Benefits of historical costs accounting (HCA)
Historical costs accounting refers to generally accepted accounting principles and procedures that require every financial statements items made based on the original costs. The benefit of historical cost accounting among others is that it is easy to verify, for instance, when used on property, plant, and equipment balance sheets (Biondi 863). This is because, the costs at the specified purchase time are well documented together with relevant invoices, transfer taxes, contracts, and payments made and therefore HCA techniques only shows the company’s depreciated value of assets and doesn’t confirm absolute success in a company.
Benefits of historical costs accounting and the hierarchy of accounting quality
The hierarchy of accounting quality sorts a user specific quality from the accounting information provided and the most useful information (relevant, reliable, comparable, and consistent) selected for decision-making processes (Biondi 863). However, HCA accounting technique may be inconsistent due to possibility of providing outdated costs and remains irrelevant and incomparable during inflations (Biondi 866). Moreover, current market valuations are not precisely reflected contravening the principles of relevance underpinning the Hierarchy of Accounting Qualities.
Benefits of fair value accounting (FVA)
FVA techniques entail frequent valuations of a company’s assets and securities in line with current market prices of assets and liabilities. A change in the value of an asset or a liability generate gain or loss for an asset held or a liability outstanding, thereby an increase or decrease in net income and balance sheet equity (Biondi 867). FVA ensures a precise asset and liability valuation to users’ of accounting information in a company. For instance, in case of an expected increase or decrease in assets and liabilities valuations, a firm will mark up the values of its current assets and liabilities market valuations to represent actual gain from the sale of an asset or loss if it does away with the liability. Under FVA, a company’s ability to manipulate its net income reports is limited, because, gain or loss from sale are reported at the period of occurrence.
Benefits of fair value accounting and the hierarchy of accounting quality
Due to the volatile nature of the market, the use of FVA techniques may adversely affect market operations downwards (Biondi 870). For instance, an asset downward revaluation due to drop in current market prices may force the company to sell the asset at a lower price. These amount to market inconsistencies thereby contravening the Hierarchy of accounting quality principles.
Month and year FASB issued an Accounting Standard Update on the amendments to achieve common fair value measurements in the US (GAAP or IFRS?)
An ASU amendment issued on October 30, 2014, and based on GAAP (Generally Accepted Accounting Principles) techniques (FASB Exposure Draft).
Main provisions in the ASU
The amendments favored in the ASU proposed to eliminate the requirement to use practical expedients to categorize within the hierarchy of fair value investments the measured net asset values. Similarly, using the same practical expedient of fair asset value, the amendments proposed the removal of a requirement to make specified disclosures for all eligibility requirements of investments and instead advocated limited disclosure of entities selected for estimation under practical expedient (FASB Exposure Draft 1).
Accounting Standards Codification (ASC) for revenue recognition
ASC provides guidance on revenue generating activities for instance products sales, service provisions, and involuntary gain or loss when converting non-monetary assets to monetary assets and on most transaction-specific revenue recognition and states that revenue is only recognized when realized (FASB Exposure Draft 9), and only realized when it is earned (revenue recognition with multiple deliverables). In addition, ASC provides arrangement procedures for customers’ product delivery services, reporting net and gross revenues from specified products, and accounting options for a small business venture.
Biondi, Yuri, et al. “A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases: American Accounting Association’s Financial Accounting Standards Committee (AAA FASC).” Accounting Horizons 25.4 (2011): 861-871.
FASB Exposure Draft: Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent): A Consensus of the FASB Emerging Issues Task Force, (2014), 1-21