Question

A first-time shareholder has approached you requesting some advice. The shareholder has received the company’s annual report and noticed the following statement in the summary of significant accounting policies:

     ‘The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets which is explained in the notes.’

Required

Explain to the shareholder why this statement is included in the accounting policy note.

Answer 1

This statement is included in the accounting policy note to inform and explain the valuation basis of the company’s balance sheet. Historical cost basis means that assets of the company are recorded at its original cost at which the assets were acquired. This statement lays out the basic accounting principle as per GAAP (generally accepted accounting principles) that the company uses.

This statement serves the purpose of informing the users of the financial statements (like shareholders, investors, etc.) the basis or the method that the company uses to report its assets. While all assets are reported using historical cost as basis some of the company’s non-current assets have to be revalued and hence they do not use historical cost as the basis.

As such this statement is providing clarity and explaining the company’s accounting policies being used in preparation of the financial reports and valuing the assets. This statement will provide a better perspective and a clearer context to users of financial statements which includes shareholders like you.