Historical costs or fair value accounting? impact of models on financial ratios

Among most discussed areas between researchers and practitioners could be stated measurement of balance sheet items. Application of various measurement bases leads to very important discrepancies and inconsistencies in presented information.

Accounting theory and practice has developed quite a wide range of possible approaches to the measurement in accounting. In the interest of reliability, clarity, and comparability of accounting data are approaches to measurement in accounting a significant part of the regulation of accounting both at the national level and within international accounting harmonization. Whether it is to standardize the output of accounting, which is characteristic for Anglo-Saxon area, or whether it is to standardize current accounting practices and the related regulation of financial reporting used in continental Europe, there are always specific rules set, adjusting the measurement used for accounting of transactions during the reporting period as well as the measurement for the preparation of financial statements (Strouhal, 2012).

Accounting rules theoretically can be based on the choice of setting a single measurement basis, which would be universally used in measurements in all situations, or may use mixed measurement approaches. For local accounting practices as well as for International Financial Reporting Standards (IFRS) is characteristic the use of mixed measurement approaches. In recent years, there is an apparent effort of the International Accounting Standard Board (IASB) to establish a single measurement approach.

Theoretical part of the paper discusses the issues of currently used valuation models in financial reporting systems (IFRS, US GAAP). Analytical part addresses the impact of studied valuation models (historical costs accounting, fair value model, revaluation model) on selected financial ratios with the purpose of identifying the most and the less sensitive ones on various valuation models. As a research tool there is used practical experiment. Results show that ratios are most sensitive on the use of fair value model which is currently used for measurement of investment properties, biological assets and financial instruments held for trading.  

 

This paper is one of the research outputs of the project P403/11/0002 registered at Czech Science Foundation (GAČR).