Historical cost

In accounting, an economic item's historical cost is the original nominal monetary value of that item. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values.Under the historical cost basis of accounting, assets and liabilities are recorded at their values when first acquired. They are not then generally restated for changes in values.It is standard under the historical cost basis to report the cost of inventory (stock) at the lower of cost and net realisable value. As a result:-Under IFRS it is acceptable, but not required, to re-measure the values of property, plant and equipment at their fair (current) values. 'Fair value' is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Such a policy must be applied to all assets of a particular class. It would therefore be acceptable for an entity to revalue freehold properties every three years. The revaluations must be made with sufficient regularity to ensure that the carrying value does not differ materially from market value in subsequent years. A surplus on revaluation would be recorded as a reserve movement, not as income.The IASB's Framework introduced Capital Maintenance in Units of Constant Purchasing Power as an alternative to Historical Cost Accounting in 1989 in Par. 104 (a) where it states that financial capital maintenance can be measured in either nominal monetary units - the traditional HCA model - or in units of constant purchasing power at all levels of inflation and deflation: the CMUCPP model.'In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.''In making the judgement, management shall refer to, and consider the applicability of, the following sources in descending order:Advantages