What is Current Cost?

Current cost is the cost that would be required to replace an asset in the current period. This derivation would include the cost of manufacturing a product with the work methods, materials, and specifications currently in use. The concept is used to generate financial statements that are comparable across multiple reporting periods.

Current Cost vs. Historical Cost

Historical cost is the original cost incurred to acquire an asset, while current cost is the cost that would be required to replace it right now. The key differences between the two concepts are as follows:

Complexity. Current cost is more complex to calculate, due to the need for regular adjustments and market data. Conversely, historical cost is simple to calculate and document using original records.
Relevance. Current cost provides more up-to-date and realistic values for decision-making, while historical cost offers historical context and comparability over time.
Inflation impact. Current cost accounts for inflation or changes in market prices over time, while historical cost ignores these factors.
Profitability impact. Current cost can result in fluctuating profitability, due to changing asset values or costs. Conversely, historical cost maintains stable profitability figures, since values don’t change.

Related AccountingTools Course

Cost Accounting Fundamentals

FAQs

Is Current Cost Measurement Required Under IFRS or GAAP?

Neither IFRS nor U.S. GAAP requires current cost measurement as the primary basis of accounting; both rely mainly on historical cost. However, IFRS allows or requires fair value (a form of current cost) for certain items like investment property, biological assets, and some financial instruments. U.S. GAAP similarly uses fair value in limited cases, but overall, historical cost remains the dominant measurement approach under both frameworks.