Historical Cost versus Fair Value Accounting: PPE and Intangibles

This report delves into the debate between historical cost and fair value accounting methods for non-financial assets, focusing on plant, property, and equipment (PPE) and intangible assets. It explains the measurement concepts of both methods, evaluating their benefits and challenges, such as timeliness, comparability, and potential for manipulation. The report analyzes the valuation policies of three companies—BHP Billiton, Anglesey Mining, and Hudbay Minerals—listed on different stock exchanges, comparing their approaches to PPE and intangible asset valuation based on their financial reports. The analysis includes a discussion of the consistency of valuation practices and concludes with an opinion on the free choice between historical cost and fair value accounting, providing a comprehensive overview of the practical application and implications of each method.

Running head: HISTORICAL COST VERSUS FAIR VALUE ACCOUNTING
Historical cost versus fair value accounting
Name of the University
Name of the Student
Authors Note

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Table of Contents
Executive summary:...................................................................................................................2
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................4
Explanation of the measurement concepts in relation to historical cost and fair value
accounting:.................................................................................................................................4
Evaluate the benefits and challenges of using historical cost and fair value accounting for
PPE and intangibles:..................................................................................................................5
Valuation policies of non-financial assets groups of three listed companies:...........................7
Analysis of consistency of valuation practices across three companies:.................................11
Framing an opinion on the free choice between historical cost and fair value accounting for
PPE and intangibles:................................................................................................................12
Conclusion:..............................................................................................................................13
References list:.........................................................................................................................14

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Executive summary:
The report is prepared to demonstrate the accounting method that is used for non financial
assets by three different organizations listed on different stock exchanges. Analysis has been
done regarding the concepts of fair value and historical accounting method practices by
organizations in valuing their intangible assets and plant, property and equipment. Three
companies that selected are BHP billion limited listed on ASX, Hudbay minerals listed on
NSX and Anglesey limited listed on LSE. Evaluation of their accounting method in valuating
non financial assets is by analyzing their respective financial report.

3HISTORICAL COST VERSUS FAIR VALUE ACCOUNTING
Introduction:
The report is prepared to conduct a detailed analysis of given research topic that is
“Historical cost versus fair value of accounting for non-financial assets”. It has been
ascertained that there is an ongoing debate between these two methods of accounting by
reviewing literature. Free choice between historical accounting and fair value accounting
have been debated and mandating any particular method is considered from one perspective
and do not considering the perspective of users of financial statements. Report has
demonstrated the explanation of measurement concepts of both the accounting method for
valuing non-financial assets. Challenges and benefits of using one particular accounting
method have also been explained.
Concerning the explanation of practical valuation practices of these two methods of
accounting, three companies from three different stock exchanges have been selected. Three
companies that are selected are BHP Billiton Limited from Australian stock exchange,
Anglesey Mineral limited from London stock exchange and Hudbay Minerals from New
York stock exchange. All these three companies operate in mineral and exploration. BHP
Billiton limited is an Australian multinational, mining and petroleum based public company
having headquarter in Melbourne (bhp.com 2018). Anglesey limited is a mining company
that is based on United Kingdom and has direct shipping deposits of iron ore in Quebec and
Labrador (angleseymining.co.uk 2018). Hudbay Mining Corporation is a mining company
that is based in Canada and has been exploring and mining for over eighty years in Manitoba
(Hudbayminerals.com 2018).

