(b) Discuss the view that fair value is a more relevant measure to use in corporate reporting than historical cost.(12 marks)
(b) Discuss the view that fair value is a more relevant measure to use in corporate reporting than historical cost.
正确答案： (b) The main disagreement over a shift to fair value measurement is the debate over relevance versus reliability. It is argued that historical cost financial statements are not relevant because they do not provide information about current exchange values for the entity’s assets which to some extent determine the value of the shares of the entity. However, the information provided by fair values may be unreliable because it may not be based on arm’s-length transactions. Proponents of fair value accounting argue that this measurement is more relevant to decision makers even if it is less reliable and would produce balance sheets that are more representative of a company’s value. However it can be argued that relevant information that is unreliable is of no use to an investor. One advantage of historical cost financial information is that it produces earnings numbers that are not based on appraisals or other valuation techniques. Therefore, the income statement is less likely to be subject to manipulation by management. In addition, historical cost balance sheet figures comprise actual purchase prices, not estimates of current values that can be altered to improve various financial ratios. Because historical cost statements rely less on estimates and more on ‘hard’ numbers, it can be said that historical cost financial statements are more reliable than fair value financial statements. Furthermore, fair value measurements may be less reliable than historical costs measures because fair value accounting provides management with the opportunity to manipulate the reported profit for the period. Developing reliable methods of measuring fair value so that investors trust the information reported in financial statements is critical. Fair value measurement could be said to be more relevant than historical cost as it is based on market values and not entity specific measurement on initial recognition, so long as fair values can be reliably measured. Generally the fair value of the consideration given or received (effectively historical cost) also represents the fair value of the item at the date of initial recognition. However there are many cases where significant differences between historical cost and fair value can arise on initial recognition. Historical cost does not purport to measure the value received. It cannot be assumed that the price paid can be recovered in the market place. Hence the need for some additional measure of recoverable value and impairment testing of assets. Historical cost can be an entity specific measurement. The recorded historical cost can be lower or higher than its fair value. For example the valuation of inventory is determined by the costing method adopted by the entity and this can vary from entity to entity. Historical cost often requires the allocation of costs to an asset or liability. These costs are attributed to assets, liabilities and expenses, and are often allocated arbitrarily. An example of this is self constructed assets. Rules set out in accounting standards help produce some consistency of historical cost measurements but such rules cannot improve representational faithfulness. Another problem with historical cost arises as regards costs incurred prior to an asset being recognised. Historical costs recorded from development expenditure cannot be capitalised if they are incurred prior to the asset meeting the recognition criteria in IAS38 ‘Intangible Assets’. Thus the historical cost amount does not represent the fair value of the consideration given to create the asset. The relevance of historical cost has traditionally been based on a cost/revenue matching principle. The objective has been to expense the cost of the asset when the revenue to which the asset has contributed is recognised. If the historical cost of the asset differs from its fair value on initial recognition then the matching process in future periods becomes arbitrary. The measurement of assets at fair value will enhance the matching objective. Historical cost may have use in predicting future net reported income but does not have any necessary implications for future cash flows. Fair value does embody the market’s expectations for those future cash flows. However, historical cost is grounded in actual transaction amounts and has existed for many years to the extent that it is supported by practical experience and familiarity. Historical cost is accepted as a reliable measure especially where no other relevant measurement basis can be applied.
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