What does the cost model for PPE entail?

The cost model for property, plant, and equipment (PPE) under accounting standards stipulates that assets should be recognized at their initial cost. This initial cost includes all expenditures necessary to bring the asset to its intended use, such as purchase price, import duties, and directly attributable costs to prepare the asset for use.

Once the asset is recognized, it is carried on the balance sheet at this historical cost less any accumulated depreciation and impairment losses. Depreciation reflects the allocation of the asset's cost over its useful life, recognizing that the asset will typically lose value as it is used. Impairment losses arise when the carrying amount of the asset exceeds its recoverable amount, indicating that the asset may be overvalued on the balance sheet.

This method ensures that the carrying amount of the asset reflects its true economic value over time, in a way that is systematic and rational based on the pattern of consumption of the asset’s future economic benefits. Other options provided do not align with the specific guidelines set forth for the cost model. For example, fair value less acquisition costs (referred to in another option) does not reflect the historical cost approach mandated by the cost model, while replacement cost and expected future cash flows move towards valuation methods that consider