In the conventions of Islamic accounting, the historical cost of an asset is its fair value at the date of its acquisition including any amounts incurred to prepare the asset for the entity’s use or to make it ready for disposal (resale). Fair value at the date of acquisition means the price paid by the entity (Islamic bank) to buy the asset in an arm’s length transaction.

In cases where an asset is acquired through a nonreciprocal transfer to the bank, fair value implies the market price at which a similar asset is exchanged in an arm’s length transaction between unrelated parties at the date of the transfer. The historical cost of a liability refers to the amount of money received by the bank when the liability was incurred or the amount at which the liability will be settled on its due date.

For example, the historical cost of a fixed asset such as vehicles or equipment would be equal to the cost acquisition plus any other expenses the bank incurred with respect to that asset such as import duties, local taxes, transport and loading charges, insurance and any other expenses directly related to this asset.