Identify the Historical Cost Accounting †MyAssignmenthelp.com

Questions: 1.Identify and describe three (3) alternatives to Historical Cost Accounting (HCA). In your description, outline the underlying assumptions of each alternative and provide examples of how each method could be applied in practice. Critically evaluate whether any of these alternatives represent a viable alternative to historical cost accounting? 2.Identify the main users of accounting referred to within the AASB/IASB conceptual framework. Does the identification of particular users within the conceptual framework have implications for the future of accounting measurement? In your response you will need to consider the implications of the identification of particular users on the use of fair values and historical cost accounting?3. Who does Hines believe has the most to gain from the development of conceptual frameworks? Compare and contrast the views of Hines with the advantages? Answers: 1. Since ages, the record of the books of account was done at the historical cost. It can be regarded as the account that is socially constructed and is inductively developed. It refers to the process in which the costs of transactions are recorded at the price at which it was the purchased (Ellul et al., 2015). Although the historical cost was positive in nature, during the late 70s and early 80s the change in the economic condition and the rise of principle of accounting, the nature of historical cost (HCA) from positive became normative. It represented the cost in which the asset was acquired and ignored its present value. Under the basis ofhistorical cost accounting the liabilities and the assets and are recorded at the values at which it was purchased. In terms of this the entry are made in the balance sheet and the income statements. The main advantages of historical cost (Taplin, Yuan Brown, 2014) it is a straightforward and comprehensive process. However, there is no indication of the current value of the assets and it completely ignores the opportunity cost of the use of the assets. In order to solve the problem and change theaccounting nature to different other normative alternatives are needed to be identified. According to IFRS, the various alternatives ofaccounting other than historical cost are listed below: Current Cost Accounting: The current cost accounting is a normative alternative for the historical cost accounting (Smith Smith, 2014). It is based on the values that are actual and the historical costs that are adjusted are not adjusted. It differentiates the profits from holding and trading gains are differentiated. The profits that are holding can be either realized or unrealized. The Income perspective adopted will determine whether holding gains or losses will be treated as income. The currents cost accounting assumption is that that they take in account the losses and gains as income and capital adjustments. The accounting method of current cost helps in many ways the business; it helps in entitys accurate performance comparison of the and the current state of performance can be evaluated easily with the help of this method (Barker Schulte 2017). However, the cost of replacement may differ that can give rise to high complexity and there can be lack of familiarity. To understand the current cost accounting an example is as follows: Considering a building as been acquired on first of January 2012 at a cost of $1000000 and is 10 years is the useful estimated life. The cost of replacement is $1800000 on first of Jan 2017 and $2000000 on 31st of Jan 2017. Then the current value of depreciation by the current cost method will be calculated by: =$1900000 Fair value accounting: Principle of Fair value accounting is the that has been implemented by the IFRS to standardize the fair value calculation by examining the historical cost. It requires that the fair market value or an estimation of market price be used the present value of the expected cash flow. In the early 1990s it was established but in 2006 was amended. While evaluating the benefits and drawbacks of the fair value accounting, It can be said that it reflects the economic reality and the accurate value of losses are recognized but at times they are subject to high volatility and it may impact the down market accounting (McDonough Shakespeare, 2015). To understand this concept practically by an example, assuming a companys stock sells currently for $20 per share. The company innovated the product, resigned the packing and the product line and made improvements. Even though these changes will not reflect directly on the financial statements of the company, it can improvise the Companys competitive advantage in key markets (Fontes, Panaretou Peasnell, 2018). Considering this, the investors may assume a enhancement in the future cash flow in the and anticipate it to be much forward going. Growth rate can be estimated and calculated by thefair valueof the stock at $50 per share that is $30 more than the current amount Current purchasing power accounting: This method is useful in times of hyperactive inflationary environment. The capital maintenance of finance is measured in units of constant purchasing power in terms of daily index in this technique,. It is fundamentally different from the method of accounting of the historical cost as in historical cost; the capital is maintained in the nominal monetary units (bbott Tan?Kantor, 2017). The process of historical cost that is to maintain the capital at nominal money units is a wrong move as the maintenance if the constant power of purchase that is the real value during inflation and deflation is impossible. In case of accounting of Constant purchasing power, the constant purchasing power of the capital for a period can be automatically maintained and that is indefinite. The advantage of the CPP is that it measures the impact on the entity in terms of the purchasing power shareholder and as it relies on the standard index it is more simple and objective based. However, it does not signify the current values of the assets and the liabilities and the general price index may not be appropriate for all the assets in all the businesses. Moreover, at times the CPP fails to capture the economic substance when there is a divergence in the general movements in price (Polman, Effron Thomas, 2017). For example, if an organization holds a land at $10, 000 at 5% is the recorded rate of inflation then the attuned value of the land may represented as $10,500 and if this land was sold then assumption can be made that the cash received would have the same power of purchasing. Although the value of the land in terms of money has increased there would be no gain or loss recognized. By comparison, $10 in cash held now is still worth $10 in cash 2 years later, but its purchasing power would have declined and this reduction in purchasing power would be recognized in shaping the financial performance of the entity. Therefore, as the historical cost method has become normative in nature it is important to make replacements in the method that is traditional of historical cost to represent the transaction. It can be easily replaced by all these accounting methods, which are more accurate and practical (Whittington, 2016). 