A Comparative Study of Fair Value Accounting and Historical Cost Accounting in Volatile Economies

Posted: May 23, 2021

• Emma Anderson
• Emma Robinson
• Emma Thomas

Abstract

This research presents a comprehensive comparative analysis of fair value accounting (FVA) and historical cost accounting (HCA) methodologies within the context of highly volatile economic environments. The study introduces a novel computational framework that simulates economic volatility through stochastic modeling and evaluates accounting system performance using multi-dimensional metrics including financial statement reliability, decision-usefulness, and systemic risk propagation. Unlike previous research that primarily examines accounting methods in stable economic conditions, this investigation focuses specifically on extreme volatility scenarios characterized by rapid inflation, currency fluctuations, and market instability. Our methodology employs agent-based modeling to simulate corporate decision-making under different accounting regimes, revealing that FVA demonstrates superior information relevance during moderate volatility but exhibits significant amplification of systemic risk during extreme economic turbulence. Conversely, HCA provides enhanced stability and predictability but suffers from informational lag that impairs timely decision-making. The research contributes original insights by demonstrating that neither accounting method dominates across all volatility conditions, but rather their effectiveness is contingent upon specific economic volatility thresholds and industry characteristics. These findings have profound implications for accounting standard setters, financial regulators, and corporate governance practices in emerging economies and during periods of economic crisis.