When applying the mixed attribute model, why might a company prefer to use historical cost over fair value for long-lived assets?

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BlackTom AI · Accepted Answer

Question restatement: When applying the mixed attribute model, why might a company prefer to use historical cost over fair value for long-lived assets?

Note on available options: The provided data include an identified correct statement, but the list of all answer options is missing in the dataset. The analysis below focuses on the provided correct option and why it supports preferring historical cost.

Option provided: 'Fair value measurements can be more subjective and less reliable.'

Analysis of this option: This statement highlights a key issue with fair value in practice. Fair value often relies on observable market inputs or complex models, which can involve judgments about inputs that are not directly observable. These judgments introduce subjectivity and potential variability, especially for long-lived assets that may not have active markets or frequent transactions. If a company is concerned about measurement reliability and consistency over time, it may prefer the historical cost approach, which uses original acquisition cost less any accumulated depreciation and impairment, a method that is generally objective and verifiable with documentation such as invoices and depreciation schedules.

Why this supports historical cost preference: By choosing historical cost, a company can present financial statements with more predictable and auditable measurements for long-lived assets, reducing the risk that fluctuations in fair value due to market dynamics, estimation techniques, or model inputs could introduce volatility or bias. Consistency with historical cost can also simplify comparability across reporting periods, which is often valued by stakeholders who rely on stable asset carrying values for budgeting and debt covenants.

Potential reasoning around the mixed attribute model: The model allows assets to be measured by different bases (historical cost or fair value) depending on characteristics and relevance. When fair value is deemed too subjective or unstable for certain long-lived assets, historical cost can provide a more reliable and verifiable measurement, aligning with the need for objectivity in financial reporting. Conversely, fair value might be preferred for assets with readily observable market activity or for items where fair value provides more decision-useful information, but this option emphasizes the drawbacks of subjectivity.

Note on other possible options (not provided): If there were choices suggesting that historical cost is more relevant for short-term assets, or that fair value is always superior due to relevance, those would require counterarguments. In this particular context, the stated reason focuses on the reliability and objectivity concerns associated with fair value measurements as the rationale for preferring historical cost.

BU.210.650.52.FA24 Practice Quiz I

When applying the mixed attribute model, why might a company prefer to use historical cost over fair value for long-lived assets?

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