ompare and contrast the use of historical cost and fair value accounting under both U.S. GAAP...
ompare and contrast the use of historical cost and fair value accounting under both U.S. GAAP and IFRS. What are the challenges associated with establishing fair values? How can management address those challenges?
Homework Answers
The cost of asset that is to be shown in the balance sheet can be calculated by two methods.
The first one is called as the Historical cost, in this method the value of asset is shown as the purchase price in the balance sheet. Even if the asset has been purchased very long time ago and May now lose its value.
The second method is the Fair value method, in this case the value is shown in the balance sheet that can be realized if the asset is sold on a particular date. This means that the value of asset is revalued as per the trend in the market.
Comparison
In GAAP
In GAAP no revaluation has been allowed and the value of an asset has to be shown at which the asset has been purchased. This means that the purchase price is the value of asset until the asset has been disposed of.
In IFRS
In IFRS, generally historical cost method is used but IFRS allows the revaluation of intangible assets, property, plant, equipment’s and the investment property are allowed to be revalued at the fair value
Challenges
The main challenge is to how to value the fair market value, should the amount that can be realized is to be considered or a fair value that a price can get is to be considered.
Address such challenges
Market approach, in this type of method the fair value is judged by taking the similar asset that is identical to one that needs to be valued.
Then that price is taken as a fair value that the other similar asset can realize.
Cost approach, in this method that value is taken that need to be expensed if the asset need to be replaced with a new or similar condition asset.
Income approach, the income that is derived from the asset in the future is discounted and that form the fair value of the assets.
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