Historical cost
AccountingCarrying an asset at what was paid for it, less depreciation and impairment, rather than at what it is worth today.
Also written: historic cost, cost model, historical cost convention
Historical cost is the default measurement basis for most non financial assets under IFRS. It is chosen for reliability rather than relevance: the price actually paid is verifiable and hard to argue with, whereas current value is an estimate somebody has to defend.
The cost of that reliability is that the balance sheet drifts away from economic reality as assets age. Property bought decades ago sits at cost less depreciation and is frequently worth a multiple of that, while a specialist asset can be worth far less than its unamortised cost from the day it is installed.
The distortion becomes a comparison problem rather than a curiosity when two companies grew differently. IAS 38 forbids recognising internally generated brands and customer relationships, but the same items acquired in a transaction are recognised as intangibles at fair value. A company that bought its brands therefore shows a larger asset base and larger book equity than an identical company that built them, which is a substantial part of why book value based comparisons mislead.
IFRS does allow alternatives in places, notably the revaluation model in IAS 16 and fair value for investment property under IAS 40, which is why European property companies present a balance sheet that means something quite different from an industrial company's. US GAAP has no equivalent revaluation option, so the divergence is worth flagging in any cross border comparison.
Worked example
A distribution centre bought for 40 twenty years ago, depreciated over forty years, is carried at 20.
If a comparable site now transacts at 90, the balance sheet understates that single asset by 70. Nothing is wrong with the accounts, and any analysis resting on book equity is nonetheless working with a number that is two decades out of date.