What is Historical Cost Principle?
The historical cost principle is an accounting concept that requires most assets and liabilities to be recorded at their original transaction cost rather than at current fair value. It promotes objectivity and verifiability because the original cost is supported by documentary evidence. Some items (financial instruments, biological assets, investment property) are exceptions and use fair value.
How It Works
- Record acquired assets at the cash paid plus directly attributable costs.
- Do not generally write up assets for subsequent market appreciation.
- Apply depreciation, amortization, or impairment to reflect consumption or loss in value.
- Apply fair value where IFRS or local GAAP specifically requires (e.g., IAS 41, IFRS 9).
- Disclose accounting policy choices in the notes.
Saudi Context
SOCPA-aligned IFRS in Saudi Arabia uses historical cost as the default for most PP&E, while permitting the revaluation model under IAS 16 for certain asset classes. ZATCA also generally requires historical cost for tax-deductible asset bases and depreciation calculations.
Example
A company buys a building for SAR 5,000,000 in 2020. By 2025, market value has risen to SAR 7,500,000. Under the historical cost principle, the building remains on the balance sheet at SAR 5m less accumulated depreciation, not at the SAR 7.5m market value, unless the company applies the revaluation model under IAS 16.