Analysis of Historical Cost Accounting †MyAssignmenthelp.com

Question: Discuss about theAnalysis of Historical Cost Accounting. Answer: Critical analysis Historical cost accounting and the fair value system of accounting are the two accounting principles which are used to evaluate and record the price of assets. Historical cost is based on the original value of the asset while the fair value accounting system is based on the current price of the asset (Easton and Zhang 2016). In this scenario, the change in accounting principle will cause the carry cost of the land and building to decrease. This is because of the fact that initially the healthcare was following the fair value method of accounting where the present value of the asset is taken into consideration. However, when the organization shifted from the mark to market method to the historical value method the carry value or the book value of the land and building will decrease as it takes the original price of the land in the balance sheet (Watts and Zuo 2016.). Therefore, when the historical accounting principle was implemented the value of the land and building during the purch ase is taken into account. According to me, the decision taken by the company was wrong as even though the historical method is easy to calculate it wont show the current valuation of the land. However, the mark to market methods gives us the exact valuation of the assets. The carry value of the land was bound to decrease as the it will show the original price of the land at the time of purchase. However, I do not agree with the decision of the Director of Regis Healthcare as fair value pricing has taken over from the historical method and is more advanced technique. However, the drawback of the technique was exposed during the financial crisis of 2008 which showed that too much fluctuation in the prices of the assets will lead to inaccurate accounting. However, in this scenario there is nowhere mentioned that there is fluctuation in the market so I feel the organization should have used the fair value method of accounting. References Easton, P.D. and Zhang, X.J., 2016. Mixing Fair-Value and Historical-Cost Accounting: Predictable Other-Comprehensive-Income and Mispricing of Bank Stocks. Watts, R.L. and Zuo, L., 2016. Understanding practice and institutions: A historical perspective.Accounting Horizons,30(3), pp.409-423.