Chapter 4
An overview of
accounting for assets
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4-1
Objectives
• Understand the definition of an asset and the
associated asset recognition criteria
• Understand the process involved in determining
whether particular expenditures should be recognised
as assets (capitalised) or expensed
• Be able to describe some of the various asset
measurement rules currently being applied within
Australia
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4-2
Objectives (cont.)
• Be aware of the disclosure requirements contained in
AASB 101 ‘Presentation of Financial Statements’ as
they pertain to a reporting entity’s assets
• Be able to explain how to calculate the acquisition cost
of an asset
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4-3
Post-2004 numbering of Australian
Accounting Standards
• As we will be discussing particular accounting standards it is
useful to discuss how the standards are numbered.
• Accounting standards issued by the International Accounting
Standards Board (IASB) were until 2003 referred to as
International Accounting Standards (IAS)—older standards
• Accounting standards issued by the IASB from late 2003 are
referred to as International Financial Reporting Standards
(IFRSs)—newer standards
• The number allocated to AASB standards will depend on whether
the ‘adopted’ standard relates to an ‘old’ or ‘new’ international
standard
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4-4
Post-2004 numbering of Australian
Accounting Standards (cont.)
• Where the adopted standard relates to a standard with
an IAS prefix, the Australian standard will be
numbered from AASB 101 to AASB 199
• Where the Australian standard relates to a standard
with an IFRS prefix, the Australian standard will be
numbered from AASB 1 to 99
• Where Australia releases a standard that does not
have an international equivalent, the numbering
system will be from AASB 1001 to AASB 1099
Copyright  2007 McGraw-Hill Australia Pty Ltd
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4-5
Definition of assets
The AASB Framework definition of an asset:
• A resource controlled by the entity as a result of past events
and from which economic benefits are expected to flow to the
entity
– the above is the ‘definition’ of assets. Apart from the definition
we also need to consider:



When we recognise assets
How we are to measure assets
How we are to classify and disclose assets
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4-6
Definition of assets
•
Following from the definition, three essential characteristics
are required of an asset
1. Expected to provide future economic benefits
2. Must be controlled by the entity
3. Transaction or event giving rise to the control must have
occurred
‘Future economic benefits’
• Service potential being the essence of assets
• Common to both profit-seeking and not-for-profit entities
Future economic benefits can be described as the scarce
capacity to provide benefits to the entities that use them,
and is common to all assets irrespective of their physical
or other form
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4-7
Definition of assets (cont.)
Concept of control
• Control concept not specifically defined in the AASB
Framework
• Control not restricted to legal ownership
• Capacity of the entity to benefit from the asset in
pursuit of the entity’s objectives and to deny or
regulate access of others to those benefits
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4-8
Recognition criteria for assets
Under AASB Framework (par. 49)
• An asset is to be recognised in the balance sheet
only when
– it is probable that future economic benefits embodied in the
asset will eventuate; and
– the asset possesses a cost or other value that can be
measured reliably.
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4-9
Recognition criteria for assets (cont.)
‘Probable’
• Not defined specifically in the AASB Framework
• Considered to mean when expected probability of
future benefits arising is greater than 50%
• If it is considered ‘improbable’ that future economic
benefits will flow beyond current accounting period,
the asset needs to be expensed in the income
statement (AASB Framework, par. 90)
• ‘Probability’ is a matter for professional judgment
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4-10
Recognition criteria for assets (cont.)
Evaluating the probability of future benefits
• What was once considered an asset might need to be
expensed later
– Dr
Loss on write-down of asset
 Cr
Asset
• Professional judgment call that machine will generate positive
cash flows is assessed at less than 50%
• If, at a given time, expenditure not deemed likely to generate
future economic benefits then the asset should be expensed in
the period when it becomes apparent that insufficient benefits
will be realised – referred to as an impairment loss
Refer to Worked Example 4.1 on pp. 158-159—Asset
recognition and probable economic benefits
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4-11
Recognition criteria for assets (cont.)
