Historical Cost Versus Fair Value Essay


Discuss about the Historical Cost Versus Fair Value Accounting.



This study deals with researching on a topic named as “Historical cost versus fair value accounting especially for non-financial assets” (Weil, Schipper and Francis 2013). In this particular assignment, emphasis will be given on understanding the choice linking fair value as well as historical cost secretarial as it is widely used debated issues in the secretarial journalism. Addition to that, International Financial Reporting Standards provide free choice connecting fair value as well as historical cost secretarial especially for use of non-financial possessions in case of PPE (Property, Plant and Equipment). These valuations are conducted for understanding the variation in the assessment practices used for PPE as well as intangible possessions. In this assignment, three companies are selected for analyzing their use of valuation method whether they use fair value accounting or historical value accounting. Selected companies are Wesfarmers Limited (listed in Australian Stock Exchange), Tesco Multinational Corporation (listed in London Stock Exchange) and Accenture (listed in New York Stock Exchange). The current segment explains the treatment of non-financial property such as Property, Plant and Equipment by using whichever fair value method or past cost method. From the past decade, it has been noted that accounting profession witness an unprecedented of either harmonization or convergence process in related to IASB Models (Waegenaere, Sansing and Wielhouwer 2015). This is one of the processes that will help in facilitating the comparison of financial information in and among the firm in various jurisdictions by making use of similar regulatory framework.

Justification for using dimension concepts in relation to historical expenditure and fair value accounting

The choice connecting fair value as well as historical cost secretarial is one of the controversial issues present in the secretarial text (Reimers 2014). IFRS 13 define fair value measurement and sets out in a distinct IFRS structure for measuring the same. It majorly requires disclosure regarding fair value measurements. IFRS 13 is applicable when another IFRS permits for measuring the fair value disclosures regarding fair value measurements like fair value less cost to sell. This includes the share-based payments dealings contained by the limits of IFRS 2. Addition to that, IAS 17 Leases takes into consideration leasing transactions (Ramanna 2013).

In accordance with IASB Framework, the major objective of fair value measurement means estimating the price whereby orderly transactions sells or transfers the liability by the market participants (Pratt 2013). Fair value measurement means an entity for determining the following criteria as under:

  • It include the particular asset or liability that is subjective to measurement in its unit of account (Macve 2015)
  • It include non-financial asset whereby there is valuation premises acting appropriate for measurement bases (Hoskin, Fizzell and Cherry 2014)
  • It is the principal market especially for asset or in that case liability (Horngren et al. 2013)
  • It means the valuation techniques used for measurement with the available data by developing inputs by representing assumption. Addition to that, market participants who uses pricing techniques for measuring the asset or liability in a fair value hierarchy (Hoggett et al. 2014).

Historical cost accounting, on the other hand, it include the interest capitalization issues places in a broader perspectives for addressing within the context of overarching fair value measurement objectives. This cost accounting in that case for capitalization of interest at market rate of return as considered by standard setters (Henderson et al. 2015).

Firstly, IFRS establishes free choice linking fair value as well as historical expenditure secretarial especially for non-financial resources unlike other secretarial principles (Harrison et al. 2014). In addition, present setting explains that IFRS requires exante obligation from one or two accounting policies. This exante remains in the management interest for limiting the scope for prospect opportunistic events such as earnings administration. Managers should have stronger incentive for responding to marketplace demands as well as commit towards accounting treatment for value maximization of firm. Considering the command or advantage side, fair worth secretarial considered to be superior on comparing with historical cost accounting in accordance to Financial Accounting Standards Board (Edwards 2013).

As rightly put forward by Gassen (2014), adoption of IFRS is linked with slight move towards fair value secretarial especially for non-financial possessions and constraint under historical cost secretarial under Generally Accepted Accounting Principles. There are several cross-sectional predictions that focus majorly on cost-benefit tradeoffs connecting given assessment practice. It is expected in considering attributes such as local economic, governance as well as legal institutions influencing the market solution in the most appropriate way (Deegan 2013).

Fair value secretarial is more preferable for selecting possessions than other non-financial resources (Deegan and Ward 2013). Managers adopt fair value for facilitating performance measurement whereby value changes especially in asset property. It is expected that use of fair worth at real land for holding speculation possessions. In other words, Fair worth negatively affects the key presentation events such as return on assets whereby management selects for holding unproductive assets. Evidence supports market supply cost as well as demand factors influencing the choice of fair value in comparing it with historical cost accounting (Christensen, Baker and Cottrell 2014).

As rightly put forward by Deegan (2013), it is argued that fair value secretarial is used for accounting non-financial possessions like augmented value significance as well as information oriented. This is one of the benefits for using fair value accounting into proper course of action. Findings shows that use of fair value is not random as well as occur when benefits outweighs the potential costs. Some of the evidence suggests enormous preponderance of managers for understanding the net reimbursement for use of fair value accounting (Cascino et al. 2016).

