Historical cost

What it means

Historical cost means valuing an asset at the amount originally paid for it, regardless of later price changes. For purchased assets this is the acquisition cost including related costs, and for self-constructed assets it is the own production cost.

It is the foundation of Slovak accounting because it can be verified from documents and is objective: the invoice shows exactly what the company paid. The Accounting Act therefore values most assets at historical cost, reduced by depreciation or impairment allowances.

The opposite is fair value, based on the current market price. Slovak accounting uses it only for certain items, such as trading securities or derivatives, whereas IFRS also allows fair value for investment property.

How it works in practice

If a company acquires an asset free of charge, for example as a gift or contribution, there is no historical purchase cost. It is then valued at replacement cost, the price at which the asset could be acquired at the time of recording.

Historical cost is not revised upwards after acquisition, even if the asset's value rises. If the value falls below the carrying amount, the company records an impairment allowance so the asset is not overstated, in line with the prudence principle.

When a company is sold or a loan is arranged, an expert valuation is often carried out to show market value. Land bought decades ago may be carried in the balance sheet at a fraction of its current value, which the balance sheet alone will not reveal.

What to watch out for

In times of inflation, historical cost can seriously understate an asset's real worth. The balance sheet then does not give a full picture of the company's wealth, and decisions should also draw on market value estimates, not just accounting figures.

Low depreciation based on historical costs can overstate profit because it does not reflect the cost of replacing old assets with new ones. When planning investment, a company should therefore use today's prices so it is not surprised by the cost of renewing machinery or buildings.