Advantages and disadvantages of replacement cost

Compared with the original cost attribute, the replacement cost has the following advantages:

(1) The replacement cost indicates the amount that the enterprise must pay to obtain the asset or service now. Objectively, it is the best measure of the current input value. It is meaningful to use it to calculate the profit of the current income ratio.

(2) By matching the current replacement cost with the current income, we can distinguish profit and loss from operating profit and loss and provide meaningful accounting information.

(3) If the asset is continuously acquired, the current replacement cost represents the value of the asset to the enterprise.

(4) The sum of current replacement costs of various assets is more meaningful than the sum of historical costs in different periods.

The main disadvantage of the replacement cost attribute is the lack of objectivity in determining the replacement cost. Because the prices of goods sold in the market on the measurement date of replacement cost may not be exactly the same, and the sales conditions may not be exactly the same, there will inevitably be some subjective factors in the process of determining the replacement cost amount. Furthermore, on the day of measuring the replacement cost, due to technological progress and other reasons, it may be difficult for some assets of an enterprise to find the same or even similar assets in the market, and the replacement cost of these assets can only be estimated, so the determination of replacement cost is more subjective.

The applicable environment and application of replacement cost method: it is more suitable for today's rapid economic development and rapid price increase. Usage: managers use it when making decisions, because it can objectively reflect the real cost of human resources and is conducive to making correct judgments.