What does the cost model for capital assets primarily rely on?

The cost model for capital assets primarily relies on historical cost. This means that assets are recorded and reported at the original purchase price or the cost incurred to acquire them, including all expenditures necessary to bring the asset to its intended use. This approach emphasizes the actual cash outlay made at the time of acquisition, which provides a reliable measure of value that can be consistently applied over time.

Using historical cost allows for the implementation of a straightforward accounting approach where changes in market value do not directly impact the financial statements. Instead, the asset's value is assessed based on the cost incurred, and depreciation is then applied to allocate that cost over the asset's useful life. As a result, financial statements can reflect a consistent value for assets as they are depreciated over time, ensuring transparency and comparability for users of financial reports.

In contrast, fair market value and replacement cost are less stable and can lead to fluctuations in asset values based on market conditions, which the cost model intentionally avoids. Book value, while related, refers specifically to the carrying amount of an asset on the balance sheet after accounting for accumulated depreciation and does not capture the foundational principle of the cost model based on historical cost.