2. The project of conceptual framework includes the one of the major undertakings of the international accounting standard board (IASB) that has been framed with an objective to improvise the reporting of finance by providing a set of concepts that are more complete with sound clarity and are updated. It addresses the areas that are not covered by the existing framework, like: Measurement Performance Disclosure Derecognizing Reporting The objective of the conceptual framework includes clarification of the existing framework, such as the various informations that are needed to meet the objectives of the firms and provides a clearer assets and liabilities definition and a sound guidance to support the definition (Sikka, 2015). The two primary users of the financial reporting can be termed as external users and internal users. The internal users include the manager who utilizes the information of accounting for making decisions related to the companys operations. The users who are external refers to the the ones who are not involved with the firms operation but hold some financial interest (Bibauw, Franois Desmet, 2018). They include the investors, lenders, suppliers, employees, creditors, consumer, public in general and the government agencies. Investors and owners: The decision makers needs to provide informations to the stakeholders of the corporation that is to whether to hold, sell or buy the stocks and share, with the help of the financial statements it will be easier to convey the information. Many prospective investors who need information for assessing the potential for the company's success and profitability, takes the help of the financial statements (Jessen et al., 2014). Similarly, the various small business entities need the financial information for determination of whether to continue with the business with that entity or to drop the idea after assessing profitability of the origination. Management: Themangers of the firms whether owners or hired, had to face regularly the economic decisions like the purchase of the suppliers, the portion of liquid cash in hand, the performance analysis and the target attainment. The financial reporting helps to get all these valuable information so that the management can efficiently manage the business and increase the efficiency (Kotl et al., 2017). Moreover, in the small scale businesses, owners may be included in the management. In large-scale organizations, the managers are the agents of the owners. They are hired externally for the taking the responsibility of operating the business. Lenders of the business: The lenders include financial institutions like the banks who are interested in the ability of company to pay the liability upon maturity. Suppliers or Trade creditors: Similar to the lenders of the trade creditors and the various suppliers are interested in the financial reporting of the company, as they need information regarding the companys ability to pay the obligations when it comes to use. In a simpler term, they are interested in the liquidity of the company, which are the obligations that are short term in nature. Government: The states governing bodies like the authorities of the tax are interested in the entities financial informations for the purpose of regulation and tax (Reed, 2014). The taxes of each of the businesses are computed based on result and operations of the company. Therefore, representation of the transactions in the financial report is needed. The state needs to keep themselves updated with the companys performance to determine the amount of tax. Employees Employees of the company are interested in the profitability and stability of the company to determine the capability to pay ability to get their remuneration and provide employee benefits. They may also be interested in its financial position and performance to examine the firms possibilities of expansion security and opportunities of development of career. Clients In times of long-term contract or involvement between the customers, the customers and the company become interested in the ability company to continue its being and maintain stability operation. This purpose is also heightened where the clients depend upon the firm. General Public The general outsiders of the company like the various researchers, students and the analysts are interested in the financial statements for various valuation and research purposes. Users of the financial reporting have a choice between the two measurement of accounting that is the fair value method and the HCA. In spite of the universal adaptation of the FVA as the measurement of accounting, there exists a debate that in many countries due its high volatility, it can result in the financial economic crisis and the historical cost method ignores the present value and considers the past, which is normative in nature. Both have underlying limitations. In this context, there has existing an underlying controversy that analyses the two approaches. It is not only a question but also a judgment on the conceptual framework to adopt for the financial reporting evaluations (Bauer, O'Brien. Saeed, 2014). It can be concluded that according to the nature of the business, the decision is to be taken about what measurement technique should be adapted. 3. As discussed in the above discussion the conceptual framework of financial reporting, is the technique in the accounting theory, which is prepared by a standard setting body like IASB for investigating the practical problems of accounting. They deal the issues of the fundamentals of financial reporting and the many other framework objectives. In other terms, conceptual framework is a theoretical principles statement that guides the financial reporting and accounting (Tracey, 2015). The reason of developing the conceptual framework is that it provides a systematic framework to set the accounting standard and resolve the various accounting disputes. The benefits of the conceptual framework according to the IASB is that the conceptual framework helps in the clarification of the various concepts underlying with the accounting standards and the makers of stands like the IASB to develop accounting standards consistently (Gordon et al., 2015). It also provides a clear understanding in the process of accounting, auditing and the other financial operations. if this approach of standard setting is made clear to the users the determination of the nature and function of the financial information that is to be reported would be much easier. The conceptual framework also acts as a guide for unusual transactions. According to the users of the framework, having a conceptual framework helps to improve the overall credibility of the accounting profession as well. Moreover, the conceptual framework enhances the process of comparing the statements to verify the performance. Therefore, the conceptual framework is a systematic and practical method of reporting in recent times. According to the Standard-setting board and the various bodies of accounting, the conceptual framework projects provides a outlook based on principles that is user-centric, it also offers the most objective approach to the generation of general purpose financial reports (Tracey, 2015). In terms of teleological normative ethics, conceptual framework is totally aligned to ethical universalism. Hines has referred the conceptual framework the body that provides knowledge to the accounting users. She terms the conceptual framework as core knowledge of various accounting practice. It guides all the transactions. She has considered it as a strategic maneuver that provides the legitimacy for setting of standard (Coulson, 2012). 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