Cost Basis vs. Fair Value Accounting

Cost basis accounting follows the historical cost principle.

It records assets at their original purchase price and does not adjust for market fluctuations.

Fair value accounting, on the other hand, records assets and liabilities at their current market value.

For example, if Wealth Investments purchased a portfolio of stocks for fifty thousand dollars, cost basis of accounting would record and retain the original purchase price on the balance sheet.

In contrast, if the market value rises to sixty-five thousand dollars, fair value accounting would reflect this increase in the financial statements.

Accounting standards determine which method is appropriate for different asset types.

Under GAAP, fair value accounting is required for trading securities and certain financial instruments, while cost basis accounting is the default for property, plant, and equipment.

IFRS broadly emphasizes fair value, especially for investment properties and financial instruments. It also permits cost basis for property, plant, and equipment.

Since both standards require consistency and transparency, understanding the applicability of each method is crucial for accurate financial reporting.