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Arguments Supporting Cost over Replacement Values

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The chairman of the board of directors of the company for which you are the chief accountant has told you that he has little use for accounting figures based on cost. He believes that replacement values are of far more significance to the board of directors than out-of-date costs.

Present several arguments to convince the chairperson that accounting data should still be based on cost.

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1. Replacement cost is not always easy to determine: Not every asset has an active marketplace. It would be impractical, and in some cases impossible, to determine the values of every asset on a regular basis without incurring excessive costs. For periodic financial reporting purposes, the cost of continually having assets appraised or offering them for sale and then backing out of the transaction just to determine the asset's replacement cost would exceed the benefit obtained by doing so. In general, most assets decline in value over time. Likewise, it would take considerable time and energy to continually revise depreciation and amortization amounts as the costs upon which they are based ...

Solution Summary

The chairman of the board of directors of the company for which you are the chief accountant has told you that he has little use for accounting figures based on cost. He believes that replacement values are of far more significance to the board of directors than out-of-date costs.

Present several arguments to convince the chairperson that accounting data should still be based on cost.

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