Historical Cost in 2025: What Australian Investors Need to Know

In a world of market volatility, fair value revaluations, and rapidly evolving accounting standards, the concept of historical cost is often overlooked. Yet, for Australian investors, business owners, and anyone interpreting financial statements, understanding historical cost is crucial—especially in 2025, when policy changes and market pressures are reshaping the financial reporting landscape.

What Is Historical Cost and Why Is It Controversial?

Historical cost is the original monetary value of an asset or liability recorded at the time of acquisition. For example, if a business buys a property for $2 million in 2010, it continues to report that asset at $2 million on its balance sheet, regardless of current market value. This principle is rooted in objectivity and verifiability, making financial statements less susceptible to manipulation.

• Objectivity: Based on actual transactions, not subjective estimates.

• Simplicity: Easier for businesses and auditors to verify and track.

• Comparability: Facilitates apples-to-apples analysis over time.

But critics argue historical cost can distort reality in inflationary environments or fast-moving markets. For instance, a property bought decades ago will appear undervalued on a balance sheet, masking the true net worth of a company.

Recent Policy Updates in Australia: Where Historical Cost Stands in 2025

The Australian Accounting Standards Board (AASB) continues to require historical cost as the default measurement for many assets and liabilities. However, 2025 has brought renewed debate and targeted reforms:

• Inflation-Adjusted Reporting: Following persistent inflation in 2023–2024, Treasury has encouraged more frequent fair value disclosures for property, plant, and equipment (PPE), though historical cost remains mandatory for initial recognition.

• IFRS Alignment: Australia’s commitment to International Financial Reporting Standards (IFRS) means listed companies often present both historical cost and fair value metrics, especially for investment property and financial instruments.

• SME Simplifications: The AASB’s 2025 update for small and medium enterprises (SMEs) offers streamlined reporting, but still relies on historical cost as the backbone measurement.

For investors, this means annual reports may now contain more dual reporting—historical cost figures alongside revalued amounts—especially in industries like real estate, mining, and agriculture.

Real-World Impacts: How Historical Cost Affects Investment Decisions

Suppose you’re analysing two ASX-listed property trusts. One acquired a portfolio of Sydney office towers in 2010; the other made similar purchases in 2024. If you look only at the historical cost figures, the older trust’s assets will seem far less valuable—potentially distorting your view of its balance sheet strength and return on equity.

This isn’t just academic. In 2025, superannuation funds, family offices, and private investors are increasingly scrutinising the notes to accounts, searching for fair value disclosures to get a true sense of underlying asset value. Recent high-profile cases—such as the devaluation of office property portfolios post-COVID—have highlighted how reliance on historical cost can obscure risks or opportunities.

• Taxation: The ATO still calculates capital gains tax (CGT) based on original purchase price, making historical cost vital for tax planning.

• Lending & Credit: Banks may require updated appraisals for collateral, but initial loan-to-value ratios are often based on historical cost.

• M&A Activity: Buyers and sellers must reconcile historical cost with current market value when negotiating business sales.

Investors who dig deeper—beyond the headline historical cost numbers—are better positioned to spot undervalued assets or hidden liabilities.

Looking Forward: Is Historical Cost Still Fit for Purpose?

While calls for full fair value accounting grow louder in some sectors, historical cost remains a cornerstone of Australian financial reporting. Its strengths—clarity, auditability, and consistency—are hard to ignore, especially for SMEs and long-term investors.

But the landscape is shifting. As digital assets and intangible investments become more common, pressure mounts for updated accounting rules. In 2025, the smart move is to understand both what historical cost tells you—and what it leaves out.