Duncan Williamson: Historical Cost Convention Feedback and Query

Following a direct question from student Sally I put together an outline reply concerning the Historical Cost Convention.

Date: 29 November 2001
Subject: historical cost accounting

I am doing an assignment and i am trying to find the rules governing historical cost accounting, I was wondering if you could be any help to me in explaining to me exactly what they are or where i could find them

Thank you
Sally

This is my response:

Subject: re historical cost accounting

Dear Sally,

It's important to know where in the world you are when answering this question: from your e-mail address I suppose you are somewhere in the UK.

You need to consider the cost concept of accounting to start off your analysis: go to my site click on financial accounting and then look at the accounting concepts page.

The web site of the Institute of Chartered Accountants of England and Wales is an excellent starting point although you might have to do a couple of searches to get exactly what you want.

In terms of the UK, have a look at

Financial Reporting Standard 18: Accounting Policies, issued in December 2000

FRS 18 deals primarily with the selection, application and disclosure of accounting policies. Its objective is to ensure that for all material items:

an entity adopts the accounting policies most appropriate to its particular circumstances for the purpose of giving a true and fair view;

the accounting policies adopted are reviewed regularly to ensure that they remain appropriate, and are changed when a new policy becomes more appropriate to the entity’s particular circumstances; and

sufficient information is disclosed in the financial statements to enable users to understand the accounting policies adopted and how they have been implemented.

You may have read or read about SSAP 2. Well, FRS 18 replaces SSAP 2

Also look at FRS 15: Tangible Fixed Assets as well since it concerns buying and acquiring fixed assets

FRS 15 sets out the principles of accounting for tangible fixed assets. The objective of the FRS is to ensure that tangible fixed assets are accounted for on a consistent basis.

Consistent with previous practice (as reflected, for example, in the Companies Act) the FRS permits a choice as to whether tangible fixed assets are stated at cost or at revalued amount. However, where an enterprise chooses to adopt a policy of revaluing some assets, all assets of the same class (that is, those with a similar nature, function or use) must be revalued. The FRS also contains requirements that ensure that the valuations are kept up to date.

The Accounting Standards Board has published a document called

AN INTRODUCTION TO THE STATEMENT OF PRINCIPLES FOR FINANCIAL REPORTING that you can download in PDF format from the Accounting Standards Board's web site.

You could also have a look at International Accounting Standards (IAS) 1 and 16 since they are both relevant in the same way that the FRSs I have highlighted for the UK are. A truly excellent site is IASPLUS that gives vast amounts of info about IASs and a whole lot more.

I hope this is useful Sally: let me know you get on.

Best wishes
Duncan Williamson

Duncan Williamson
29 November 2001 corrected and revised 11 September 2003