Advance Financial Accounting Report: Historical Cost and Fair Value

This report delves into the core concepts of financial accounting, specifically focusing on the measurement of assets and liabilities using historical cost and fair value methods. It defines fair value according to IFRS 13, explaining its application and the factors considered in valuation. The report contrasts this with the historical cost method, detailing its characteristics and limitations. It further examines the challenges and benefits associated with each method, including relevance, accuracy, and simplicity. The report then explores the recognition and valuation of non-financial assets, such as intangibles and PPE, and assesses the stability of these assets across different companies. The report concludes with an opinion on the free choice between historical cost and fair value accounting, providing a comprehensive overview of the subject matter.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
University Name
Student Name
Authors’ Note

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Table of Contents
Measurement concepts in association to Historical cost and Fair value....................................3
Challenges and Benefits of Using Historical Value and Fair Value..........................................5
Recognition of practices of valuation and the non-financial assets: Intangibles and PPE.........9
Assessment whether PPE and intangibles are stable among the three companies...................13
Opinion regarding free choice between historical cost and fair value accounting..................13
References................................................................................................................................15

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Concepts of measurement in relation to Historical cost and Fair value
The concept of fair value is defined by International Financial Reporting Standard
(IFRS) 13 (Warren and Jones 2018). Fair value may be defined as the market value at which
assets is sold or a transfer of liability is done within the market at a particular date. The
measurement of fair value can be done for any kind of liabilities and assets of a company as
per the policy of the company. Whenever the company is following fair market valuation, the
characteristics of the particular assets or liabilities are also taken into consideration as some
times potential buyers and seller also takes such factors into consideration. Some of such
factors can be the condition of the asset, position of the asset and restriction during the sale or
purchase of the asset. Furthermore, the goal that is related to the measurement of the fair
value in both circumstance are similar for projecting the price within which a systematic
transactions that are being taken in the market related to the asset or in scenarios of transfer
of the asset takes place among the market participants during the measurement date within
the current assessment scenario. Specifically, the “IFRS” would be appropriate during the
time when the other “IFRS” permits the enumeration of the fair value or the declarations in
accordance to the measurement of the fair value that has been established on the fair value or
else the declarations in accordance to assessments (ref: paragraph 5 IFRS 13).
As per “Para 16 of the IFRS 13”, measurement of fair value estimates that the
transactions which have taken place are either in the standard market for assets and liabilities
or in the most beneficial market where the liabilities or assets can be sold in the absences of
principle market. More as per para 34 of the standard states the general principles which
company has to follow in case of financial and non-financial liabilities of the business or
even the business’s equity is assumed to be transferred to the potential buyers at the

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measurement date. Therefore it can be concluded that fair market valuations can be done by
any business in accordance with the policies of the company (Henderson et al. 2015).
In order to understand the measurement process under historical cost method, the first
thing which is needed to understand is that the concept of historical costs. Historical costs is a
value measurement concept which is used in accounting in which assets are shown in the
balance sheet at its nominal or original cost at which the company had acquired the asset.
The key business transactions that are recorded in the accounting aspect of a company are
registered at cost. It is seen that historical expense can be recognised by gaining access to the
trade documents or the foundation of the purchase. Additionally, the historical expenditure
has the drawback of not fundamentally imitating the factual fair value of a distinct asset that
can deviate from the acquisition expense of a precise time frame. In accordance to the
accounting standards, the historical cost is in need for various modifications within the advent
of time. Primarily, the historical cost is different from any other sort of costs that are
allocated to a distinct asset that is even known as the cost of replacement or the adjustment of
the inflation expense (Williams 2016). Conversely, the historical cost can be observed to be a
core theme for the purpose of asset registration even though the fair value is substituting the
similar sorts of the assets. The continuing historical cost substitution by the system of the fair
value assessment is established on the argument that the historical cost replicates a
conventional outlook of a company.
Conversely, the selection among the utilisation of the historical cost process and the
fair value method of accounting can be granted to be a vastly debatable matter of worry.
Conversely, the disagreement has been arising during the decade of 1990s. Contrasting to the
most of the standards of accounting, “IFRS” provides a selection among the historical cost
prices and the fair value method of accounting for an assorted assets that are non-financial in
nature. Furthermore, the “IFRS” even asks for the requirement of an ex-ante obligation that