Impairment of assets
• AASB 136
– when recoverable amount of an asset is less than its
carrying amount —the carrying amount of the asset must
be reduced to recoverable amount (impairment loss)
– ‘recoverable amount’ is the higher of an asset’s net selling
price and its value in use
– ‘carrying amount’ is the amount at which an asset is recorded
in the accounting records (after deducting accumulated
depreciation and accumulated impairment losses)
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4-12
Recognition criteria for assets (cont.)
Impairment of assets (cont.)
• Reinstatement of assets:
If in a subsequent period the recoverable amount of
an asset increases towards formal levels (benefits
now probable)
– the asset can be recognised when it so qualifies
Dr Asset
Cr Gain from reinstatement of asset previously written
off
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4-13
Recognition criteria for assets (cont.)
‘Impairment of assets’
AASB 136
– An impairment loss recognised for an asset in prior years
must be reversed when, and only when, there has been a
change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was
recognised. If this is the case, the carrying amount of the
asset must be increased to its recoverable amount.
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4-14
Recognition criteria for assets (cont.)
Impairment of assets (cont.)
• Some accounting standards specifically exclude reversal for
particular types of assets
- for example, once an intangible asset (brand name, patent,
development expenditure) is written off it cannot be reinstated,
even where future economic benefits are deemed probable (is
this conceptually sound?)
Effect
• Balance sheet understates assets controlled by entity
AASB 136 (reversal of prior period impairment losses)
• Overridden by other accounting standards that provide
requirements for specific classes of assets
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4-15
Recognition criteria for assets (cont.)
Asset measurement
• Rules of measurement may vary across different types
of assets
• Various measurement rules currently in use in
Australia
– for example, inventory at lower of cost and net
realisable value and non-current assets at fair value
Result
• Sum of total assets will not reflect either cost or net
market value
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4-16
Recognition criteria for assets (cont.)
Asset measurement (cont.)
• One method of valuation to apply to all assets unlikely,
e.g. market value or fair value
• Measurement practices (under AASB Framework)
need to be consistent with accounting standards
• Significant changes to generally accepted accounting
practice likely to be opposed by significant proportion
of financial statement preparers
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4-17
Recognition criteria for assets (cont.)
Asset measurement (cont.)
• Determining appropriate measurement bases for some assets
is problematic
– are there ‘economic benefits’?
– museums, art galleries, botanical gardens?
‘heritage assets’: often negative cash flows
• Valuation of biological assets, e.g. trees on plantation
– based on cost of seedlings?
– take into account maintenance costs?
– consider present value (with assumptions)?
Refer to Table 4.1 on page 161—Some classes of assets and
their associated measurement rules – what does the number
‘total assets’ actually represent given that we are combining the
values derived from so many different measurement bases?
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4-18
Recognition criteria for assets (cont.)
Historical cost vs present value/market value
• Preferred basis of management considered by
Houghton and Tan (1995)
• Surveyed CFOs and found:
– 80% satisfied with historical cost in current
modified form
– historical cost objective and verifiable, easily
understood and widely known
• Questionable whether shift from historical cost would
be successful
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4-19
General classification of assets
Current assets
• AASB 101 ‘Presentation of Financial Statements’
• Current asset (balance sheet) if
(a) expected to be realised in, or intended for sale or consumption in,
the entity’s normal operating cycle
(b) it is held primarily for the purpose of being traded
(c) it is expected to be realised within 12 months after the reporting
date; or
(d) it is a cash or cash equivalent (under AASB 107 ‘Cash Flow
Statement’
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4-20
General classification of liabilities
Current liabilities
• AASB 101 ‘Presentation of Financial Statements’
• Current liability (balance sheet) if:
(a) expected to be settled in the entity’s normal operating cycle
(b) it is held primarily for the purpose of being traded
(c) it is due to be settled within 12 months after the reporting date; or
(d) the entity does not have an unconditional right to defer settlement of the
liability for at least 12 months after the reporting date.
