Accounting for AssetsOverview

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NZ FrameworkDefinition of an asset:

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (para 49(a))

‘Future economic benefits’Service potential – assets used in production,

exchange, settlement of liabilities or distributed to owners (para 55)

Common to both profit-seeking and not-for-profit entities

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ControlControl concept is not specifically defined

in the NZ FrameworkControl not restricted to legal ownershipHowever, control can be defined as the capacity

of the entity to enjoy the benefits in and deny or regulate the access of others to those benefits

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Recognition criteria for assetsRecognition of an asset:

An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably (para 89)

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Probable?This is not defined in the NZ Framework, but is

considered to mean that the chance of the economic benefits arising is more rather than less likely (on the basis of available logic)

‘Probable’ implies that the expected probability of future benefits arising is greater than 50%

If it is considered ‘improbable’ that future economic benefits will flow beyond the current accounting period, or that insufficient benefits will be realised from an asset, the asset needs to be expensed (para 90)

This may be a determination for professional judgment

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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 i.e. impaired (see NZ IAS 36)

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Recognising serviceIf an asset is held for a number of periods,

the service potential of the asset is expected to decline over time — hence it should be recognised as an expense

Over the period of its useful life the asset should be depreciated/amortised

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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If the benefit to the business is for an indefinite period with a specified minimum term, the asset should be depreciated 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, depreciation should be over a short time period (say, five years)

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Asset measurementA number of different measurement bases apply to assets, including:

a) Historical cost – cash or cash equivalents paid or the fair value of the consideration given

b) Current cost – cash or cash equivalent that would be paid if the asset was currently purchased

c) Realisable (settlement) value – cash or cash equivalents currently obtained by selling the asset in an orderly disposal

d) Present value – present discounted value of future net cash inflows that the asset is expected to generate in the normal course of business (NZ Framework para 100)

As a consequence the sum of total assets will not reflect either cost or net market value

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Cost of acquisition of an asset is considered to be the purchase consideration plus any costs incidental to the acquisition

Guidance to measurement is given in standards related to particular assets (e.g. NZ IAS 16 Property Plant and Equipment and NZ IAS 38 Intangible Assets)

Each accounting standard that addresses the method of accounting for a particular class of assets typically provides measurement rules specific to that class

However, determining appropriate measurement bases for some assets is problematic:Are there ‘economic benefits’?Museums, art galleries, botanical gardens,

‘Heritage assets’: often negative cash flows

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Donated assetsDonated assets are recognised as an asset to the extent that it

is expected to provide probable and measurable future

economic benefitsJournal entry would be:

Dr Asset

Cr Donation income (or similar)

In the books of the entity donating the asset this is recorded as:Dr Donation expense (or similar)

Dr Accumulated depreciation

Cr Asset

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General classification of assets Current assets

An entity classifies an asset as current when (NZ IAS 1 para 66):

a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;

b) It holds the asset primarily for the purpose of trading;

c) It expects to realise the asset within 12 months after the reporting period; or

d) The asset is cash or cash equivalent (as defined in NZ IAS 7) – unless use restricted for at least 12 months after the reporting period

All other assets are classified as non-current