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20 Jun 2025 11:00

Why Historical Cost Accounting Is Broken (And What Could Fix It)

What if the foundation of financial accounting is fundamentally flawed? Tom Selling, author of The Accounting Onion blog, argues that historical cost accounting creates a "truth in labeling problem" that allows management to manipulate earnings while failing to capture economic reality. Through compelling examples from oil and gas, pharmaceuticals, and subscription businesses, he explains why value creation often occurs years before GAAP recognizes a single dollar of revenue. You'll discover how a $2 change in expected cash flows can trigger a $400,000 impairment loss, why the FASB shifted focus from earnings to balance sheets, and how current corporate governance essentially lets management "grade their own papers." This conversation challenges core assumptions about what accounting should measure and offers a provocative vision for reform.

Chapters

(01:21) - The Myth of Honest Financial Accounting
(02:28) - Management Gaming the System
(03:22) - Historical Cost Accounting Explained
(05:44) - Examples of Manipulation and the Enron Scandal
(09:16) - Impairment and Depreciation Issues
(13:26) - Alternatives to Historical Cost Accounting
(20:59) - The Disconnect in Value Recognition
(25:08) - R&D Expenses and Unrecognized Assets
(25:39) - Challenges in Valuation and Accounting
(27:08) - Measuring Assets and Liabilities
(28:09) - Industry-Specific Accounting Limitations
(31:08) - The Role of Transparency in Accounting
(34:12) - Subscription Businesses and Revenue Recognition
(44:22) - The Problem with Estimates and Auditing
(48:18) - Conclusion and Summary

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Connect with Our Guest, Tom Selling

The Accounting Onion: http://accountingonion.com

Connect with Blake Oliver, CPALinkedIn: https://www.linkedin.com/in/blaketoliverTwitter: https://twitter.com/blaketoliver/

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