Fair Value dimension is conducted on the foundation of being more specific for decision makers of monetary statement (Callen 2015). It is argued that fair value improves transparency as well as comparability and appropriateness of gaining secretarial information. Benefits of fair value accounting takes into consideration advantage revaluations for finding out fair value posses for gaining superior relevance

Evaluating the advantages and challenges by means of using historical cost and fair value secretarial for PPE intangibles

Fair Value Accounting

IAS 16 explains PPE (Property, Plant and Equipment used for Small and Medium sized enterprises that fails in permitting use of a model for PPE (Bradshaw et al. 2013). There is less fair value measurement used for SMEs. This initial measurement include costs such as purchase costs after trade discounts for gaining settlement discount used for early cash payments. In fair value accounting, items of PPE should be recognized as assets whereby it is likely that prospect financial reimbursement in association with benefit run of business entity. This particular recognition principle is applied to PPE costs for acquisition or constructing item of PPE costs. One of the benefits of fair value accounting is providing accurate valuation of PPE intangibles and other assets (Bevis 2013). This particular method of accounting help in providing more accuracy for current valuation of assets as well as liabilities

Fair Value Accounting provides dimension of true profits. Addition to that, there is less of an chance for manipulating secretarial information by making use of fair value approach as far as possible (Bazley et al. 2013). Fair Value Accounting is more agreed upon use of standard of accounting whereby historical cost accounting provides inaccurate data. It is the far value accounting that tracks all types of assets starting from equipments to buildings as well as land. This reveals the fact that Fair Value Accounting provides a method used for survival in a difficult economy. In that case, fair value accounting aims at allowing ways for asset deductions in and within the market (Waegenaere, Sansing and Wielhouwer 2015).

Historical Cost Accounting

Historical Cost Accounting has several benefits that are used for accounting PPE intangibles (Weil, Schipper and Francis 2013). This method had undergone criticism for given period as it takes into consideration acquisition cost of assets as well as fails in recognizing the current market value. Historical cost accounting is objective in nature that majorly records original cost of an item for making the final purchase (Hoskin, Fizzell and Cherry 2014). This particular cost accounting has no room for handling as well as information supported by self-governing documentary confirmation like statement, cheque stump as well as statement and receipt. This accounting method help in recording the transactions for gaining fewer objectives as the amount is being recorded as well as depends upon individual point of view at the same time (Waegenaere, Sansing and Wielhouwer 2015).

On comparing between different accounting method, historical cost is easier as well as cheaper way of assessment. It depends upon original cost that is already existed as well as cannot amend for determining factors. Addition to that, it requires less estimation especially for accountants for recording data as well as easier for auditor for inspection purpose. This historical cost accounting method is extremely reliable as examined under IASB Framework (Weil, Schipper and Francis 2013).

Recognition of estimation activities in relation to the utilize of historical cost and fair value secretarial

Wesfarmers Limited

Wesfarmers Limited is one of the Australian-listed retail company listed in Australian Stock Exchange (ASX) (Wesfarmers.com.au 2017). This company uses fair value method of accounting for valuing its non-financial assets such as Property, Plant and Equipment. PPE is affirmed at cost less accumulates reduction as well as any other accumulated impairment losses. Wesfarmers Limited includes the price for replacing the parts that seems to be eligible used for capitalization at replacing the unit cost. This major inspection is formed by recognizing the cost concerning payables from the taxation authority (Wesfarmers.com.au 2017). This retail organization uses straight line method for calculating depreciation for 4 to 40 years (useful life of an asset) for Plant and Equipment.

Tesco Multinational Corporation

Tesco Multinational Corporation is one the retail organization that is listed in London Stock Exchange (Tesco plc 2017). This retail company treats all their non-financial assets such as PPE by performing impairment testing as proper indicator of impairment. This existence of indicators involves the recoverable amount of assets for determining the extent of impairment loss. When a particular asset fails in generating cash flows, then these are considered independent than other possessions. This company estimates the recoverable quantity for cash-generating units for assets. This recoverable amount is considerable higher after comparing it with fair value after deducting costs for selling as well as value in use (Tesco plc 2017). In that case, recoverable amount of an assets are majorly estimated to be quite less than its carrying amount as mentioned the Income Statement.


Accenture had excellent fiscal year for the year 2015 that reflects successful execution of strategy in and across the world. This is company based in Ireland as well as listed in New York Stock Exchange (Accenture.com 2017). They treat PPE intangibles by considering free cash flow amounting to $ 3.7 Billion as well as PPE amounting to $ 395 Million. This company makes strategies in and across dimensions for the business as well as investments for reaching new and high growth areas. They aim at delivering business with strong revenue growth for outpacing the market condition. This means generating strong new bookings as well as grew earnings per share for delivering strong free cash flows. This enables return of substantial cash to potential shareholders for continue making significant investment in business (Accenture.com 2017).

Analyzing the valuation practices for PPE and intangibles: Wesfarmers Limited

Valuation practices used by Wesfarmers Limited are consistent in nature as they proceeds from the sale of PPE amounting to $ 358 Million (Wesfarmers.com.au 2017). This resulted in net capital expenditure amounting to $ 456 Million for the previous years. This retail property majorly makes the disposals for accelerating for given year in treating non-financial assets such as Property, Plant and Equipment. In the balance sheet of Wesfarmers Limited, it has been seen that the valuation of PPE remained consistent because capital expenditure was offset by major disposals as well as depreciation (Wesfarmers.com.au 2017). It has been mentioned previously that working capital finishes because of increased inventories in relation with store network growth. The valuation of non-financial assets such as PPE is measured by way of viewing at the cost of an asset after deducting depreciation as well as impairment. This means the cost of asset takes into consideration cost of replacing parts that are sued for capitalization as well as cost of major inspections (Waegenaere, Sansing and Wielhouwer 2015).

