASB needed to modify the narratives contained in the conceptual framework removing reliability and substituting faithful representation because much of what constitutes FVA disclosures are estimates and judgements of questionable reliability. A more forceful critical evaluation of the re-orientation of accounting practise from Historical Cost Accounting to FVA might have located changes in the context of the financialized company.

High turbidity: Water valuation and accounting in the Murray-Darling Basin

Australia’s sophisticated and advanced water market legislation has allowed direct investment by non-landholder stakeholders in water ownership, which over time has increased the volume of water entitlements owned by government, non-governmental organisations and non-landholder investors (e.g. superannuation companies, trade speculators). The growing market value of Australian water entitlements, driven by increased water scarcity and international commodity prices, has meant that water is now one of the most valuable assets owned by many irrigators. However, to date, there is no standard practise of financial water valuation and accounting, nor is there an understanding of the most common methods used by various stakeholders. We report information from 63 in-depth expert interviews with bankers, environmental water holders, financial investors/agri-corporates, property evaluators and water brokers in the Murray-Darling Basin to establish the current practices employed. The most common valuation methods used current market prices based on water register and water broker data. Water entitlements were valued with historical cost or fair value water accounting, depending on the stakeholder. However, given the lack of standardised methodology, evaluator discretion and fast moving (or thin) markets can lead to considerable divergence in water valuation values. Recommendations are made for the need for greater transparency and standardised water valuation methods.

A Comparative Analysis of Inflation-Adjusted and Historical Cost Accounting Information: Implications for the Value Relevance of Corporate Reports

Purpose of the article: This study investigates the effect of historical cost accounting on the reported profit of a company, with an evaluation of current cost accounting as an alternative reporting method in a high-inflationary and volatile economy as experienced in Nigeria. Using secondary data gleaned from the annual reports and accounts of ten (10) manufacturing companies quoted in the industrial sector of consumer goods of the Nigerian Stock Exchange from 1996–2016. Methodology/methods: To test the formulated hypotheses, a multiple regression model was formulated comprising the depreciation charge, taxes and dividend as the independent variables while reported profits both at historical and current cost of the firm served as the dependent variables. The Ordinary Least Square (OLS) estimation technique was employed to ascertain the inter-relationships between the variables. Scientific aim: This research is aimed at empirically investigating, by means of available statistics, the effect of historical cost accounting on the reported profit of a company during period of inflation. Findings: The study revealed that both historical cost and current cost accounting have significant effect on reported profit, as an increase in the depreciation charge, tax bills and dividends declared by firms will occasion a decrease in the reported profit. Conclusions: It is recommended that companies should prepare their financial reports using both historical cost and fair value (current cost) methods simultaneously, as this will allow the companies to ascertain the true financial position of their companies before declaring dividends and other benefits.