Essay: Assets on Historical Costs

Sample Essay

The information contained in the financial statements proposed by bank managers is based on the historical values of property and actual payment of loans rather than current market values which is quite irrelevant to creditors and investors. The investors and creditors of the company will base their decisions based on these values which do not reflect current market conditions.

If the financial statements reflect current market values then the information contained in these statements would be more reliable and relevant to investors and shareholders. The ethical problem with this scenario is that the managers of the bank want to report these assets on historical costs which would cause the net income and value of assets to be overstated. If the financial statements are prepared using current market values the net income and value of assets would be decreased and this would reflect inefficiency in management decisions. Managers of the bank prefer personal benefits and saving face instead of presented financial statements at realistic values. If the bank reports its loans on current market values it would have to realize significant losses. The present situation is quite similar to the ongoing financial crisis which started from the subprime mortgage crisis in the United States of America (Shiller, 2008).

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