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Discussion:
Explanation of the measurement concepts in relation to historical cost and fair value
accounting:
A fair value disclosure or measurement is permitted by IFRS 13 Fair value
measurement and the reporting entities are provided a single platform for making disclosure
about their fair value measurement. Fair value under this standard is defined as the basis of
notion of exit price and makes use of fair value hierarchy that provides a measurement that is
market based rather than entity based. Estimating the price for executing an orderly
transactions to transfer the liabilities or sell the assets between market participants at the
under the present market conditions is the objective of fair value measurement. Reporting
entities are required to determine the valuation premise for non-financial assets that is
regarded as appropriate for measurement. The measurement of fair value of an item of plant,
equipment and property is done at its existing or current use when the economic benefits of
such assets available to market participants cannot be accessed (Allee et al. 2015). When
there is availability of sufficient data for measuring the fair value so that it helps in
minimization of observable inputs use and maximizes the use of relevant observable inputs,
the entity should use valuation techniques.
Now, historical cost accounting can be seen as a measurement basis used in
accounting under which the price of assets is based on original cost or nominal price. The
measurement of historical cost accounting is drawn from the initial cost that is incurred on
item. Information those are prepared based on historical costing are relevant to organizations
for some purpose. This method of accounting seems inferior to fair value accounting as
described in the conceptual framework of financial accounting reporting standard. The
interpretation of historical cost accounting is done in a way in terms of assets price should not

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be more than recoverable amount from its selling and usage. Recoverable amount is regarded
as higher of the value in use and realizable value of assets. Recognition of gain under this
method of accounting is realisable when increase in value of assets is more than the amount
of historical cost. There can be reliable measurement of historical cost that can be identified
from the transactions of actual prices. It can be explained with the help of an instance,
purchase price of items of stock can be identified on clear basis and there can be objective
measurement of amount owed to the business and amount received. Fair value accounting for
non-financial assets provides with the benefits of increased content of information and
relevance of value. On the reliability dimensions, fair value is likely to be dominated by
historical cost. Opportunity cost of investment is reflected by the historical cost accounting
method. Classification of organization in the application of historical cost is done if there is
recognition of one asset class at historical costs. It has been ascertained from research that
fair value accounting is used by 5% of companies that are operating in UK while for one
asset class within the group, all companies are using historical cost basis (DeFond et al.
2014).
Evaluate the benefits and challenges of using historical cost and fair value accounting
for PPE and intangibles:
Benefits of historical cost and fair value accounting:
Timeliness:
Timeliness is one of the benefits that arise from the fair value accounting that are used
for the valuation of non-financial assets. Any reporting change in plant, equipment and
property fair value has the potential of providing timely to interest users of financial
statements such as investors and creditors. The information relating to the valuation of such
assets is considered reliable. For determining the fair value of assets, investors requires

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current appraisal of non-financial assets. Current changes in the plant, equipment and
property under the fair value method also provided information to other users of financial
statement (Chabrak 2016). On other hand, the capacity of influencing decisions is also
provided by historical cost as long as the fair value is reasonably estimated by book value of
assets. However, the capacity of influencing user’s decision influenced under this method of
accounting because of existence of deviation of fair value from book value.
Comparability:
Comparability of information in different reporting time is enhanced using fair value
method and on other hand, comparability can be hindered by the measurement of historical
cost basis. This is because latter fails to make the identification similarities between similar
items. One of the important implications regarding comparability is the issue of allowing
versus plant, equipment and property revaluations. Under the convergence model of plant,
equipment and property, revaluations concerning such non-financial assets will continue to
exist (Cascino and Gassen 2015).
Enhanced information disclosure:
Since under the fair value accounting, valuations of assets are done at their current
market value, it helps in capturing the present value of future cash flows associated with such
assets. As opposed to historical cost method, fair value helps in enhancement of informative
power of financial report. Organizations are required to make an extensive discourse about
the assumptions that are made, risk exposure, methodology used, any issues and related
sensitivities leading to thorough financial statements (Christensen et al. 2015).
Challenges of fair value accounting and historical accounting:
Creation of large swings of value:

