Should Accounting Numbers Be Measured on Historical Costs or Market Value?

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Should accounting numbers be measured on historical costs or market value? Accounting numbers measured on either historical costs or market value will influence the decision making in management and investment, and lead to the results in economic activity. Standard setters have long debated between historical costs or market value because of the reliability versus relevance issues. From the conservatism and reliability perspective, accounting numbers should be measured on historical costs because the numbers is reasonably free from bias and error. The reason is the information support by independent documentary evidence. Historical cost accounting figures are based on actual acquisition prices, not merely possible of market values that can be revised to affect the ratio analysis which improve the performance of financial results. That is, historical costs accounting provides an objective view of an entity’s performance. Thus it consider verifiable and reduces the risk of manipulation of figures by management. In contrast, if there is not active market, market value accounting requires the use of estimation subject to uncertain assumptions, personal judgment, and subjective information about future values, such as discount rates and allowance for doubtful accounts. FASB has broadened the framework and disclosure practices to increase the reliability of market value accounting. However market value accounting is still emphasize the role of managerial judgment in the valuation process. Besides, market value accounting offers management the opportunity to manipulate the bottom line. So it’s less reliable than historical costs. From the relevance perspective, accounting numbers should be measured on market value. Market value accounting allows the decision maker to obtain true and fair view about the financial statement because it more representative about current

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