A Comparison of Historical Cost and Fair Value Accounting Systems: General and Some Regulatory Concerns

  • Michael BromwichEmail author


A simple and parsimonious example compares the accounting results of two accounting systems in terms purely of aiding investor decision making (buying/holding and selling securities). This article summarises the ideas in Bromwich et al. (2011) though with a slight regulatory emphasis using a different example. A major aim of this chapter is to show that practical accounting models can help the understanding of their utility in predicting the future. A variety of regulators often have recourse to modelling the possible future outcomes of organisations involving accounting simulations and simulated comparisons of the results of different accounting systems. Reconciling the reported results with those derived from benchmark models reveals the deficiencies of accounting systems in supplying information for decision making. Historical cost (HC) accounting is found to perform poorly. Fair value (FV) systems without estimated FVs may perform even worse and may mislead investors but allowing FV estimates increases the subjectivity of financial reports.


Cash Flow Accounting System Residual Income Future Cash Flow Financial Account Standard Board 
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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of AccountingLondon School of EconomicsLondonUK

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