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Current costs have to do with the expenses involved with replacing an asset with one of the same value. As a rule, current cost is based on the present market value of the asset in question. The replacement should be as close to the existing asset as possible, in terms of current value, general condition, and age.
There are several factors that go into determining the current cost of replacing an asset. Assuming the existing asset has been held for some time, there is a need to make allowances for the impact of inflation on the value of that asset. Depreciation due to wear and tear over time may also come into play when identifying the market value of the product.
Current cost is somewhat more complicated than simply allowing for the historical cost of an asset. With historical cost, the focus is on what was originally paid for the asset. In order to identify current cost, the process begins with the original purchase price, but then incorporates a number of considerations to determine what the asset will sell for in today’s market. Going simply by historical cost, the focus would be on recouping the original investment in the asset, and not on identifying the actual current worth of the asset.
The means of determining current cost can be illustrated by the process of replacing a motor vehicle that is several years old. In order to identify the present market value of the vehicle, it is important to consider the general condition of the automobile, especially in terms of wear and tear on the interior, the condition of the engine and transmission, and the current status of the exterior paint job. Since vehicles tend to depreciate in value even when they are maintained and in near new condition, that factor will influence what type of sale price the car can reasonably command in today’s market. In an economy where the rate of inflation has changed considerable since the vehicle was first purchased, adjusting the market value for inflation is also important. After allowing for all these factors, the owner of the vehicle will have a good idea of the current cost, and can determine if the car can be replaced with the sale of the car offsetting the purchase of a similar vehicle, or it would be impossible to replace the car without spending additional money.
The concept of current cost can be applied to the replacement of any type of asset, including operating machinery, shares of stock, and even real estate. At times, the results of determining this current market value can indicate that it is not a good time to attempt to replace the asset, based on the current level of inflation. At other times, the calculation will suggest that it would be an excellent time to consider replacement.
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