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explains the obligation to any one of the two accounting regulations and policies. Therefore
the managers have a remuneration to answer to the market demands and the pledge to a
distinct accounting treatment that aids in optimising the value of an organization.
Additionally, the fair value accounting process for the variant assets that are non-financial in
nature have the advantage of a developed value preciseness as well as the content of the data,
lowered level of asymmetry of the data and the amplified comparability (Wild 2015). The
statements recommend that then the utilisation of the fair value instead of the historical cost
is not random in most of the cases but only occurs when the benefit is more than the costs.
Challenges and Benefits of Using Historical Value and Fair Value
According to “AASB 116”, the fair value can be regarded as the value in accordance
to which a specific asset can be switched among primarily the parties who are close to the
business transactions and who are even knowledgeable. It is seen in “Paragraph 15 of AAS
116” (Assessment at identification), an entity of plant, machinery and property that
essentially is eligible for the intention of identification and can be regarded as a distinct asset
which can be reckoned at the cost.
“AASB 138” suggests the accounting treatment for numerous assets that are intangible in
nature that are not essentially with specifically in any other kind of accounting standard. In
this aspect, this standard can be implied to the reporting of the entity that has the requirement
to construct fiscal statements according to “Part 2M 3 of the Corporations Act” and this is
necessarily an entity for reporting. As explained in the “AASB 138” standard that is
associated with the intangible assets, the cost is essentially known as the carrying value of
specifically cash and cash counterparts that is paid and is shown as fair value of the other
deliberations that are given in order to gain a distinct asset during the period of procurement.
During the applicability of this standard, the total amount is recognised to the specific asset

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during the time when it is recognised initially according to the specific needs of the other
standards related to accounting. According to “AASB 3”, in scenario, if an asset that is
intangible in nature is gained in a distinct blend of the business, the distinct expense of that
specific intangible asset is essentially seen at the fair value during the acquisition time.
Primarily, the asset fair value that is intangible in nature would be helpful in duplicating the
anticipations of the participants of an economy during the acquisition date in accordance to
the potentiality that the projected future economic benefits that are essentially embarked in a
specific asset that will flow in to the documenting entity (McLaney and Atrill 2014). In
circumstances, if an elusive asset which is purchased in a distinct mix of business can be
aggregated or if it comes from an agreement or from any other aspect of lawful rights then
the sufficient data lives to compute the assets at a fair value. The documenting entity may
look to identify the intangible asset and even permit at the fair value in accordance to the
“AASB 120”. Additionally, in accordance to the framework of cost, that is explained in
“Paragraph 74 of AA 138”, that after clear primary identification, a distinct imperceptible
asset of a body shall be fundamentally be taken at a specific revalued figure that looks to be
at a fair value and is recorded at the date of revaluation after substitution of any sort of
successive accrued amortisation and any upcoming accrued impairment losses.
The basic advantages of Fair value measurement which are associated with all assets and
liabilities of the company are given below in details:
a. Relevant Information: Fair value measurement uses specific information for the
timing and current marketing conditions in the measurement of the value, thus
providing the most relevant information. The method has great value in providing
information and also enables the business to take immediate actions.

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b. Correct Valuations: The method is known to provide more accuracy in comparisons
to other methods. The current market value which the method can display is very
useful for investors to judge whether they are on the right track or not.
c. More information than Historical Cost Method: Fair value method provides more
information in the financial statement of the company as compared to historical cost
method.
The fair value measurement has certain disadvantages which are that the value of the
company of the company fluctuates widely many times during a year. Another disadvantage
which the company faces is in case the company facing losses, in such cases fair value
measurement method is not appropriate as such will be affect by the downward trend of the
company.
In case of Historical cost method the basic advantage which the company has are given
below in details:
a. Simplicity: The concept of historical cost is quite easy to understand and also
implement in the business. The transactions are recorded as per initial amounts and
the company does not need to adjust the financial statements every year in order to
incorporate the changes due to changes in buying behaviour and inflationary effects
as well.
b. Comparability of Financial Statements: The method allows the business to adopt
techniques which can compare the performance of the company with respect to the
competitors of the company.
c. Reliability of Information: The method recognizes the aspects of the financial reports
in association with the original value of the assets and liabilities of the company.

