Summary
Maybe it's just me, but these quotes from Herz and Pozen are off-base. When they suggest there could be a pure historical cost system, they are talking about something that doesn't exist and hasn't existed in a 100 years, if even then. I have to believe that Herz was misquoted or misinterpreted; I can believe that Pozen would misunderstand. Nothing will come out of this. There will be no turning back to more costs. There will be a continuing progression toward fair value accounting for the simple reason that it produces the information that users want and that society needs them to have.undefined undefined
Analysis
Pozen and Herz seem to think there could be a pure historical cost system. No such thing exists and maybe never has.
What auditor, for example, would tolerate carrying assets at a cost that's known to exceed their market? A shift to pure cost would roll back 70+ years of lower of cost or market and impairment practices that have protected auditors against recrimination (while denying users access to useful facts).
Also, a pure historical cost system would have no systematic depreciation. Something acquired would be carried at that amount until it was sold or completely consumed. Nothing could be allocated to intervening years' earnings, and nothing could be allocated to products manufactured with the assets.
Then, of course, there is the problem of the measuring unit. Would a pure system report costs in nominal dollars or constant dollars? What would be done about costs in other currencies? The system wouldn't be pure if you ever altered the exchange rate.
Finally, a pure historical cost system would have no comparability whatsoever. Two companies holding identical assets acquired at different prices would not report identical amounts, yet they both have the same future cash flow potential. Where is the usefulness in that?
Here's the bottom line fact -- the only pure system that can ever be useful is one based on current fair values.
No lower of cost or market, just market (if the market value is reliable below cost, it's equally reliable above cost).
No systematic depreciation, just the change in market value between points in time. No assumptions about value behavior, just actual observations of what happened.
No systematic allocations of costs to manufactured inventory. The output of the accounting system would be the value of the product, not the sum of the arbitrarily allocated costs of the consumed inputs. The result would be a measure of the value added in production, achieved by comparing the values of the products with the values of those inputs when they were consumed.
Comparability would be perfect because companies holding identical assets and liabilities would report identical amounts, and companies holding different assets and liabilities would report different amounts, thus allowing users to assess the future cash flow potential.
There are still measuring unit issues but not across companies, only over time, as in comparing the end of the year value with the beginning of the year value. Currency exchange rates are merely part of the formula for describing market values usefully.
THERE IS NOTHING USEFUL IN PURITY FOR PURITY'S SAKE, UNLESS THE PURE INFORMATION IS USEFUL FOR ASSESSING THE FUTURE.
Herz or Pozen were either misquoted, misunderstood, or terribly naive.
Any longing for a pure historical cost system is a nostalgic pipe dream that denies the realities that (a) one ever existed and (b) the resulting statements would not ever be useful.