•
When an entity’s normal operating cycle is not clearly identifiable, its
duration is assumed to be 12 months
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4-21
How to present a balance sheet
•
Two basic approaches (under AASB 101, par. 51)
1. current/Non-current presentation
2. liquidity presentation
•
Current and non-current assets and current and
non-current liabilities are to be presented
separately, except:
– when presentation in order of liquidity provides information
that is reliable and more relevant
•
In which case all assets and liabilities to be
presented broadly in order of liquidity
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4-22
How to present a balance sheet (cont.)
AASB 101
• Does not prescribe a single format
• Commentary (pars 53 and 54)
– If goods and services supplied within clearly identifiable
operating cycle, classification into current/non-current
deemed useful for decision making, e.g. working capital vs
long-term operations
– If financial institution—a decreasing order of liquidity format
more suitable, i.e. more relevant for decision makers
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4-23
How to present a balance sheet (cont.)
AASB 101
• Requires specific disclosures in relation to the
duration of an operating cycle
• If current vs non-current method adopted and entity
has a single, clearly identifiable operating cycle
greater than 12 months, the length of the operating
cycle must be disclosed
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4-24
How to present a balance sheet (cont.)
AASB 101
• Appendices offer illustrations of formats:
– current/Non-current approach (see Exhibit 4.3, p. 169)
– liquidity approach (see Exhibit 4.2, p. 167)
• Entities may elect to provide subtotals, e.g.
(a) total assets less total liabilities equals net assets/equity;
or
(b) total assets equals total liabilities plus total equity.
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4-25
How to present a balance sheet (cont.)
Pursuant to AASB 101, the face of the balance
sheet is to include, at a minimum, aggregate line
items that represent
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
property, plant and equipment
investment property
intangible assets
financial assets
investments accounted for using equity method
biological assets
inventories
trade and other receivables
cash and cash equivalents
trade and other payables
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4-26
How to present a balance sheet (cont.)
Specific disclosures (under AASB 101) (cont.)
(k)
(l)
(m)
(n)
(o)
(p)
provisions
financial liabilities
liabilities and assets for current tax (AASB 112)
deferred tax liabilities and assets (AASB 112)
minority interest (presented within equity)
issued capital and reserves (attributable to equity holders of
parent)
Additional lines can be presented (par. 72), taking into account:
•
The nature and liquidity of assets
•
The function of assets within the entity
•
The amounts, nature and timing of liabilities
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4-27
How to present a balance sheet (cont.)
Entities may choose to provide other subtotals in addition to
those provided in the exhibits, such as:
• Total assets less total liabilities equals net
assets/equity; or
• Total assets equals liabilities plus equity
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4-28
Determination of future economic
benefits
• Can be derived from the use of the asset within the
reporting entity or through sale of the asset to an
external party
• Where the recoverable amount is less than its cost,
the asset should be written down to its recoverable
amount (AASB 136)
– recoverable amount being the higher of an asset’s net selling
price and its value in use
– write-down referred to as recognition of ‘impairment loss’
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4-29
Determination of future economic
benefits (cont.)
• Where recoverable amount of asset is to be based on
market value, future cash flows are often easy to
determine
• If an asset’s value is to be determined by its value in
use, determining this value can be highly subjective
(e.g. specialised asset)
• AASB 136: ‘value in use’—the present value of
estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the
end of its useful life
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4-30
Determination of future economic
benefits (cont.)
• If an asset is held for a number of periods, the service
potential of the asset is expected to decline over
time—it should be recognised as an expense
• The asset should be amortised over the period of its
useful life
• If there is a uniform flow of economic benefits over a
fixed period, the asset should be expensed on a time
basis
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4-31
Determination of future economic
benefits (cont.)
• If the benefit to the business is for an indefinite period
with a specified minimum term, the asset should be
amortised over the minimum term
• If time is indeterminate or so extended that it is not
practical to determine an apportionment of expenditure
based on assessments of expected related revenue,
amortisation should be done on a time basis over a
short period (say five years)
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4-32
Acquisition cost of assets
A number of accounting standards are relevant:
• Intangible assets (AASB 138)
- intangible assets: non-monetary assets without
physical substance, e.g. patents, trademarks,
customer lists, research and development
- excludes the recognition of certain intangible assets
for balance sheet purposes, e.g. internally generated
goodwill, mastheads, research expenditure
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4-33
Acquisition cost of assets (cont.)
