Foundations in Accounting: Fair Value Accounting vs. Historical Cost Accounting

Running head: FOUNDATIONS IN ACCOUNTING
Foundations in Accounting
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1FOUNDATIONS IN ACCOUNTING
Table of Contents
Introduction......................................................................................................................................2
IFRS Statement of Fair Value Accounting......................................................................................2
Fair Value vs. Historical Cost Accounting......................................................................................3
Advantages and Disadvantages of Fair Value Accounting.............................................................4
Effects on Balance Sheet.................................................................................................................5
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2FOUNDATIONS IN ACCOUNTING
Introduction
The process of Fair Value Accounting (FVA) has been gaining popularity from most of
the accounting standards all over the world for financial reporting. Among them, the
International Financial Reporting Standard (IFRS) has also considered the application of FVA
for the accounting of non-current assets for the Australian Security Exchange (ASX) listed
companies (Zack, 2013). It implies that IFRS has allowed the application of FVA in position of
the use of Historical Cost Accounting (HCA) for the valuation of the non-current assets. It needs
to be mentioned that the main aim of FVA is the development of correct financial statements so
that they can reflect the true financial position of the companies. In this process, difference in
opinion can be seen under the process of FVA and HCA (Christensen & Nikolaev 2013). This
particular report aims at the analysis of the superiority of FVA over HCA for the computation of
the value of non-current assets. Wesfarmers Limited has considered for this report.
IFRS Statement of Fair Value Accounting
The framework of IFRS Framework 13 Fair Value Measurement contains all the
information and details about the factors needed for the successful implementation of fair value
accounting (iasplus.com, 2018). This particular standard puts the accounting obligation on all the
ASX listed companies to use fair value accounting process for measuring the value of their non-
current assets. As per this particular standard, the notion of ‘exit price’ can be used for defining
the aspect of fair value. Under the process of fair value accounting, a market-based measurement
is taken into consideration rather than entity based measurement. Another essential standard in
this aspect is IFRS 5 Non-current Assets Held for Sale and Discontinued Operation as it
provides the direction for the accounting treatment of non-current assets. This particular standard

3FOUNDATIONS IN ACCOUNTING
states that there is no need to charge depreciation on the assets held for sales and their valuation
needs to be done under the basis of fair value accounting after deducting the selling cost
(iasplus.com, 2018). After that, the accountants are required to present them separately in the
financial statements. Lastly, companies are required to follow all the required standards for
separately disclose them.
Fair Value vs. Historical Cost Accounting
Some specific differences can be seen between FVA and HCA. Accountants consider
FVA as the improved version of HCS as FVA does not have the drawbacks that can be seen in
the accounting of HCA (Blankespoor et al., 2013). The most important aspect under FVA is the
initial price paid while buying any assets or liability. For this reason, these initial prices of assets
and liabilities does not have the ability to fluctuate the price in the balance sheet while this
fluctuation can be occurred in case of HCA. The main reason is the consideration of all the
changes in the price of assets and liabilities by the process of FVA. For this reason, under the
process of FVA, the financial statements of the companies reflect the correct financial position of
the businesses (Shalev, Zhang & Zhang, 2013). The whole fact indicates towards the
consideration of the price volatility of the assets and liabilities while HCA does not do it. Thus,
based on the above discussion, it can be said that the accounting process of FVA has superiority
over HCA for not depending on any subjective valuation of assets.