Historical Cost Or Fair Value Accounting?

The historical cost accounting convention had encountered a great challenge since the 1990s.From then on,the fair value accounting had been more widely used to measure the financial instruments.However,for those financial assets that had no liquid market still stuck to the conventional accounting measurement.As a result,the fair value and the historical cost combined to be a "mix-attribute model" which is still functioning today.Now the accounting standard setters are dedicating themselves to transform the mix-attribute model into a full fair value accounting model.Unfortunately,this new element of revolutionary transformation arises a fierce opposition from the banks and their authority.This paper focuses on the loan asset measurement with comparison of historical cost and fair value,based on the theory of institutional economics.When considering the recent subprime mortgage crisis and the different perspectives of the banking and regulation body, we conclude that neither of the attributes will perfectly meet their demand.With respect to the contradiction and unification between historical cost and fair value,we try to counterbalance them by introducing the dynamic provisioning system from Spain.China has made its great effort to reform the accounting system in accordance with the international accounting standard.We hope that this paper will bring some enlightenment to the regulation setters to improve the accounting standards.