What is Cost Model?
IAS 16.30 states the cost model in a single sentence: after recognition, an entity carries the asset at its cost less any accumulated depreciation and any accumulated impairment losses. The simplicity is deceptive. The model still requires the entity to determine useful life, select a depreciation method, estimate residual value, and review all three at least at each financial year-end (IAS 16.51). It also requires an impairment test whenever indicators exist under IAS 36.
The election sits at the class level, not the asset level. IAS 16.29 defines "class" as a grouping of assets of a similar nature and use. Land and buildings are separate classes. Vehicles are a class. An entity cannot apply the cost model to half its machinery and the revaluation model to the other half. ISA 540.13(a) directs the auditor to evaluate whether the entity's method is appropriate for the asset class, which includes confirming that the policy election is applied consistently across the class.
For intangible assets, IAS 38.74 permits the cost model under identical mechanics. The revaluation alternative under IAS 38.75 is available only when an active market exists for the intangible, which is rare outside broadcasting licences and certain quota rights.
Key Points
- Under the cost model, the carrying amount equals historical cost minus accumulated depreciation minus accumulated impairment losses.
- The choice between cost model and revaluation model is made per class of PP&E, not per individual asset.
- Residual value and useful life must both be reviewed at least once per financial year at the reporting date.
- Setting residual value at zero without documentation is one of the most common inspection findings for PP&E-heavy entities.
Worked example: Hoffmann Maschinenbau GmbH
Client: German engineering company, FY2025, revenue €28M, HGB reporter also preparing IFRS-compliant group reporting. Hoffmann acquires a CNC milling centre on 1 March 2025 for €640,000. Delivery and installation costs total €24,000. The entity estimates a useful life of eight years, a residual value of €40,000, and applies straight-line depreciation. Hoffmann elects the cost model for its machinery class.
Step 1 — Determine initial cost
Purchase price of €640,000 plus directly attributable costs of €24,000 gives an initial cost of €664,000 per IAS 16.16(b).
Documentation note: record the cost build-up per IAS 16.16–17, cross-referencing the supplier invoice and the installation contractor invoice. Confirm no borrowing costs are capitalised (the asset does not qualify under IAS 23 because the acquisition period is less than one month).
Step 2 — Calculate annual depreciation
The depreciable amount is €664,000 minus residual value of €40,000, giving €624,000. Annual depreciation is €624,000 divided by eight years, which is €78,000. For FY2025, Hoffmann depreciates from 1 March to 31 December (10 months), producing a charge of €65,000.
Documentation note: record the depreciable amount, the depreciation method (straight-line per IAS 16.62), the useful life estimate of eight years, and the residual value estimate of €40,000 per IAS 16.73(b)–(d). Note that 10 months of depreciation applies in the first year.
Step 3 — Assess impairment indicators at year-end
At 31 December 2025, Hoffmann reviews external and internal indicators per IAS 36.12. No indicators are present: the machine is operating at planned capacity and order backlog supports continued utilisation through 2026.
Documentation note: record the indicator review per IAS 36.9. State that no impairment test is required because no indicators were identified. If indicators had existed, the entity would determine recoverable amount per IAS 36.18.
Step 4 — Determine carrying amount at 31 December 2025
Cost of €664,000 less accumulated depreciation of €65,000 less impairment of nil gives a carrying amount of €599,000.
Documentation note: reconcile opening cost, additions, depreciation charge, and impairment (nil) to the closing carrying amount of €599,000 per IAS 16.73(d)–(e). Cross-reference to the fixed asset register and the trial balance.
Conclusion: a carrying amount of €599,000 under the cost model is defensible because each component (initial cost, useful life, residual value, depreciation method, and impairment indicator review) is documented and traceable to supporting evidence.
Why it matters in practice
Teams frequently set the residual value at zero by default without documenting the assessment. IAS 16.51 requires a review of residual value at least at each financial year-end. ISA 540.13(b) directs the auditor to evaluate whether the assumptions used are appropriate. A blanket zero residual value for assets that will be sold or traded in at the end of their useful life misstates the depreciable amount and overstates the annual depreciation charge.
The impairment indicator review under the cost model is often treated as a formality. Entities tick "no indicators" without documenting which external and internal sources of information they considered per IAS 36.12. The AFM has flagged insufficient documentation of impairment trigger assessments in its inspection findings on asset-heavy companies, noting that a bare assertion of "no indicators" does not satisfy the standard.
Cost model vs. [revaluation model](/glossary/revaluation-model)
| Dimension | Cost model (IAS 16.30) | Revaluation model (IAS 16.31) |
|---|---|---|
| Measurement basis | Historical cost less depreciation less impairment | Fair value at revaluation date less subsequent depreciation and impairment |
| Revaluation surplus | Not applicable | Recognised in other comprehensive income and accumulated in equity |
| Frequency of remeasurement | No remeasurement; depreciation and impairment only | Revaluations must be sufficiently regular to keep carrying amount close to fair value (IAS 16.31) |
| Valuer requirement | None | Typically requires an independent valuation, particularly for land and buildings |
| Common application | Machinery, vehicles, equipment, IT hardware | Land and buildings (investment property where IAS 40 fair value model is not elected) |
The choice matters when an entity's assets appreciate. The cost model ignores appreciation entirely; the revaluation model captures it in equity. For asset classes where fair values are volatile or hard to obtain (production machinery, bespoke tooling), the cost model avoids the recurring valuation cost and the earnings volatility that revaluation reversals can introduce.
Related terms
Frequently asked questions
Can I switch from the cost model to the revaluation model?
Yes, but IAS 8.14 treats a voluntary change in accounting policy as permitted only if it results in more relevant and reliable information. The entity must apply the change retrospectively unless impracticable. ISA 540.13(a) requires the auditor to evaluate whether the new method is appropriate and whether the entity has a reliable source of fair values for the entire class.
Do I need an impairment test every year under the cost model?
Not automatically. IAS 36.9 requires the entity to assess at each reporting date whether any indicator of impairment exists. A formal impairment test (calculating recoverable amount) is required only when indicators are present. The exception is goodwill and indefinite-life intangibles, which must be tested annually regardless of indicators per IAS 36.10.
How does the cost model work for intangible assets?
Identically. IAS 38.74 applies the same mechanics: cost less accumulated amortisation less accumulated impairment losses. The revaluation model under IAS 38.75 is restricted to intangibles with an active market, so in practice the cost model is the default for nearly all intangible assets, including software and customer relationships acquired in business combinations.