Types of future economic benefits
The future economic benefit embodied in an asset
is the potential to contribute to an entity's net
cash inflow [F.53]. These benefits may arise in
a number of ways. Benefits may result from the productive
capacity of, for example, plant and equipment. These,
however, do not automatically qualify as assets,
as there may be circumstances in which they become
obsolete and lose their capacity to provide benefits
to an entity [IAS16R.7] [IAS38.21] [IAS40R.16] [IAS41.10].
Alternately, future economic benefits may result
in an asset's ability to reduce cash outflows [F.53].
For example, an entity's research and development
efforts may produce a superior production process
that lowers the future cost of production [IAS38.57-61].
However, much expenditure that reduces future cash
outflows does not give rise to future benefits that
the entity can control, and should not be recognised
as either tangible or intangible assets [F.59] .
Prepayments are assets because they represent rights
to receive services in the future [F.57] . Cash in
hand is an asset because it can be exchanged for
goods and services (economic benefits). Receivables
and investments are direct claims to cash inflows
[F.53-54].
Future economic benefits may also arise from the
rights conveyed to an entity under specific business
arrangements. For example, rights under joint ventures
and lease agreements provide benefits through the
right to share in the benefits of the venture and
for leases the right to use particular property,
plant or equipment to generate future benefits [F.55-57] [IAS17R.4,20-32] [IAS31R.3].
Control
Control relates to an entity's capacity to benefit
exclusively from the benefit (or certain of the
benefits) embodied in a particular asset. The entity
that controls the asset can use it to provide goods
and services, to settle liabilities or make distributions
to owners [F.55].
The entity's capacity to control an asset's benefits
usually arises from legal rights, but an item may
satisfy the definition of an asset even where there
is no legal right. For example, the substance of
business arrangements may give an entity control
over the benefits (and expose it to the risks) that
are expected to flow from an asset without specific
legal rights. To analyse transactions in accordance
with their substance and economic reality and not
merely their legal form to determine where control
over future benefits (and risks) lies is fundamental
to assess whether it is an asset of the entity [F.57]
.
Ownership is usually synonymous with control. An
entity may however own plant and equipment but lease
it to another party under a finance lease arrangement.
In this case the entity (lessor) does not control
the future benefits [IAS17R.36-37].
Likewise, possession of an asset will usually indicate
control; however, an entity may hold cash as agent
for another party and be restricted from using it
in an exchange transaction, and hence does not control
the asset .
Past events
Assets arise from past transactions or past events.
Entities would normally obtain assets by: purchasing
them for cash; from credit or barter transactions;
by selling goods and services; or by entering into
arrangements that provide rights to future benefits
[F.58-59]. Resource-type assets may also arise from
discovery, although recognition will generally occur
on extraction of the resources. Biological assets
and agricultural produce arise from agricultural
activity [IAS41.5-7].
An entity may not need to incur expenditure to
recognise an asset. An asset donated to an entity
is acquired free of charge, yet has the capacity
to generate future economic benefits and hence meets
the definition of an asset [F.59] .
Tangibility
Tangibility is not an essential characteristic of
an asset. IFRS specifically defines intangible assets
as identifiable non-monetary assets without physical
substance, held for use in the production or supply
of goods or services, for rental to others, or for
administrative purposes [IAS38.8].
Initial recognition
Recognition of assets is a process of recognising
on the balance sheet an item that meets the definition
of an asset and satisfies the recognition criteria
for assets [F.82].
To recognise an asset an entity must deem it probable
that future economic benefits associated with an
asset will flow to the entity, and it has a cost
or value that can be measured reliably [F.83]. The
term probable means more likely than not. To determine
the probability of future economic benefits, an
entity must assess the degree of uncertainty associated
with future benefits on the basis of all available
evidence when it prepares financial statements [F.83-85,90]
.
The second recognition criterion is reliable measurement.
An item must possess a cost or value that an entity
can measure reliably. An estimate of cost or value
is usually required. Where the estimate cannot be
made reliably then the item cannot be recognised
as an asset [F.86-89] .
Contingent assets
Contingent assets are possible assets that arise
from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within
the entity's control [IAS37.10]. The most common
example is an entity pursuing a legal claim whose
outcome is uncertain.
