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Is Historical Cost Used in Other Countries?
Accounting rules in the United States require the use of the historical cost to record most accounting transactions. Thus, if Coca-Cola Company purchased land in Atlanta $10,000 in 1920, that land, if still owned, will be on the company’s 2020 balance sheet at $10,000 even if it is worth $5,000,000 by then. Not everyone in the United States thinks this is the best way to report accounting numbers, but U.S.GAAP require the use of historical costs.
The accounting rules of most countries around the world also use the historical cost as the primary means of measuring and reporting costs; however, there are exceptions. The major exceptions occur in economies that have experienced a lot of inflation. In the hypothetical Coca-Cola example, a time frame of 100 years was used to make the change in the value of land look dramatic. In short time spans, land prices in the United States do not change so radically, so most accountants are comfortable with using historical costs. In some South American countries, prices have risen a lot faster than those in the United States. For example, while the annual rate of inflation in the United States typically ranges from 2 to 6%, in Brazil it has seldom been below 20% and in some years has exceeded 1,000%. Not surprisingly, the GAAP in Brazil do not use historical costs as the primary way of reporting financial information.
In some countries, such as the Netherlands, companies use historical costs as their primary way of measuring costs but may report the value of some assets, such as land and buildings, at the amount it would cost to replace them “today” rather than at their historical costs. Accounting is a discipline created to serve the needs of financial statement users. It is logical that accounting rules reflect the unique needs of users in different countries.
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