Definition
Historical Cost Profits and Losses represent a memorandum item included in a company’s annual accounts and report that presents an abbreviated restatement of the profit and loss account. This restatement shows the reported profit or loss as if no asset or liability revaluations had been conducted.
Examples
Example 1: Asset Revaluation Impact
A company with machinery worth £100,000 initially (historical cost) and revalued at £150,000 will show higher depreciation expenses post-revaluation. The historical cost profits and losses will depict the profit as if the machinery depreciation was still based on the original £100,000 value.
Example 2: Real Estate Property
A real estate company owns a building acquired for £200,000 (historical cost), later revalued at £300,000. The revaluation increases depreciation expenses, reducing reported profit. Historical cost profits and losses will show profits assuming the building was still valued at £200,000, excluding the revaluation impact.
Example 3: Investments
An investment firm initially acquired stocks for £50,000, now revalued at £70,000. Profit adjustments consider this £20,000 gain. Historical cost profits and losses will exclude this gain, presenting profits based on the initial £50,000 acquisition cost.
Frequently Asked Questions
1. Why include historical cost profits and losses in reports?
It provides stakeholders with a clearer view of the company’s performance, independent of asset revaluations, facilitating better comparisons over time.
2. Are all companies required to report historical cost profits and losses?
Previously under FRS 3, it was required. However, under the new Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102), it is no longer mandatory.
3. How does historical cost affect profit statements?
By excluding revaluation effects, it shows profit based on original acquisition costs, offering a conservative and consistent profit measure.
4. What’s the difference between FRS 3 and FRS 102 regarding historical cost notes?
FRS 3 required the inclusion of such notes; FRS 102 deems it optional, reflecting evolving views on the utility of these disclosures.
5. Can historical cost profits and losses mislead investors?
They can present a simplified view, potentially misleading if not supplemented with revaluation details and other financial reports.
Related Terms
Fair Value
The price at which assets or liabilities could be exchanged in an orderly transaction between market participants at the measurement date.
Revaluation Reserve
A reserve created when assets are revalued upwards, reflecting unrealized gains due to the appreciation of asset values.
Depreciation
The systematic allocation of the depreciable amount of an asset over its useful life.
Financial Reporting Standard (FRS)
A set of accounting standards and guidelines designed to ensure consistency and transparency in financial reporting.
FRS 3
Financial Reporting Standard 3, which outlined the requirements for reporting financial performance, including the historical cost memorandum item.
Online References
- FRS 3 Reporting Financial Performance
- FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland
- Annual Accounts - Financial Reporting Council
Suggested Books
- “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- “UK GAAP 2019: Generally Accepted Accounting Practice Under UK and Irish GAAP” by Ernst & Young LLP
- “Advanced Financial Accounting” by Richard Lewis and David Pendrill
Accounting Basics: “Historical Cost Profits and Losses” Fundamentals Quiz
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