29 June 2015
Hans Hoogervorst, Chairman of the International Accounting Standards Board
(IASB), has today delivered a speech on what he calls one of the most difficult
topics in accounting—how assets and liabilities should be measured.
Speaking at the IFRS Foundation’s conference in Paris, he presented high-level,
general observations on when historical cost and current value measurement could
be most appropriate.
When measuring an asset or a liability, different measurement models are available: historical cost and current value, which includes fair value. They are often seen to be at opposite ends of the measurement spectrum, and both have their own ‘fan clubs’ with strong views on which is the better model.
Hoogervorst outlined the benefits and challenges linked to the measurement models and said the differences between them are not as great as they may seem.
The dichotomy between historical cost and fair value is not as stark as one would expect. Historical cost needs a degree of current measurement to maintain its relevance, is not free from subjective updating requirements and it is not necessarily stable. It is also open to abuse.
All the vulnerabilities that are often attributed to fair value accounting can be equally applicable to historical cost accounting.
Hoogervorst concluded that both historical cost and current value (including
fair value) have advantages and shortcomings and that therefore neither should
be the overall preferred measurement model.
The IASB has, in the recently-published proposed changes to its Conceptual Framework, opted to stick with a mixed measurement model, using both historical cost and current value measurement.
The full speech can be accessed here