The difference between historical cost and fair value primarily depends on the accounting treatments. Historical cost is understated and obsoleteįair value reflects the prices in line with current market value Historical cost is the original price spent to acquire the asset.įair value is the price at which the asset can be sold in the market.
However, calculating fair value has to be done regularly and is costly and time-consuming. This provides a more reliable value compared to using historical cost. When assets are valued at their fair value, this represents the current price at which they can be sold. Certificate of Deposits (CDs)ĬD is a security issued with a fixed interest rate and a fixed maturity period which can range from 7 days to 1 year. This is typically issued to finance short-term debts of the company. Commercial PaperĬommercial paper is a short-term unsecured debt issued by a company usually with a maturity period ranging from 7 days to 1 year. Treasury bills do not carry interest, however, are issued at a discount to its original value. This is a short-term security issued by the government to fulfil short-term financing needs. Some examples of such securities are, Treasury Bills These are very liquid in nature (can be easily converted into cash through the sale of the security) thus, should be recorded at fair value. Marketable financial instruments are held at fair value. If the company cannot derive at a reasonable fair value, the asset should be valued using the cost model in IAS 16, assuming that the resale value of the property is zero as stated in IAS 16. To practice this method, the fair value should be able to be measured reliably. Considering the above example, ABC Company may decide to record the land and buildings at $450,000 in case the asset is valued at fair value.Īccording to this method, the non-current asset is carried at the fair value less depreciation. ‘Exit price’ is the price at which the asset can be sold off subjected to the market conditions. Accounting treatment for fair value is governed by IFRS 13-fair value measurement. However fair value should be able to be measured reliably to record assets according to this method. All assets that are subjected to market fluctuations have a fair value. This is the price at which a seller and a buyer can enter into a transaction under normal market conditions. However, this does not provide an accurate picture of the value of company assets as they are understated. Historical Cost method of recording assets is less complicated as the original asset value is not subjected to change, resulting in limited price volatility. Under the Historical Cost method, the asset is carried at the net book value (cost less accumulated depreciation)
#Current cost basis of measurement professional
Historical cost and fair value are two key methods of recording non-current assets and financial instruments.
Key Difference – Historical Cost vs Fair Value
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