General Criticism of the LCM Rule

The LCM rule has long been criticized primarily on the basis of its inherent inconsistency. Thus, if current replacement cost is objective, definite, verifiable and more useful when it is lower than acquisition cost it also possesses these attributes when it is higher than acquisition cost (Sprouse and Moonitz, 2015). The conservatism reflected in the LCM rule for asset valuations in one period results in an over-statement of income in the subsequent period. The consequence of recognizing decreases in value but not increases in value occurring prior to sale is reflected in a shifting effect in periodic income measurement.

The valuation of other assets Investments

In financial accounting, investments are defined as shares and other legal rights acquired by a firm through the investment of its funds. Investments may be long-term or short-term, depending upon the intention of the firm at the time of acquisition. Where investments are intended to be held for a period of more than one year, they are in the nature of fixed assets: where they are held for a shorter period, they are in the nature of current assets. Shares in subsidiary and associated companies are usually not held for resale, and hence would be classified as being of the nature of fixed assets. Short-dated Government stocks, for example, may provide a convenient vehicle for the investment of excess funds not immediately needed. Such short-term holdings would be classified as current assets in the balance sheet. It is the practice, however, to show investments separately in the balance sheet and not to include them under the heading of 'fixed assets'.

Investments are recorded at their cost of acquisition, and whilst substantial decreases in value may be written off against current income, appreciations in value are not recognized until realized.

Legislation in the United Kingdom requires that a note be appended to the balance sheet in respect of both long- and short-term investments, where there is a difference between the book value and the market value. In the case of long-term investments, there is the further requirement of distinguishing investments which are quoted on a stock exchange from unquoted investments.


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Read on: Different Meanings of 'Market Value'

Different meanings of 'market value'

Whilst most accountants would agree with the LCM rule, there seems to be little unanimity as to which market value is the most useful. According to one Publisher, the net realizable value interpretation of market value is most commonly accepted in the United Kingdom and Australia; in the United States, market value means replacement or reproduction cost; in Canada and most European countries, net realizable value is used for the valuation of finished goods and replacement cost is applied to the valuation of raw material inventories (Mueller. 2004).
Different Meanings of 'Market Value'