What does replacement cost mean?

Replacement cost refers to the cash or cash equivalents that a business would pay to reacquire an asset that is identical to or functionally equivalent to an asset owned by the company. Generally, the methods that can be used are the direct method, the functional value method, and the price index method.

Replacement cost is an ongoing cost that is consistent with the original cost at the time of asset acquisition. Subsequently, the same asset or its equivalent may need to be acquired with more or less exchange** due to changes in prices. Thus, replacement cost represents the exchange required to acquire the same asset or its equivalent at that time**.

Such exchange should be a cost derived from the assets or labor market of the enterprise, and not from the sale of its assets or services in the market where the business normally conducts its assets or services in the ordinary course of business.

Replacement cost is the cost at the present point in time, which emphasizes the value invested in an asset as the replacement cost from the perspective of the main body of the enterprise. In practice, replacement cost is mostly applied to the measurement of fixed assets.

The cost approach, also known as the replacement cost method, is a method of subtracting accrued wear and tear from the estimated current cost of renewing or replacing an asset, provided that the asset continues to be used.

The replacement cost method is a criterion for asset valuation, which is to use a ** index, such as CPI, to convert the value of the asset at the time of acquisition to the current value, or better yet, adjust each asset separately to reflect the true current replacement cost of each asset, so as to reflect both inflation and obsolescence. The biggest drawback of the replacement cost method is that it ignores organizational capital. In the case of replacement cost assessments, no matter how perfectly the replacement cost of each asset is measured, such an additional harmonized value is overlooked.

Under replacement cost measurement, assets are measured at the amount of cash or cash equivalents that would be paid to purchase the same or similar assets now; Liabilities are measured in the amount of cash or cash equivalents that are now required to pay the obligation.

The word you are talking about is one of the FRM vocabulary, and mastering the FRM vocabulary can make you feel like a fish in water in the learning of FRM, the translation and meaning of this word are as follows: the ** involved in replacing existing assets with similar assets.

The replacement cost method, also known as the cost method, refers to the method of determining the value of the assessed asset by deducting its various losses from the current re-envy cost of the asset at the time of asset valuation. So what are the relevant contents about replacement cost?

Meaning of replacement cost.

Replacement cost, also known as current cost, refers to the amount of cash or cash equivalent that needs to be paid to reacquire the same asset under current market conditions. In the case of replacement cost measurement, an asset is measured at the amount of cash or cash equivalents that would be paid to purchase the same or similar asset today. Liabilities are measured in the amount of cash or cash equivalents that would be required to pay the obligation now.

Generally, the methods that can be used to defeat this are the direct method, the functional value method, and the price index method.

The conditions under which the replacement cost method is applied.

In general, there are four prerequisites:

1) The purchaser shall not change the original use of the object of the proposed transaction.

ii) The physical characteristics, internal structure and functional utility of the assessee must be comparable to that of a hypothetically reset brand new asset.

3) The assessment object must be renewable and can be reproduced, and the assessment object that cannot be regenerated and replicated cannot be reproduced and cannot be reproduced using the replacement cost method.

4) The object of assessment must be assets that have obsolete depreciation over time, otherwise the replacement cost method cannot be used for valuation.

To apply replacement costs.

In the first step, once the assessee asset is identified, the full replacement price should be estimated using the current (valuation base date) market price based on the basic information such as the physical characteristics of the asset.

The second step is to determine the useful life, remaining useful life and total useful life of the asset to be assessed.

In the third step, the physical and functional wear and tear of the asset are estimated using the life depreciation method or other methods.

The fourth step is to estimate the net value of the asset to be assessed.