Current measurement method is historical cost base method
A historical cost is a degree of value which is applied in accounting. In this, price of an assets on the balance sheet is constructed on its nominal or original cost once developed by the firm. Generally, it is defined as a concept in which assets required to be valued on the basis of purchase price or the money which is paid for the assets. It is a chosen method of valuing assets because it can be proven (Pereira, Pinto and Martins, 2018). This lead to make easier for the firm to put heading on the piece of property and perceive amount paid for it. Similar to this, there are other costing and valuation method such as replacement cost or current cost. With the use of these methods company can easily report the same piece of property at various values in each year based on the market. However, these variations can disrupt the accounting concept and reliability. In historical cost method, historical cost values remain same as they do not change every year. Due to this, reason consistency concept does not get disrupted. However, there are also some issues with historical method such as time value of inflation or money is not considered in it (Whittington, 2015). This method assumes that inflation is not relevant and assets can be valued on the basis of purchase price. For example if an organisation purchase a new car at $25,000 then it will be considered as historical cost value even its price fall in future.
There are some advantages of this method. One of the most understandable benefit of historical cost method is that it is objectivity (Lu, Guerrero and Vasquez, 2014). It is considered as a predominantly objective system because it keeps record of original cost of an item at the time of making purchase. In this method there is not area for manipulation and all the data is supported by independent documentary evidence. For example, cheque counterfoil receipt invoice, etc Further it is also known as one of the most easier and cheaper method of valuation as compared to other methods (Grudinschi, Hallikas and Sintonen, 2015). One of another significance benefit is that its reliability which is one of the main characteristics of financial reporting. It is examined in the IASB’s framework. Inappropriately, every coin has two sides so there are some limitation of historical method which are as follows
Lack of relevance as it is considered as important characterises of financial reporting which is identified in IASB’s framework. This method is based on past values and due to which reason, it not able to provide applicable data for the future (Ellul, Jotikasthira and Wang, 2015.). However, it is considered as predominately objectives which can be broke in some circumstance.
Some of the alternative methods which can be consider at the place of Historical cost are deprival value method and current cost method (Nykvist and Nilsson, 2015). Deprival value method is known as the method in which asset value is measured. It is considered as actual value which should be paid by
Generally, it is defined as a method of an assets evaluation which build on the basis of assumption. In this value of assets is measured in term of the loss and damage which is hold by assets holder. It means disbenefit which outcome is the outcome of the loss of a purchased assets. It does not undertake historical cost value or fair value (Pereira, Pinto and Martins, 2018).. As it is considered as actual value that has to be pay who further purchase those assets. In this one has to suffer from loss of assets. At the time when anyone want to pay liability then it can be easily repaying through giving the assets with proper justification. For instance, if house is sold with the marked value of 500000 but owner is required to paid 1 crore because of construction. Therefore, at the time when lender buy it then it need to pay deprival value either it can wait for better buyer who can pay high amount. In the business, deprival value cannot be accepting in respect to calculate the value of assets (Whittington, 2015). At the time when company sell its assets then it need to consider market value or historical value. There are some criticism with deprival value that it is more complex as compared to other measurement bases. Further the use of this also increase the values which are different from market values. It is also point out that calculation of value in use is tough and may be subjective.
Current cost method
It is accounting method for assets use in which production has been calculated on the basis of current price and using historical cost as well. In this regard, activities consist in which price consider on the basis of original value (Lu, Guerrero and Vasquez, 2014). Therefore, current cost has been determines in number of ways which includes and applying with specific price index on the basis of book value. In this regard, recording and reporting transactions consist at historical cost which is one of the long-standing principles in the accounting profession. This approach is not considered without its critics so that economy experiences double inflation and process improvement results. Number of alternative approaches also reporting in the financial statement that are proposed and includes current cost accounting. It is also known as the price level method which reflect to the current value of certain assets and liabilities held by the business (Grudinschi, Hallikas and Sintonen, 2015). Objective of this method consider report of the financial assets and liability in the enterprise at fair market value instead of historic cost. For instance, book value of vehicle is £15000 but fair market value closer to the £8000. As results, it can be stated that approach in accounting requirement consider certain class of investment that are owned by the business
It creates several benefits which determines fair market value on all the assets and liabilities which held in the corporation (Ellul, Jotikasthira and Wang, 2015.). Critics of the approach consider that investor analysis have trouble to determine such value which based on the historical cost and replacement cost. Along with this, when assets and liabilities recorded on the balance sheet at fair market value, changes in the value consider which are typically considered in the income statement. This approach believes that it lead to perceive profitability of the enterprise in systematic manner (Grudinschi, Hallikas and Sintonen, 2015). Main aim to implement this method is that identify the best aspect of measurement as alternative source. Therefore, capability helps to develop share capability and borrowing as well. There are different ways exist through current cost method will be apply in the market. For instance, depreciation adjustment, cost of sales adjustment, monetary working capital adjustment, etc. All the elements consider important role to make successful business operations. In this regard, cost of sales will be included to focus on illustrate example in systematic way (Nykvist and Nilsson, 2015. In this way, economic value has been generated to focus on the desired results and attain significant advantages as well.
Main benefit of this method is that actual spending assessed easily. Therefore, actual value of the product and services has been identified. It will help to focus on the planning of effective results that would be undertaken on the basis of effective functions and operations in the business environment (Lu, Guerrero and Vasquez, 2014). For instance, in the Tesco this method has been applied that help to manage historical cost account in systematic way. This is because, in each cost account, stock sold and consumed with the FIFO method. Therefore, it will help to attain more systematic. Hence it can be stated that company can consider historical method as it help in carrying out purchase value yearly which is effective enough as compared to the deprival method.
From the above report it is concluded that there are various method which can be consider by companies in their financial reporting such as current value method, deprival value method, historical value method etc. For any organisation it is important to selected method which is appropriate with the selling of assets so that they may not suffer from loss while selling the assets. It is recommended that company can use historical value method as it is considered as effective method. It is considered as a predominantly objective system because it keeps record of original cost of an item at the time of making purchase.
- Ellul, A., Jotikasthira, C. and Wang, Y., 2015. Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), pp.2489-2538.
- Grudinschi, D., Hallikas, J and Sintonen, S., 2015. Creating value in networks: A value network mapping method for assessing the current and potential value networks in cross-sector collaboration. The Innovation Journal, 20(2), p.2.
- Lu, X., Guerrero, J.M. and Vasquez, J.C., 2014. An improved droop control method for dc microgrids based on low bandwidth communication with dc bus voltage restoration and enhanced current sharing accuracy. IEEE Transactions on Power Electronics, 29(4), pp.1800-1812.
- Nykvist, B. and Nilsson, M., 2015. Rapidly falling costs of battery packs for electric vehicles. nature climate change, 5(4), p.329.
- Pereira, M.A., Pinto, A.E. and Martins, E., 2018. Deprival value: análise da utilidade da informação. Revista Contabilidade & Finanças, 29(76), pp.16-25.
- Whittington, G., 2015. Measurement in Financial Reporting: Half a Century of Research and Practice. Abacus, 51(4), pp.549-571.