Current Cost Accounting

The current cost accounting model relies primarily on the assumption that, apart from any currency changes, the price of assets can change significantly compared to the general price level. Within this model, the cost of replacing assets is of particular concern. One of the questions that this method brings up is whether a company has sufficient insurance coverage to replace a given asset with one that is comparable.

For example, a manufacturing facility purchased several years ago for 1,000,000 USD could most likely not be replaced for that same 1,000,000 USD today if it burned down. While inflation might account for some of the difference, the current cost of building supplies and labor might have risen beyond the rate of inflation. Conversely, if a personal computer, originally purchased three years ago for 4,000 USD is stolen, a comparable replacement can be found for less than that original cost because the cost of computer-related equipment has been decreasing. If a company revalues its assets for insurance purposes, it can ensure adequate coverage when such dramatic losses occur.

The revaluation of large numbers of assets is most often accomplished through the use of indexes. These indexes are obtained from sources that are external to the company, whether from governments or other organizations. They can be expressions of change over periods as short as a single day or as long as several years. The indexes can be applied to only current year balances or to prior year balances. The application of these indexes to the proper selection of assets to revalue through a method of calculation can yield significant results, whether your aim is to revalue for insurance purposes, to meet government reporting requirements, or to report to management for future planning.