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What are Historical Cost Approach and its limitations?

What are Historical Cost Approach and its limitations?


1 Answer

In this approach, actual cost incurred on recruiting, hiring, training and development the human resources of the organization are capitalized and amortized over the expected useful life of the human resources. Thus, a proper recording of the expenditure made on hiring, selecting, training and developing the employees is maintained and a proportion of it is written off to the income of the next few years during which human resources will provide service.

There Exist Some Limitations.

  • It takes into account a part of the employees acquisition costs and thus ignores the aggregate value of their potential services.
  • It is difficult to estimate the number of years over which the capitalized expenditure is to be amortized.
  • It is difficult to determine the rate of amortization, should it be increasing, constant or decreasing one.
  • The economic value of human resources increases over time as the people gain experience. But in this approach, the capital cost decreases through amortization.

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July 12, 2019