Difference Between Historical Cost Accounting and Fair Value Accounting
Basis |
Fair Value Accounting |
Historical Cost Accounting |
---|---|---|
Basis of Valuation |
Fair value accounting values assets and liabilities based on their current market prices or the price they would command in an open market transaction. |
Historical cost accounting values assets and liabilities based on their original acquisition cost. The value is determined at the time of purchase and remains unchanged. |
Relevance |
Fair value accounting is considered more relevant, especially in dynamic markets where asset and liability values can change rapidly. |
Historical cost accounting is considered less relevant in situations where the original cost is significantly different from the current market value. |
Transparency |
Fair value accounting often requires detailed disclosure of the methods and assumptions used to arrive at fair values, promoting transparency in financial reporting |
Historical cost accounting is generally less transparent regarding the current market value of assets and liabilities because it does not provide updated values. |
Volatility |
Fair value accounting can lead to more volatility in financial statements, as the values of assets and liabilities are subject to market fluctuations. |
Historical cost accounting tends to result in less volatility because it relies on original purchase prices, which remain relatively stable over time. |
Complexity and Cost |
Fair value accounting can be more complex and costly to implement, particularly for assets without readily observable market prices. |
Historical cost accounting is generally less complex and less costly because it involves recording assets at their initial acquisition cost. |
Difference between Historical Cost Accounting and Fair Value Accounting
Valuation of assets and liabilities is an important aspect of accounting to prepare financial statements. The two basic methods of accounting are Historical Cost Accounting and Fair Value Accounting. Historical Cost Accounting emphasises recording assets and liabilities at their initial acquisition or incurrence cost, whereas Fair Value Accounting values assets and liabilities at their current market prices.
Table of Content
- What is Historical Cost Accounting?
- What is Fair Value Accounting?
- Difference Between Historical Cost Accounting and Fair Value Accounting