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The main limitation which the company faces is that the method completely ignores
the inflation rates and also the effects of inflation in the business. Another limitation
which the method faces is that the current revenues and the current costs from operations
do not match.
The dimensions of fair value and the process of accounting for the plant, property and
equipment can be regarded to be larger to specifically historical expense established on the
characteristics of primarily estimated value, feedback value, figurative faithfulness,
reliability, timeliness comparability and neutrality. Specifically, verifiability is found to be
only of the qualitative characteristics that is in favour of the historical cost over the fair value
theme.
Conversely, there are advantages of making use of the historical costs for the PPE
(Plant, Property and Equipment) valuation within the balance sheet. It is in such a manner
that the historical cost can be confirmed. In general circumstances, the cost that has been
incurred during the time of buying is registered in numerous treaties, disbursements, taxation
transfers and various others. Particularly, the historical cost of a specific PPE is even
exploited for the intention of determination of the depreciation value that expands and that
have been disclosed on the income statement of the entity. In this essence, the total amount of
depreciation is addressed as a distinct subtraction from the historical cost of the registered
asset on the balance sheet (Hoyle, Schaefer and Doupnik 2015). Conversely, in circumstances
of impairment, there exists assets that may be documented at the value that is lower than the
one that is established on the historical cost. In reality, the utilisation of the historical cost can
be found to be a drawback for the financial assertion users that has the requirement to
understand the present value. The intangible assets may have the requirement to be valued for
several factors.

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It is seen that the process of fair method of accounting has extensive likelihood to be
chosen for specifically the “PPE” than any other sort of assets that are the non-financial in
nature as the property creators that are specifically liquid. The managers have the probability
of incorporating the fair value when it essentially accelerates the computation and assessment
of the performance. In this scenario, the amount changes in the investment property are
generally enlightening of the various operational performance during the time, when the
capital gains are essentially a section of the business framework (Callen 2015). Nonetheless,
the process of fair value undesirably has an impact on the key performance dimensions in
circumstances if the management chooses to hold the diversified assets that are unproductive
in nature.
Recognition of practices of valuation and the non-financial assets: Intangibles and PPE
In this paper, the organization selected in accordance to the “Australian Stock
Exchange” has been Woolworths Limited, the firm chosen in accordance to “London Stock
Exchange” is Tesco Plc and the enterprise that has been selected in accordance to “New York
Stock Exchange” is Alcoa Corporations.
Alcoa Corporations: The financial report that is consolidated in nature for Alcoa
Corporation is constructed essentially according to the fundamentals of accounting that is
normally acknowledged in United States of America which is “GAAP”. This needs the
management to undertake distinct judgments, projections and estimations. Conversely, this
may in certain cases have an impact on the amounts that have been registered for the
liabilities and assets of the body in addition to the declarations on the distinct contingent
liabilities and assets at the date of the financial report.
In Alcoa Corporations, the plants, properties and equipment are recorded at the cost.
Primarily, the depreciation is recorded generally in the straight line process at distinct rates

