Firstly, from reviewing legions of FTSE companies’ financial reports, most of them use historical cost accounting which is the one that commonly use as their accounting policy, such as Tesco and Sainsbury, will demonstrate as specific examples afterwards. In other words, it is attribute simply proposes that users could be able to compare. In one hand, the investors can compare the latest entity’s statement to previous years. In the other hand, it provides the platform for users to make a comparison to other firms under the same accounting policy. For instance, both Sainsbury and Tesco’s annual financial reports indicated that PPE is stated at cost, less any depreciation and any recognized impairment value. It increases the transparency of financial statements by facilitating this. In Sainsbury’s financial statement, the PPE in 2011 is £8,784 million, however, in 2012, it increases to £9,329 million. In Tesco’s report, the PPE is £25,710 million in 2012 that grows from £24,398 million in 2011. It implies the information to the public that both of them expands more industry or retail stores in the past one year and grows in the healthy operation. Not only the potential investors can assess the performance between the two companies, but also the existing shareholders and managers can evaluate the performance of the firm from previous year or compare to their competitors under the same standards. Secondly, historical cost is straightforward to occur, the information in financial statements allows users to assess historic events. The companies may prefer historical cost accounting to fair value accounting due to the fact that it is not subject to manipulation as much. Historical cost accounting is based on an actual transaction that took place instead of an estimate of its current market value, and so therefore is easily verified. Yet, the historical seems the preferably choice to the entities, it also has some drawbacks which may provide the useless information and mislead the users of financial statements.
Initially, historical cost accounting contributes no illustration of current market value of the tangible non-current assets of the company. The figure is not relevant as it is not an up to date value of the assets due to the financial reports are drew up based on the prices resulting from past transactions which is possible to be higher or lower of the market price. It is only concerned about cost allocation but not value of the assets. Therefore, the investors cannot make rational decisions based on the historical cost accounting. What is more, the historical cost is likely to ignore the flaws in time- inflation, that an accounting policy based on historical costs is an imprecise reflection of the actual position. Cozma (2009) stated that the PPE is under-valuated and the performance of the company cannot be properly evaluated due to profit is over-valuated; the company is exposed to an inflation tax and distributes false dividends, which induces its capital losses. It indicates that that the data may not reliable after marked by inflation, which is not a precise performance indicator. In the following paragraphs, the alternative essential measurement of tangible non-current assets, fair value accounting will be evaluated from its pros and cons.
Fair value accounting, which based on the policy of revaluation model, the property, plants and equipment is evaluated reliably can be approved at a revalued price, being its fair market value at the date of the revaluation less any depreciation and impairment. It ensures that the carrying value does not contrast materially from that which would be determined accessing fair value at the end of the accounting period (IFRS, 2012). Although it is very rare to find a company uses fair value accounting to measure the value of tangible non-current assets, it still has some merits to recommend it.
First of all, fair value accounting is more appropriate to use the current market value of the asset as it indicates the economic reality of transactions rather than the past view, making it more useful and relevant to users of financial statements. Then, it indicates losses and gains directly, for example, the impairment expenses would be written off directly which increase the accuracy of the statements. In the contemporary economical circumstance, the market value is continuing changing; fair value accounting would make sense for companies to indicate their assets to represent the changes including inflation. Nonetheless, the inescapable disadvantages of fair value may lead the market to some frauds.
According to some authors (Shortridge R. P., Schroeder A., Wagoner E., 2006) the arguments around fair value method is surrounding the debate over the relevance and dependability of accounting information. In that case, the fair value accounting that the information provided by financial statements prepared based on just value is not dependable due to it is not based on objective transactions and, consequently, they cannot construct platforms for making decisions. Besides, if the market price of PPE fluctuate sharply or change unpredictably or temporarily may mislead the managers or investors to make some inaccurate decisions. They may profess a number of specific instances when this is the case, including incapability to value the future revenue and expenditures both accurately and collectively, often because of unreliable information, and over-optimistic or over-pessimistic prospects. For instance, if the land is revalued and presented in the company’s financial statement, the number may be subjective that the large number will be over-dramatised. Furthermore, making use of fair value accounting is costly that is expensive and unnecessary especially in some industry. For instance, Tesco is one of the largest retailers in the world with 14 countries operations. It governed 2,479 stores just in UK, 1,719 and 1,351 stores in Asia and Europe respectively (Tesco, 2012). Revaluation all the properties around the world certainly will spend vast sum of money. In other words, apparently, the large expenses would have a significant negative impact in the entities’ financial statements. There are some other parameters in the measurement of tangible non-current assets must be mentioned that influence the value incisively, will demonstrate in the next section.
Under IAS 16, it requires that where has been a permanent diminution in the value of property, plant and equipment, the carrying amount should be written down to the recoverable amount. An asset is impaired when its carrying amount exceeds its recoverable amount (IFRS, 2012). As the specific examples of Tesco and Sainsbury, they both state in their ‘Notes to the financial statements’ that PPE is stated at cost, less any depreciation and any recognized impairment value. The entities always calculate their asset’s depreciation method in either straight-line method or reducing balance method. Both Tesco and Sainsbury chose the straight-line method to measure the depreciation of tangible non-current assets to its residual value. It presented as a typical result of historical cost that is understandable to the readers. What is more, under this method, same amount is charged as depreciation, it makes the comparison of profits for several years easier. On the contrary, the diminishing balance method delivers heavy depreciation charges for the first several years of an asset. However, this may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new. Although the diversified methods providing the choices to the company to select the preferential and suitable one for their financial statements, it is less understandable to users and the investors may be confused and misled by the differences.
Conclusion
In the contemporary economic society, the accounting policy becomes more difficult and controversial that some business models thrive off a lack of transparency and controversial. The differentiated measurement technique in accounting standards, as historical cost and fair value accounting are often slight, but it is inescapable to induce the disputation and subjectivity. The historical cost model applies in most of the organisations that is more comparability. However, it is not relevant as it is not an up-to-date value of the assets. While fair value is considered to be an alternative measurement technique, it is more relative to the current value, but it is less used in the firm’s accounting policy not only the subjective revaluation may cause unreliability, also the techniques is costly especially in some industry. While investors are the prime audience of the financial reports, that the accounting standards setters should enhance the pragmatism and strengthen the underlying principles for presenting useful information of entities’ status. Therefore, they should eliminate the variances between methods of measurement, which improve the standards more precise and put more emphasis on qualitative information to enhance the reliability, relevance, comparability and understandability that assist the investors to make informed decisions.
Reference
Elliott, B. & Elliott, J. (2012) Financial Accounting and Reporting. 15th edn. London: Prentice Hall.
Hans Hoogervorst (2012) The Imprecise World of Accounting. International Association for Accounting Education & Research Conference.[Online] Available at: [Accessed: 20 November 2012]
IFRS Foundation (2012) IAS 16: Property, plant and equipment. Available at: , [Accessed: 20 November 2012]
HM Treasury (2012) Tangible Non-current Assets. Available at:, [Accessed: 21 November, 2012].
J Sainsbury plc (2012) Annual Report & Financial Statements 2012, Available at: [Accessed: 22 November, 2012]
Tesco plc (2012) Annual Report & Financial Statements 2012, Available at: , [Accessed: 22 November, 2012]
Dinan, C.I. (2009) Historical cost versus Fair value, Annals of Faculty of Economics.
Shortridge R. P., Schroeder A., Wagoner E. (2006) Fair Value Accounting: Analyzing the
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