Historical Cost

Question: Wal-Mart reports property and equipment with a book value of $93 billion. However, that figure has

virtually nothing to do with the value of these assets. They might actually be worth hundreds of billions. Decision

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makers analyze financial statements in order to make decisions about an organization at the current moment. Are

these decision makers not more interested in the fair value of these assets than in what remains of historical cost?

Why are property and equipment not reported at fair value?

Is fair value not a much more useful piece of information than cost minus accumulated depreciation when

assessing the financial health and prospects of a business?

Answer: The debate among accountants, company officials, investors, creditors, and others over whether various

assets should be reported based on historical cost or fair value has raged for decades. There is no easy resolution.

Good points can be made on each side of the argument. As financial accounting has evolved, rules for reporting

certain assets (such as many types of stock and debt investments where exact market prices can be readily

determined) have been changed to abandon historical cost in favor of reflecting fair value. However, no such

radical changes in U.S. GAAP have taken place for property and equipment. Reporting has remained relatively

unchanged for many decades. Unless the value of one of these assets has been impaired or it is going to be sold in

the near future, historical cost remains the basis for balance sheet presentation.

The fair value of property and equipment is a reporting alternative preferred by some decision makers, but only

if the amount is objective and reliable. That is where the difficulty begins. Historical cost is both an objective

and a reliable measure, determined by a willing buyer and a willing seller. In contrast, any gathering of “experts”

could assess the value of a large building or an acre of land at widely differing figures with equal certitude.