Historical cost principle

Meaning

The historical cost principle (مبدأ التكلفة التاريخية) says an asset goes into the books at the price actually paid to acquire it: the purchase price plus the costs of getting it ready for use, such as delivery, customs duty and installation. VAT that can be reclaimed is not part of the cost. The figure is verifiable from the invoice, which is why it is the default basis of the accounts.

Cost is the starting point, not a fixed number for ever. A machine is depreciated over its useful life, stock is written down when it can only be sold for less than it cost, and the IFRS standards endorsed in the Kingdom by SOCPA allow some assets, such as investment property or listed shares, to be measured at fair value instead. Where a business uses another basis, its accounting policies say so.

Also called: historical cost · cost principle · cost basis · مبدأ التكلفة التاريخية

Example

Al Noor Trading buys a forklift for 85,000.00 plus 15% VAT, pays 2,500.00 to deliver it and 1,500.00 to fit it. The forklift is recorded at 89,000.00; the 12,750.00 of VAT is reclaimed in the VAT return and is not part of the cost. Two years later a similar forklift sells for 95,000.00, but the books still start from 89,000.00 less the depreciation charged.