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.

Current Cost FAQs

How does current cost differ from fair value?

Current cost is an entry price: the amount needed to replace an asset in the current period. Fair value is generally an exit price: the amount that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date.