Wahid’s evaluation the use of historical cost and non-current asset valuationDocument Transcript
WAHID’S EVALUATION - THE USE OF HISTORICAL COST AND NON-CURRENT ASSET
The asset is included in a class of non-current assets considered on the fair value basis, the
asset need not be revalued pending the class of non-current assets is next revalued. If the
transferred asset is in a category of assets, which are esteemed at historic cost, the pre-transfer
assessment becomes the historic cost.
Introduction: In preparing reports, at present guided by the historical cost principle. This
principle states that non-current assets should be valued at the cost at which the asset was
acquired. This cost includes costs involved in getting the asset ready for use. For case in point
- if you were to buy a dryer Machine for your washing plant at a cost of (USD) $10,000 it
may also cost you a further $ 1500 to have the dryer Machine installed the depreciable cost of
the dryer Machine becomes $11,500
What Does Historical Cost Mean?
A assess of value used in accounting in which the cost of an asset on the balance sheet is
based on its nominal or original cost when acquired by the company. The historical-cost
system is used for assets, under generally accepted accounting principals (GAAP).
Although Historical cost accounting is an approach to accounting using asset values based on
the real amount on currency paid for assets with no increase amendment. This approach is
said to use the accounting principle of historical cost. It contrasts with approaches such as
current cost accounting.
In addition, although recent accounting standards are largely based on historical cost
accounting, there are exceptions such as the use of reasonable value, net feasible value, and
Current and non-current assets:
The assets of a business are physical property owned and used by the business and are listed
on the balance sheet to reproduce the value. Assets are classified into two major groups:
01. Current assets (consisting primarily of cash, accounts receivable and inventory)
02. Non-current assets (sometimes referred to as fixed assets) consisting of land, buildings,
plant and machinery, tools and dies, motor vehicles, computer equipment
Current assets: Current assets are estimated or able to be renewed into cash within a normal
trading cycle of one year. Since such assets are unspecified to be relatively short-term items,
they are normally reserved for or committed to short term use.
Non-current assets: The non-current asset section of the balance sheet represents a list of the
long term or more permanent assets used in the business. These include investments in land,
buildings, equipment and vehicles.
Valuation of assets:
Basically the net value of a business is the variation between what it owns and what it owes.
That is, deduct the total liabilities from the total assets to verify the business net value. This
form can then be used to evaluate the return on funds invested in the business and thus verify
The process of assessment can have a major bearing on the estimate of net worth. by tradition,
non-current assets are valued at the lower of either historical cost or market value which can
gladly be strong-minded for some curriculum of property.
Historical cost and non-current asset valuation
The advantage of using historical cost is that it is based on objective evidence rather than
subjective opinion. However, the problem with some non-current assets such as property is
that they usually increase in value over a number of years.
In accounting - it is familiar understanding that different methods of arriving at a result or
outcome exist. Asset valuation, which is critical in financial accounting, is not always
uncomplicated. Asset values change yearly, due to depreciation and appreciation, and the
nature of assets make asset valuation methods major.
Four basic methods of valuation of assets in financial statement include:
(I) Historical cost
(II) Replacement cost
(III) Net realizable value
(IV) Economic value
Historical cost is the most common valuation of assets in financial statements. This is because
historical cost is provable and known. As its name suggests, historical cost recorded cost of an
asset when the cost was incurred. In other words, the amount that an entity pays for an asset
represents the historical cost. If, for case in point, you purchased an item for $10,000.00, then
it would be valued at its cost. Although financial accountants find "costs" a more objective
index than asset values, asset valuations are important for fairly presenting the position of a
The use of historical cost can be difficult in periods of high price rises. It can guide to the
arrangement of the business not being practically presented if the asset has a lower
assessment than its current cost. This is because historical cost does not identify unrealized
investment gains of a non-current asset. The historical cost principle is usually used, except
for where it conflicts with other essential accounting concepts, such as carefulness.
This in sequence may significantly involve decision making in the business. The business
may now reflect on selling the property and conclusion the business, renting somewhere else
or in search of a more gainful movement.
The assessment to reproduce more current values for non-current assets is a phase of current
cost accounting. Using this come up to the business attempts to show the non-current asset at
current or substitute values.
Depreciation is the decline in the prospect economic benefits of a depreciable non-current
asset during carry and split and obsolescence. It is a share process. It can be considered by
two main methods, each dazzling in a different vision in the way the asset is used.
Depreciation is to be treated as an estimated expense that does not set aside cash for the
replacement of a non-current asset. In determining the cost of achievement of the Machine,
any capital costs made must be added to the buy price of the lathes. This amount will be
considered as the historical cost and will be used in cunning the depreciation expense
Depreciation is the allocation of the cost of a non-current asset less its estimated disposal
value against returns over the property useful life. A depreciable asset is an asset that will be
used over more than one accounting period and will steadily make a payment to returns over
its useful life.
Though, it will give rise to future expenses as their future economic benefits are used up or
expired. This has certain ramifications. Depreciation also has to be adjusted to allow for
changes in current values. This brings into question the purpose of depreciation itself. Is it
intended to allocate the cost of the asset over the life of the asset? This is the definition
currently used. If the depreciation is based on current or replacement values then this suggests
the purpose is to provide for the replacement of the asset. This is a purpose not currently met.
What happens if you do not intend to replace the asset or if you do, with a more expensive
Conclusion: Assessment of presentation becomes more complex if the base against which
profit is exact continuously changes. Is the improvement in presentation due to improved
profit or reduced asset valuation? The use of ratios, as assess of presentation, loses its value
with these changes and a careful assessment of real reports becomes vital.
Summary: The Assets exact at historic cost should not at all be revalued upwards, even if
they retain some service potential after being depreciated to nil value to calculate the cost of
the acquirement of the machine, the investment expenditures that are made, need to be added
to the purchase price of the machine. These expenditures may include importing the machine
into the country, installation expenses and any other costs that occur which will contribute to
the future economic benefit of the business for more than one accounting period