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Using Faithful Representation of The Original Transaction Is Irrelevant Response

Using Faithful Representation of The Original Transaction Is Irrelevant Response

Question Description

  • Ask a probing question
  • Share an insight from having read your colleague’s posting
  • Offer and support an opinion
  • Make a suggestion, OR
  • Expand on your colleague’s posting

50 words of each, choose two discussions to reply.

discussion 1: In my opinion, using historical cost to accounting land is objective, because the book value is exactly the amount originally paid for the asset, but I don’t think it’s relevance.

The value of lands will change with the time due to inflation and government land policies, so the unchanged book value under the historical cost method can not reflect lands’ real current value, thus financial reporting users could not rely on it to forecast how much money will the land bring into the company. It will also overvalue or undervalue the scale of the balance sheet significantly because the amount of the land value is usually large. When external analysts do ratio analysis work, there will be some bias, impacting their conclusion’s effectiveness. So historical cost will reduce the predictive value and confirmatory value under the conceptual framework.

To remedy the defect of historical cost, fair value or replacement cost will be better served as an accounting method of lands. That means we adjust book value periodically, leading it to float with the time. The advantage is that financial reporting users could know the current value directly and make decision effectively. Thus accounting information will be more relevant and timely.

However, in land revaluation, collecting related data and other materials is difficult and costly. Sometimes the corporation also need to hire professional land assessment team and pay it commission fees. Moreover, fair value recognition process is tend to be affected by human factor, so it’s subjective. Some company managers could even manipulate financial statement accounts. In that way, faithful representation and comparability might not be fulfilled.

i will give you other disscusion later.

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