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Fair value accounting does not benefits some type of business and such business are
those that have their assets always fluctuating by large amount throughout the year. There can
be creation of misleading gains and loss for assets due to volatility in assets that do not reflect
actual value. The changes in level of pricing are not taken into consideration under historical
cost accounting and hence change in money value is not reflected. Consequently, it fails to
give actual picture of statement of affairs of company.
Manipulation:
Estimates made about non-financial assets can come with risks because of the
possibility that reporting entity will make any manipulation it their assets pricing. This would
influence both quoted and traded prices and hence in this regarded, historical cost is
considered better. Under historical costing, the income statement does not reveal true profits
and there is a probability that profits would be overstated during inflation period.
Misleading information:
It is certainly possible that the fundamental value of assets will not be indicative by
observed value of assets that are used under fair value accounting. Not all the publicly
available information might be reflected in the formation of estimates as market has the
probability of being inefficient. In this regard, historical costing method would be considered
suitable. Market deviation can also be caused due to other factors such as behavioural bias,
irrationality and prevalence of arbitrage (Whittington 2014).
Valuation policies of non-financial assets groups of three listed companies:
In this particular section, there companies have been selected from the three different
stock exchange that is Australian stock exchange, London stock exchange and New York
stock exchange for the evaluation of valuation policies of intangibles and PPE. These

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companies are BHP Billiton limited, Anglesey mining and Hudbay minerals limited.
BHP Billiton has not adopted the standard in relation to measurement of PPE and
intangible assets that is IAS 138 Intangible assets and IAS 16 property, plant and equipment.
The valuation of plant, property and equipment is done at cost by deducting
impairment charges and accumulated depreciation. Cost that is considered here is the fair
value in relation to asset acquisition at the time of construction and acquisition. It also
incorporates the direct costs that are required for bringing the assets to location. In relation to
certain items of plant, property and equipment, there are certain finance leased liabilities that
are recognized initially at fair value. Therefore, it can be said that the valuation of PPE of
BHP Billiton is done at historical costs (Tran and Zhu 2017).

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The difference between fair value of intangible assets and acquisition of contingent
liabilities is the value of goodwill. There is immediate recognition of the difference between
the considerations of fair value of net acquired assets. Intangible assets having finite lives
such as licences and software’s are carried at fair value of consideration paid in the statement
of financial position by deducting impairment charges and accumulated amortization
(bhp.com 2018).
It has been ascertained from the annual report of Anglesey minerals that the group has
not adopted new accounting standards and implementations. However, the group have not
applied the standard such as IAS 138 intangible assets and IAS 16 property, plant and
equipment and they are issued and applicable for organization. However, they are not yet
effective (angleseymining.co.uk 2018).

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From the analysis of financial report of Anglesey mining listed on LSE, it can be
inferred that valuation of plant, equipment and property in the balance sheet is doe at costs.
There is annual reviewing of carrying value of assets for evaluating that recoverable amount
is exceeding impairment value that are charged in the income statement immediately. The
measurement of intangible assets is done at historical cost by deducting impairment provision
and accumulated amortisation. Recognition of development expenditure is done immediately
when the organization is not recognizing any internally generated intangible assets (Picker et
al. 2016).
From the above table derived from annual report of Anglesey minerals, it can be seen
that PPE are measured at historical costs.
The standard that has been applied by organization in relation to non-financial assets

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are IAS 138, Intangible assets and IAS 16, plant, property and equipment. It has been
ascertained from the analysis of annual report of Hudbay minerals that items of PPE is
measured by group at cost by deducting any impairment losses that are accumulated over
years and accumulated depreciation (Hudbayminerals.com 2018). However, the initial costs
incurred on such assets does not incorporate cost of construction, price of purchasing, any
direct costs, non refundable purchase taxes and import duties.
Intangible asset of Hudbay involves computer software that is measured at historical
costs by deducting accumulated loss related to impairment and accumulated amortization.
Such costs involve all the costs that are directly attributable and are necessary of creating and
producing the assets (Berker 2015).
Analysis of consistency of valuation practices across three companies:
From the above discussion regarding the accounting policies of valuation of non-
financial assets of selected companies, it can be said that there was much consistencies
between them as there existed difference between the measurements of accounting. BHP
Billiton did not mention the adoption of international standard relating to plant, property and
equipment and intangible assets. While, Anglesey minerals have not applied the concerned
standard relating to the adoption of standard. Hudbay minerals on other hand have made the
new amended standard for intangible assets and PPE applicable in the financial year 2016.