Historical cost accounting has been and is still widely recognized and accepted by corporations across the world despite concerns raised across time. But it has not been without its critics - for example, historical cost assumes constant purchasing power yet inflation reduces the value of each dollar in 'real' terms.

Required:

a. Discuss briefly the problems and issues suggesting that traditional historical cost accounting is not an ideal approach to measure performance across time. 

 

b. In reality, is the historical cost model applied or is it a 'mixed measurement model'? Discuss whether the issues are both related to inflation (the fact dollars do not retain constant purchasing power across time) and subjectivity that enters choice within the accounting information system (for example, depreciation - choice and method selection, inventory, revaluation, fair value and impairment assessments).

 

c. A specific issue raised relates to 'additivity' - specifically in the context of measurement in accounting. Discuss this issue and indicate why it may be a problem in the measurement of a business's wealth? Illustrate by reference.

 

d. Does this then have implications for the quality of information available to the user, and the ability to compare performance reports both across time for an entity and between entities? Discuss.

 

e.  Alternative models to historical cost have been suggested by a number of accounting academics overtime. Discuss one of these models and indicate why you believe this model has not replaced historical cost, and why, in accounting, the historical cost model (or a modified historical cost model) continues to be preferred.