Tesco Multinational Corporation

From the accounting policy section, it has been noted that Tesco held 17900 Million Euros for treating PPE intangibles in consistent form for the year 2016. In Tesco, the Group performed impairment testing for treating the non-financial assets such as Property, Plant and Equipment (Tesco plc 2017). This particular company exorcizes over judging the ways for determining the useful lives as well as residual values of non-financial assets such as PPE intangibles. These assets are mainly depreciate from their remaining values for a estimated useful lives. They even exercises for judgment for determining the required classification of shopping malls considered as investment properties or non-financial assets. There are several factors that needs to be considered for making the determination such as level of services rendered by tenants, property of sublet space acting as a variation in the earning management (Tesco plc 2017). Free cash flow is considered as the net money generated from the in service behavior after deducting from capital spending especially on non-financial assets such as PPE intangibles.


On analysis, it had been found that Accenture has consistent treatment for valuing their non-financial assets such as Property, Plant and Equipment. Accenture Plc PPE gross hugely declined from 2014 to 2015 and then increases from 2015 to 2016 (Accenture.com 2017). This means carrying amount taken from the balance sheet for valuation of long-lasting physical possessions used for usual behavior of commerce as well as not future for resale activities. This takes into consideration land, equipment, computer equipment as well as furniture and vehicles. These are the amount that is excluded from depreciation (Hoskin, Fizzell and Cherry 2014). Tangible assets, on the other hand, are held by business unit for making use especially in case of manufacture of goods as well as services. It is expected that the company uses or provides economic benefits for more than a year from net accumulated depreciation (Accenture.com 2017). This takes into consideration land as well as production equipment as well as buildings at the same time.

Free option connecting historical cost and fair value accounting for PPE and intangibles

The choice linking fair value as well as historical cost accounting is the subject for very old argument in and among secretarial academic as well as regulator (Weil, Schipper and Francis 2013). There should be free choice connecting historical cost and fair value secretarial especially for PPE (Property, Plant and Equipment) and intangibles. Further tests signifies that the option for using fair worth varying largely with its financial costs as well as reimbursement. It remains consistent whereby it is found that there are institutional differences as important determinants for selection of fair value. The other predictions are made whereby manager’s uses fair value for obtaining reliable estimates are consistently low. Fair value expects for facilitation of performance measurement. Most of the business firms hold investment property whereby fair choice is associate and considered as primary activity (Hoskin, Fizzell and Cherry 2014). It shows some confirmation whereby company with lower speculation opportunity by using fair worth techniques. It is predicted that reliance on debt financing in association for use of fair value taking into consideration asset property and PPE intangibles. This verdict shows robustness as well as holds well while measuring the dependence on liability by leveraging the incidence of debt market assessment. This indicates that market supply as well as command factor pressure the alternative of fair value in opposition to historical cost secretarial. This means historical price is far more leading in nature that attributes secretarial practices while marketplace forces decide the outcome of the option.

It is argued that fair value secretarial used by way of documenting a marketplace explanation by selection connecting historical cost as well as fair worth especially for non-financial possessions (Waegenaere, Sansing and Wielhouwer 2015). This help in considerate the marketplace explanation by providing input into regulators choice making procedure. This reveals that marketplace solution are offered by bringing efficient welfare solutions in case of any kind of possible market failures. Firstly, management choice needs to be exercised after considering principles of free exchange as well as absence of externalities such as correction on part of auditors or in that case industry organization. Secondly, in case free markets fails in conducting discipline management by promoting the interest of outside investors such as government failures or the presence of information asymmetry (Hoskin, Fizzell and Cherry 2014). Managers select accounting practices from their private sources of interest activities. There are two additional features for setting opportunism for considering the IFRS requirements for pre-committing of either fair value accounting or historical price. It takes into consideration nonexistence of information irregularity connecting principal or investor as well as agent or organization in admiration to agent’s events such as selection of accounting practices (Weil, Schipper and Francis 2013).


From the above analysis, it has been noted that measurements concepts are widely used by companies in accordance to IASB Framework and IFRS 13. Companies either use fair value accounting or historical cost accounting for evaluating their non-financial assets such as PPE and other intangibles. The above discussion clearly explains the concept of fair value accounting as well as historical cost accounting as a measurement bases. It also takes into consideration various benefits as well as challenges by making use of historical cost accounting as well as fair value accounting especially for non-financial assets like PPE intangibles. The above-mentioned companies (Wesfarmers, Tesco and Accenture) use fair value accounting as a measurement bases for making effective valuation practices. In the last part, it is recommended that there should be free choice of selecting either fair value accounting or historical cost accounting for making the valuation of non-financial assets such as PPE and intangibles.


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