Deemed Cost

Deemed cost represents a substituted value for the net book value of an asset when an entity transitions to a new accounting regime. This approach allows entities to treat assets as if initially recognized at this value on the specified date.
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Deemed Cost

Definition

Deemed cost is an accounting term referring to an amount that replaces the net book value of an asset at a specific date, particularly when an organization transitions to a new accounting framework. This substituted amount is treated as if the asset had originally been recognized at this value on that date. For instance, under the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102 Section 35), entities adopting the new standard for the first time may choose to measure their property, plant, and equipment at fair value (or previously recognized valuation) on the transition date. This assessed value becomes the deemed cost from that point onward.

Examples

Example 1: A manufacturing company transitioning from local GAAP to IFRS decides to value its machinery at fair value on the date of transition. The fair value calculated is $1,500,000, and this value is now treated as the deemed cost of the machinery as of the transition date.

Example 2: An entity in the real estate sector elects to use the fair value of its properties upon first-time adoption of a new financial reporting standard. The fair valuation results in $10,000,000, replacing the previously recorded net book value. This valuation now serves as the deemed cost for accounting purposes moving forward.

Frequently Asked Questions

1. What is the purpose of using deemed cost in accounting?

  • Deemed cost facilitates a smoother transition from old to new accounting standards by allowing entities to revalue their assets and recognize them at fair value as of the transition date.

2. Can deemed cost be applied to all types of assets?

  • It is typically applied to property, plant, and equipment, but specific standards may allow or restrict its use for other asset categories.

3. How does deemed cost differ from historical cost?

  • Historical cost is the original purchase price of an asset, while deemed cost is a revalued amount assigned at a specific date to aid transitions between accounting regimes.

4. Is deemed cost a mandatory requirement?

  • No, entities can choose whether to use deemed cost, but it is often elected to provide more relevant valuations during transitions.

5. Does adopting deemed cost affect depreciation calculations?

  • Yes, future depreciation charges will be based on the newly established deemed cost rather than the original historical cost.
  • Net Book Value: The carrying value of an asset after subtracting accumulated depreciation and impairment losses from its historical cost.
  • Fair Value: The estimated market value of an asset at a particular date, reflecting its worth in current market conditions.
  • Financial Reporting Standards: Guidelines and frameworks governing how financial statements should be prepared, offering consistency and comparability across entities.

Online References

Suggested Books for Further Studies

  1. International Financial Reporting Standards (IFRS) 2019 by Wiley
  2. Financial Accounting and Reporting by Barry Elliott and Jamie Elliott
  3. Wiley IFRS 2020: Interpretation and Application of IFRS Standards by PKF International Ltd

Accounting Basics: “Deemed Cost” Fundamentals Quiz

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