Intangible assets (cont.)
For intangible assets that can be recognised for
balance sheet purposes (e.g. development
expenditure) the ‘cost’ of an internally generated
intangible asset comprises all expenditure that can be
directly attributed to it and is necessary in preparing
the asset to be capable of operating in the manner
intended by management
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4-34
Acquisition cost of assets (cont.)
Intangible assets (cont.)
‘Costs’ could include
• Expenditure on material and services used or consumed in
generating the intangible asset
• Salaries, wages and other employment-related costs involved
directly in generating the asset
• Expenditure that is directly attributable to generating the asset
(e.g. fees and amortisation of patents and licences)
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4-35
Acquisition cost of assets (cont.)
Property, plant and equipment (AASB 116)
This class to be recognised as an asset when and only
when
(a) it is probable that future economic benefits associated
with the asset will flow to the entity; and
(b) the cost of the asset or, when the asset is carried at a
revalued amount, the fair value of the asset can be
measured reliably
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4-36
Acquisition cost of assets (cont.)
Property, plant and equipment (AASB 116) (cont.)
If item qualifies as an asset it must be recognised at
‘cost’. Cost includes
(a) purchase price, including import duties and non-refundable
purchase taxes after deducting trade discounts and rebates
(b) any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by management; and
(c) initial estimates of the costs of dismantling and removing the
item and restoring it
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4-37
Acquisition cost of assets (cont.)
Property, plant and equipment (AASB 116)
‘Directly attributable costs’ include
(a) costs of employee benefits arising from the construction or
acquisition of the item of property, plant and equipment
(b) costs of site preparation
(c) initial delivery and handling costs
(d) installation and assembly costs
(e) costs of testing whether asset is functioning properly, after
deducting the net proceeds from selling any items produced while
bringing the asset to that location and condition (e.g. samples)
(f) professional fees
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4-38
Acquisition cost of assets (cont.)
Acquisition of property, plant and equipment other
than by cash
• If acquired in exchange for equity instruments (e.g. shares)
cost is fair value of equity instruments issued (fair value: amount
for which an asset can be exchanged between knowledgeable,
willing parties in arm’s length transaction)
• ‘Fair value of consideration’ Used to measure acquisition cost
of asset. When consideration is the purchaser’s own equity
instruments (e.g. shares not listed on the stock exchange) the
fair value of the asset acquired is used to measure the value of
the equity issue
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4-39
Acquisition cost of assets (cont.)
Acquisition of property, plant and equipment other than
by cash (cont.)
Acquisition can also be based on an exchange of assets
(property, plant and equipment)
Cost of asset measured as the fair value of the asset given up,
adjusted by the amount of any cash or cash equivalents that are
transferred
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4-40
Acquisition cost of assets (cont.)
If fair value of asset is given up or that of the asset being received can
be reliably determined (e.g. asset is unique), cost of property, plant and
equipment acquired in exchange for a similar asset is to be measured
at the carrying amount of the asset given up in the exchange
Note: Subsequent accounting periods will require adjustments to the
value of the asset (post-acquisition) by way of depreciation, recognition
of impairment losses or, possibly, asset revaluations
Refer to Worked Example 4.3 on page 177—Determining the
acquisition costs of assets
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4-41
Determining the cost of an asset
• Assume that an asset (land) is acquired for the
following consideration
–
–
–
–
cash: $100,000
shares: 20,000 shares with a market value of $4.00 each
machinery: Cost $50,000, accumulated depreciation, $15,000
market value $30,000.
• What is the cost of the land, and what are the journal
entries?
• What if the land had been acquired at no cost?
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4-42
Acquisition cost of assets (cont.)
What about borrowing costs (capitalise or
expense)?
