question archive XYZ Company bought real estate properties in Boston 50 years ago for $30,000
XYZ Company bought real estate properties in Boston 50 years ago for $30,000
Subject:AccountingPrice:2.84 Bought3
XYZ Company bought real estate properties in Boston 50 years ago for $30,000. In 2020, a real estate appraiser inspects the properties and concludes that their expected market value is $2 million. The company has been using historical accounting principles for the last 50 years. A newly appointed financial manager recommends the use of fair value accounting for the value of the properties. Discuss the difference between the two approaches. Do you agree with the financial manager? Why or why not?
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DIFFERENCE BETWEEN HISTORICAL ACCOUNTING AND FAIR VALUE ACCOUNTING
| HISTORICAL ACCOUNTING | FAIR VALUE ACCOUNTING |
| It refers to the actual/original value at which the asset is purchased. | It refers to market value or Intrinsic value of the asset |
| It is not globally accepted method as it is only allowed in US GAAP. | It is globally accepted method it is allowed in US GAAP and IFRS too. |
| It always remains constant throughout the life as it is the original value of asset | It is fluctuated on comparing monthly or annually. |
| It doesn't reflected the true picture of asset | It reflects the true picture of asset |
Yes I agree with the manager that XYZ Company should use fair value accounting principle approach instead of historical accounting principle because it reflects the true picture of real estate properties,it is also globally accepted method for recording the value of asset,it is easy to compare with any other valuation methodology,it also determine the value of property on the basis of fundamental principles and it is also tested annually for impairtment
