| Historical Cost |
Article Index for Historical |
Website Links For Historical |
Information AboutHistorical Cost |
| CATEGORIES ABOUT HISTORICAL COST | |
| generally accepted accounting principles | |
| costs | |
|
Depreciation effects the Carrying Value of an asset on the Balance Sheet . The historical cost will equal the carrying value if there has been no change recorded in the value of the asset since acquisition. Improvements may be added to the Cost Basis of an asset. Historical cost does not generally reflect current market valuation. Different accounting standards may require that the carrying value of an asset (or liability) be updated to the market price ( Mark-to-market valuation) or some other estimate of value that better approximates the real value. Accounting standards may also have different methods required or allowed (even for different types of balance sheet assets or liabilities) as to how the resultant change in value of an asset or liability is recorded, as a part of income or as a direct change to shareholders' Equity . HISTORICAL COST CALCULATION Fixed assets Historical cost is the actual purchase price plus incidental costs incurred in getting the fixed asset in a condition and position ready for initial use / Commercial Production .
Special cases
Costs after acquisition In general, costs incurred to improve an asset should be capitalized (that is, added to the historical price), whereas expenditures that simply maintain a given level of services should be treated as ordinary expenses. In order for cost to be capitalized, one of these conditions must be met:
Depreciation HISTORICAL COST PRINCIPLE Under U.S. Generally Accepted Accounting Principles (US GAAP), the historical cost principle dictates that most assets and liabilities should be recorded at their historical cost. For example, a tract of land which was purchased 50 years ago for $10,000 may be worth $1 million today, but it will be recorded on the Balance Sheet at its historical cost of $10,000. The historical cost principle is used because of its reliability and freedom from bias when compared to the fair market value principle. Adjustment for current valuation In the US, the Financial Accounting Standards Board allows current valuation for certain assets such as marketable securities, impaired assets, and derivatives.1 In contrast to US GAAP , under UK GAAP firms may revalue assets based on appraised market values. This can result in the recognition of unrealized gains as income. Adjustment for inflation Historical cost assumes a stable monetary unit only with regard to constant real value non-monetary items in low inflationary economies. As PwC described it in a paper on accounting in hyperinflationary environments: Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost without regard to changes in the general level of prices. The individual assets, liabilities, shareholders’ equity, revenue, During periods of severe monetary inflation, such as during the 1970s in the United States, accounting standard-setting bodies such as the Financial Accounting Standards Board have considered various new ways to present financial information. In the United States, as in all low inflationary economies, financial information regarding historical cost items are not adjusted for inflation.2 It is accepted in low inflationary economies that the historical cost model will undermine the accuracy of financial statements whenever inflation is non-zero, which means always. When inflation is low or moderate however, the inaccuracy is considered insufficiently important to warrant applying other methods. The IASB requires that hyperinflation accounting methods be used whenever cumulative inflation over a three-year period is greater than 100%. This limit has been criticized as too high and arbitrary. {Link without Title} ''IAS 29 Financial Reporting in Hyperinflationary Economies'',[http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm} Kapnick, H.,''Value-Based Accounting - Saxe Lectures (1975/76):'' NOTES AND REFERENCES |
|
|