What does the cost approach in fair value measurement focus on?

The cost approach in fair value measurement emphasizes the current replacement cost of an asset, which is the amount that would be required to replace the asset at its current value, considering the same utility. This method is grounded in the principle that the fair value of an asset is reflected in the cost to replace it with a similar asset, accounting for any physical or functional obsolescence.

This approach is particularly relevant for assets that are specialized or not traded in an active market, as it provides a clear method to assess value based on the effort and resources required to replicate the asset. It takes into account factors like technology changes, improvement in production methods, and other aspects that may affect the cost.

In contrast, the other approaches focus on different aspects of valuation. For instance, looking at sales of identical assets pertains more to the market approach, where comparable transactions guide the valuation. The future cash flows generated from an asset align with the income approach, which assesses value based on the expected benefits derived from the asset over time. The historical cost of the asset, while it provides a basis for understanding the original investment, does not reflect current valuation and is generally not used for fair value measurements. Therefore, the focus of the cost approach is distinctly on the current replacement cost