Merlin Law - October 2019

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All Acquisition Costs Should Be Included for Replacement Cost Values

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Insurance company adjusters often leave off the reasonably expected acquisition costs when determining replacement cost. While the actual pricing can become theoretical, the bottom line is that these acquisition costs can be a material cost, and every adjuster should include them when determining the top-line replacement cost value.

One site, AccountingTools, lists acquisition cost as follows:

“Acquisition cost refers to the all-in cost to purchase an asset. These costs include shipping, sales taxes, and customs fees, as well as the costs of site preparation, installation, and testing. When acquiring property, acquisition costs can include surveying, closing fees, and paying off liens. This amount is considered to be the book value of an asset.”

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The website Principles of Accounting noted:

“The correct amount of cost to allocate to a productive asset is based on those expenditures that are ordinary and necessary to get the item in place and in condition for its intended use. Such amounts include the purchase price (less any negotiated discounts), permits, freight, ordinary installation, initial setup/calibration/programming, and other normal costs associated with getting the item ready to use. These costs are termed capital expenditures and are assigned to an asset account.” Insurance adjusters doing their job properly will try to determine what these costs are when determining loss for contents and business property. For example, for some residential and commercial properties, the costs of interior decorators should be included and always be considered as an acquisition cost. I noted this before in “Hurricane Sandy Personal Property Claims — Include All Acquisition and Setup Costs to Determine Value” (Dec. 10, 2012), but I have recently come across some insurance company estimates without any of these costs.

Article by Chip Merlin (Aug. 17, 2019)

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