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established on the estimated asset life. Specifically, for assorted Greenfield assets that
concentrates on the development of numerous innovative assets on numerous lands that are
underdeveloped the various mechanisms of production is exploited in order to record the
depreciation. Therefore, these assets have the requirement for a substantial time period that is
generally one year and above in order to increase the production capability
(Investors.alcoa.com 2018).
“PPE” are assessed with the intention of diminishing in situations there are various
proceedings or else have changes in the scenario of the concerns. This replicates that the
factor of the carrying value of these types of assets or in the asset groups may not be
recovered. It is even seen that the asset recoverability can be determined by the process of
making a comparison of the estimated undiscounted net cash flow operations related to the
asset of the company and even in the group of the asset in the carrying amount of the
company. Furthermore, a loss in impairment can be observed at the time when the carrying
value of the asset and the asset group goes past the estimated undiscounted net cash flows.
Additionally, the amount of the impairment loss that is to be recorded is computed as the
additional carrying value of the asset group or the individual asset over the fair value, with
which the fair value that is determined by exploiting the effective data that is gathered and is
generally a discounted flow of the cash framework. Additionally, the fortitude of the
comprises of the asset group the linked projected undiscounted net cash flow and the
projected economic asset lives even has the requirement of considerable judgments.
With respect to the annual report of Alcoa Corporations, it is explained that the
goodwill is not essentially repaid, and in area of that which is evaluated for annual
impairment and even in more frequent in circumstances if the indicators of the impairment is
existent or else if a distinct decision to exit or sell a company is undertaken. The policies of
accounting explained in the annual report explains that a reasonable amount of the

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management judgment is associated with the method of determination in scenarios, if a
distinct impairment indicator may be inclusive of the worsening of the general economic
scenarios, developments that have been negative in the aspect of equity and even in the credit
market, unfavourable transitions in the economy where the company functions
(Investors.alcoa.com 2018). These parameters are even inclusive of the developments in the
cost of input that essentially have a bad effect on the earnings of the firm along with the cash
flow or a stable pattern of reducing flow of the cash. Impairment examination of the goodwill
in the past years explained that the goodwill of the company is not impaired. The intangible
assets that have limited lives are essentially amortised on the basis of a straight line method
over a specified time frame.
Woolworths Limited: The financial reports that are consolidated for the overall body are
actually the common intention of the financial reports that have essentially been constructed
and presented according to the “Corporations Act 2001” and the “Australian Accounting
Standards” along with “International Financial Reporting Standards and Interpretations”.
In accordance to the annual report of the company, the PPE of the overall group is generally
constructed at the deduction cost accrued depreciation, accrued impairment loss or
amortisation. Specifically, the expense associated to any self-generated assets of the company
consists of the material expenses, direct labour additionally to the percentage of the
overheads. The cost associated with the developmental properties even consists of the cost of
holding, borrowings and development till the asset is comprehensive. The annual financial
declarations of the company even addresses the fact that the PPE are generally assessed in
accordance to the strategy of non-financial asset impairment (Wow2016ar.qreports.com.au
2018). Furthermore, the estimation of effective lives also ask for the requirement of
significant management decisions and are evaluated at least once a year. In accordance to
Woolworths Limited, the PPE deficiency generally relates to the impairment of the property,

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store assets and the distribution centres that are associated to the Home Development
Business.
Additionally, according to the annual report of Woolworths Limited, there has been
an observation that the intangible assets are calculated at cost less distinct accrued
amortisation as well as the losses of impairment. In scenarios, when the intangible assets have
been attained in a distinct business mixture, the distinct expenses indicate that the fair value
specifically at the acquisition date. In addition, the intangible assets of the company having
limited exists are repaid essentially with several limited lives that are have been amortised by
making use of the straight-line process over the projected economic lives.
Tesco Plc: The assessment of their annual report for the accounting year of 2016 explains
that the financial statement of the company are constructed and presented in accordance to
the regulations that have been put forth by the “International Financial Reporting
Standards” that has been incorporated by the “European Union”. The financial declarations
are constructed in accordance to the provisions of the “Corporations Act” in the year 2006
that is worried about the financial statements of the groups and as article 4 of specifically the
regulations of IAS. The assessment of the key accounting principles of the company explains
that the PPE of the organization is essentially undertaken at the cost deducting accrued
depreciation over any recognised impairment amount (Tescoplc.com. 2018). Specifically, the
PPE is depreciated by making use of the straight line process for the computation of the
residual value over the projected economic live. The critical assessment of the annual report
of the firm for the accounting year 2016 even highlights the fact that in case of the non-
financial assets of a company that counts the intangible assets along with the PPE, the group
initiates the examination of impairment within which there are various pointers of specifically
impairment. In scenarios, if these kinds of impairments are existent, the overall recoverable
value of the asset of the organization is projected in a proposition to the extent and level of