Deemed cost

Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. Subsequent depreciation or amortisation assumes that the entity had initially recognised the asset or liability at the given date and that its cost was equal to the deemed cost.

To put it short – the introduction of deemed cost is a practical simplification to smoothen the first-time adoption of International Financial Reporting Standards.

But IFRS 1 BC 41 says:

Some measurements in accordance with IFRSs are based on the accumulation of past costs or other transaction data. If an entity has not previously collected the necessary information, collecting or estimating it retrospectively may be costly.  To avoid excessive cost, ED 1 proposed that an entity could use the fair value of an item of property, plant and equipment at the date of the transition to IFRSs as its deemed costs at that date if determining a cost-based measurement in accordance with IFRSs would involve undue cost or effort.Deemed cost

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BC 41… the Board noted that reconstructed cost data might be less relevant to users, and less reliable, than current fair value data.

And more of such arguments were made.

As a result IFRS 1 includes the following ways to used deemed-cost in the first-time adoption of IFRS:

IFRS 1 30 If an entity uses fair value in its opening IFRS statement of financial position as deemed cost for an item of property, plant and equipment, an investment property, an intangible asset or a right-of-use asset (see IFRS 1  paragraphs D5 and D7), the entity’s first IFRS financial statements shall disclose, for each line item in the opening IFRS statement of financial position:

  1. the aggregate of those fair values; and
  2. the aggregate adjustment to the carrying amounts reported under previous GAAP.

IFRS 1 31 Similarly, if an entity uses a deemed cost in its opening IFRS statement of financial position for an investment in a subsidiary, joint venture or associate in its separate financial statements (see IFRS 1 paragraph D15), the entity’s first IFRS separate financial statements shall disclose:

  1. the aggregate deemed-cost of those investments for which deemed cost is their previous GAAP carrying amount;
  2. the aggregate deemed-cost of those investments for which deemed cost is fair value; and
  3. the aggregate adjustment to the carrying amounts reported under previous GAAP.

IFRS 1 31A Use of deemed-cost for oil and gas assets

IFRS 1 31B Use of deemed-cost for operations subject to rate regulation

IFRS 1 31C Use of deemed-cost after severe hyperinflation

The deemed cost need not conform to fair value measurement techniques under IFRS 13 Fair value measurement. So, for example, if when adopting IFRS the entity uses the amortised cost method for a financial liability that had been acquired in a previous combination, then the effective rate of interest would be determined at the conversion date based on the estimated future cash flows from that date and using the deemed cost as the initial value. An unresolved issue is whether the deemed cost of the liability is the gross liability or the liability net of any intangible asset related to the financial liability.

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It should be noted that the intent of IFRS is that measurement of assets and liabilities should conform to IFRS after the adoption of IFRS. Allowing the use of previous accounting methods and of a deemed cost approach as of the acquisition date does not have the effect of permitting entities to continue to use non-conforming measurement methods. For example, a financial liability must, as required by IFRS 9, be measured at amortised cost or at fair value after adoption of IFRS.

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Deemed cost

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