The accounting treatment of contingent assets will
depend on the probability of future benefits [IAS37.31-35].
For example, where the inflow of economic benefits:
| a) |
is not probable - no asset is recognised or disclosed; |
|
| b) |
is probable, but not virtually certain
- no asset is recognised, but disclosure is
required [IAS37.31,89]; and |
|
| c) |
is virtually certain - the asset is not
contingent and is recognised on the balance
sheet [IAS37.33]. |
|
Initial measurement
Initial measurement of assets is usually at cost
[F.89,99-101]. Cost has several different definitions
throughout IFRS, depending on the nature of the
asset acquired. For example, assets may be recorded
at the amount of cash or cash equivalents paid or
the fair value of the consideration given to acquire
them [F.100(a)]. Transaction costs are included
in the cost of financial assets [IAS39R.9,AG13].
Where assets such as property, plant and equipment
are constructed by the entity, cost may include
its purchase price, including any directly attributable
costs of bringing the asset to working condition
for its intended use [IAS16R.16-18].
Biological assets should be measured on initial
recognition at fair value less estimated point-of-sale
costs, except where the fair value cannot be measured
reliably [IAS41.12,30].
Subsequent re-measurement
IFRS gives an entity the choice to re-measure assets
such as property, plant and equipment, intangible
assets and investment property to fair value
[IAS16R.31] [IAS38.72,75]
[IAS40R.30]. However, for certain financial assets,
remeasurement to fair value is mandatory [IAS39R.45-46].
Similarly, IFRS mandates the remeasurement of biological
assets where the fair value can be established reliably.
Agricultural produce, which is the harvested product
of the entity's biological assets, should be remeasured
to fair value on initial recognition
[IAS41.13].
Entities whose functional currency is the currency
of a hyperinflationary economy must restate all
assets in terms of the measuring unit current at
the balance sheet date [IAS29.8]. Monetary assets
denominated in a foreign currency are recognised
at an amount based on the exchange rate current
at the balance sheet date [IAS29.12].
Derecognition
An asset should be derecognised when it ceases
to satisfy either or both of the definition and
recognition criteria outlined above.
There are a number of circumstances under which
derecognition will occur. An item will usually cease
to meet the definition of an asset where it is sold.
An entity should however carefully analyse the conditions
of the sale to determine whether it has in fact
transferred the risks and benefits embodied in the
asset (control) to another party
( [IAS18.14-19] .
Investments in subsidiaries, joint ventures
and associated entities should be derecognised when
an entity ceases to have control or significant
influence over the investment [IAS27R.30]
[IAS28R.18].
Productive assets such as plant and equipment should
be derecognised on disposal or when permanently
withdrawn from use, as they will cease to generate
benefits [IAS16R.67].
Assets that represent prepaid expenditure or accumulated
costs, such as construction contract work in progress,
should be derecognised when an entity realises the
associated benefit in the case of a prepayment or
can reliably estimate the stage of completion under
a construction contract arrangement [IAS11.22].
Impairment
An entity must test most of its assets for impairment
when it becomes probable that it will not recover
the asset's carrying amount [IAS36.8-14]. Investment property
and biological assets that are carried at fair value
are excluded from this requirement [IAS36.2]. Measurement of impairment
of financial assets depends on the classification
and measurement basis of the financial asset .
The measurement basis used to test impairment will
depend on the type of asset involved. Inventories
should be written down when their carrying amount
exceeds the lower of cost or net realisable value
[IAS2R.28-33].
Capitalised contract costs that will probably not
be recovered should be expensed immediately [IAS11.34].
Likewise, deferred tax assets should be expensed,
where it is not probable that sufficient taxable
profits will be available in the same period as
the reversal of a deductible temporary difference,
or in the periods into which a tax loss arising
from a deferred tax asset can be carried back or
forward [IAS12.56].
The carrying amount of all other non-financial
assets should be reduced to their recoverable amount,
when recoverable amount is less than carrying amount
[IAS36.6,8]. Recoverable amount in this case is
the higher of an asset's net selling price and value
in use [IAS36.18]. Value in use is derived from
the future discounted cash inflows and outflows
expected from the use and subsequent disposal of
the asset [IAS36.30-57].
Presentation and disclosure
Specific guidance is given throughout IFRS about
the presentation and disclosure of specific classes
of assets.
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