The main contents of the chapter consist of the following: Historical cost accounting, alternative to historical cost accounting, current cost accounting - CCA, fair presentation, true and fair override,. | Revise lecture 8 Historical cost accounting Under historical cost accounting, assets are recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration given for them Liabilities are recorded at the amount of proceeds received in exchange for the obligation. Historical cost accounting 1. Another, similar asset might be purchased. Management need to know the current replacement cost which might have changed substantially since the present asset was purchased at its historical cost. 2. The asset might be sold. Management need to know the amount which would be realised from sale, less any costs involved in disposal, . the NRV. Again this may bear no relationship to historical cost. Historical cost accounting 3. The asset might be used in the business. Management need to estimate the future cash flows arising from the asset and discount these to their present value, . their economic value. Clearly there is no direct link with historical cost in this case. Historical cost accounting Advantages of historical cost accounting Easy to understand Straightforward to produce Historical cost accounts are objective and free from bias Historical cost values are reliable and original values can be confirmed based on original invoices / accompanying documents Historical cost accounts do not record gain until they are realised Historical cost accounting Disadvantages of historical cost accounting In periods in which prices change significantly, historical cost accounts have grave deficiencies: Carrying value (CV) of non-current assets is often substantially below current value Stock in the SFP reflects prices at the date of purchase or manufacture rather than those current at the year end Historical cost accounting 3. Income statement expenses do not reflect the current value of assets consumed so profit in real terms is exaggerated 4. No account is taken of the effect of increasing prices on monetary items 5. The overstatement of profits and . | Revise lecture 8 Historical cost accounting Under historical cost accounting, assets are recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration given for them Liabilities are recorded at the amount of proceeds received in exchange for the obligation. Historical cost accounting 1. Another, similar asset might be purchased. Management need to know the current replacement cost which might have changed substantially since the present asset was purchased at its historical cost. 2. The asset might be sold. Management need to know the amount which would be realised from sale, less any costs involved in disposal, . the NRV. Again this may bear no relationship to historical cost. Historical cost accounting 3. The asset might be used in the business. Management need to estimate the future cash flows arising from the asset and discount these to their present value, . their economic value. Clearly there is no direct link with historical cost in this
