Replacement cost

The use of replacement cost for valuing stock eliminates the effect of profits or losses made by carrying stocks. Supplies are valued at current cost, which is usually the average price over the period.

Replacement cost, FIFO, LIFO and average cost are all consistent with the accrual principle, but they differ in how the costs accrue.

Replacement cost is conceptually similar to mark to market, but implementation and practical issues are very different.

Replacement cost profit

Oil companies often disclose replacement cost profit. This is because the oil price is so volatile, they hold large stocks, and the amount stocked also varies significantly from one reporting period to period.

If inventory levels have not changed, then replacement cost profit should be the same as profit calculated using LIFO costs. If stock levels have changed LIFO based and replacement cost profits will be different. Unless price movements have been extreme or the change in stock levels very large the difference is unlikely to be material.

As replacement cost and replacement cost profit are not IFRS measure (or a GAAP measure where that still matters) its exact definition may vary a little from company to company.

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