AASB 123—‘interest and other costs incurred by an
entity in connection with the borrowing of funds’
‘Benchmark treatment’—borrowing costs to be
recognised as an expense in the period in which
incurred
AASB 123 (par. 11)—an exception being: ‘borrowing
costs that are directly attributable to the acquisition,
construction or production of a qualifying asset shall
be capitalised as part of the cost of that asset’
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4-43
Acquisition cost of assets (cont.)
What about borrowing costs (capitalise or expense)?
(cont.)
‘Qualifying asset’—an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale
‘Substantial period of time’—generally more than 12 months
Borrowing costs to be included are those that that would have
been avoided if the expenditure on the asset had not been
incurred
Capitalisation of borrowing costs to cease when substantially all
the activities necessary to prepare the asset for its intended use
or sale are complete
Capitalising borrowing costs results in deferring expenses to later
periods (e.g. depreciation or cost of sales)
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4-44
Acquisition cost of assets (cont.)
Resources acquired at no cost (e.g. donation)
To be recognised as an asset to the extent that it is expected to
provide probable and measurable future economic benefits
– Dr Asset
Cr Donation income (or similar)
In the books of the entity donating the asset:
– Dr Donation expense (or similar)
Cr Provision for depreciation
Cr Asset
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4-45
Acquisition cost of assets (cont.)
Resources acquired at no cost (e.g. donation)
Note: strict interpretation of AASB 116 would mean initially no cost
nor revenue recorded as result of donation but entity likely to
revalue asset to fair value. Para 16 - an item of property, plant
and equipment that qualifies for recognition as an asset shall be
measured at cost.
Refer to Worked Example 4.4, pp. 181—Accounting for an
asset acquired at no cost
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4-46
Additional subsequent expenditure
• Additional expenditure subsequent to purchase is
either
– capitalised if expected to increase future economic benefits;
or
– expensed if expected to maintain current level of future
economic benefits
• Capitalised value of non-current asset and any
subsequent capitalised improvements are to be
depreciated over expected useful life of the asset
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4-47
Additional subsequent expenditure
(cont.)
AASB 116
• An entity does not recognise in the carrying amount of an item of
property, plant and equipment the costs of the day-to-day
servicing of the item. These costs are recognised in the profit and
loss as incurred. Costs of day-to-day servicing are primarily the
costs of labour and consumables, and may include the cost of
small parts. The purpose of these expenditures is often described
as for the ‘repairs and maintenance’ of the item of property, plant
and equipment.
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4-48
Discovery of errors in prior periods
Example: Prior period inventory valued in excess of net
realisable value (overstated)
AASB 108 ‘Accounting Policies, Changes in Estimates and Errors’
An entity is to correct material prior period errors retrospectively
in the first financial report authorised for issue after their
discovery by
(a) restating comparative amounts for the prior period(s) presented in
which the error occurred; or
(b) if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity for
the earliest prior period presented.
Result: A retrospective basis for the correction of errors, thus
adopting the perspective that the financial statements are
presented on the basis that the error never occurred
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4-49
Summary
The purpose of the chapter is to explore a number of
issues that relate to assets
–
–
–
–
assets are defined as resources controlled by an entity as a
result of past events and from which future economic
benefits are expected to flow to the entity
requires recognition criteria to apply—AASB Framework
states that for an asset to be recognised, the future
economic benefits must be both probable and capable of
reliable measurement
recognition of assets therefore based on professional
judgment (see recognition criteria)
for different classes of assets (later chapters) other criteria
for recognition will need to be applied pursuant to the
relevant accounting standards
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4-50
Summary (cont.)
•
•
•
•
•
Classes of assets are typically measured using different measurement
rules
There are no paragraphs within the AASB Framework that provide
measurement rules for assets generally—each accounting standard
that addresses the method of accounting for a particular class of
assets typically provides measurement rules specific to that class
AASB 116 ‘Property Plant and Equipment’ and AASB 138 ‘Intangible
Assets’ were addressed in in the chapter
Cost of acquisition of an asset is considered to be the purchase
consideration plus any costs incidental to the acquisition
Purchase consideration is typically measured in terms of the fair value
of the assets given up in exchange
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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