The Cost Principle

Even if youre a novice in accounting, you probably already know that assets are a crucial
part of the accounting process. In fact, they are an integral part of the accounting equation itself.
But how you record your companys assets also comes into play in one of the foundational
accounting principles: The Cost Principle.
One of the underlying accounting principles (along with the conservatism principle and
the consistency principle), the cost principle states that your assets will be recorded on the books
at whatever their cash value was at the time they were acquired. This means that the asset
amounts recorded on your financial statements will be their actual value," not their current
market value. Early since 1970s , this principle is the only principle used in price-control
formula.
Using the Cost Principle Concept
Generally speaking, this is a way to ensure that an objective and verifiable cost is
recorded on the books. However, if the market value of an asset happens to be lower than the
original purchase price, then the asset may be recorded at that lower amount (which is in line
with the conservatism principle).
Relation with the amendment
Bearer plants which was in the scope now of IAS 16 permits the use of a cost, until
accumulated maturity in initial recognition. It is before measured as fair value less cost to sell in
the scope of IAS 41. This amendment is connected with the cost principle in the reason that IAS
16: Property, Plant and Equipment is measured at historical cost as originally stated on Generally

Accounting Accepted Principles (GAAP). There are also some opinion about the Cost Model
Principle related with the amendments:
As said by Wolfgang Laubach, KPMGS global IFRS valuation and impairment leader,
The fair value measurement of produce on bearer plants will continue to present a challenge for
some preparers.
As said by Reinhard Klemmer, KPMG Singapore, Many companies in Asia will
welcome the amendments , because they believe there is a little value in more complex fair value
model current applied.
As a result of the amendments, bearer plants will be subject to all of the recognition and
measurement requirements in IAS 16, including the following:
1.

Before maturity, bearer plants will be measured at their accumulated cost, similar to
the accounting treatment for a self-constructed item of plant and equipment before it

is available for use.

2. After the bearer plants mature, entities will have a policy choice to measure the bearer
plants using either the cost model or the revaluation model
3. Identifying the costs that can be capitalized under IAS 16