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  • BAE

Identify the weaknesses of historical cost accounting

Task Question 1 ­ 4 marks (750 words)

Conceptual frameworks have identified a number of qualitative criteria that financial information should possess if it is to be useful to decision making. The AASB framework Chapter 3 QC12­16 for example makes reference to ‘faithful representation’, with neutrality being one of the key components of ‘faithful representation’. Critically evaluate whether it is possible for financial information to ever be neutral and/or representationally faithful. In your discussion you should consider why standard setters might want to make reference to representational faithfulness within conceptual frameworks.

Question 2 ­ 4 marks (750 words)

Identify the weaknesses of historical cost accounting. In light of these weaknesses, why do you think historical cost accounting remains the most popular method of accounting measurement? In your answer you will need to discuss the merits or otherwise of the main alternatives to historical cost accounting.

Question 3 ­ 4 marks (750 words)

The Conceptual Framework Chapter 1 OB2 states that "the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity" Does the identification of these particular users have implications for the measurement basis chosen by the IASB? In your response you will need to consider whether fair values or historical costs will be more relevant to the users identified within the conceptual framework.

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