Week 2 Important Flashcards
The Conceptual Framework defines an asset as
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
In considering the above definition of an asset, there are three fundamental characteristics that should be present. These are:
- the asset should be expected to provide future economic benefits;
- the asset must be controlled (as contrasted to legal ownership);
- the event giving rise to the control must already have occurred.
In terms of asset recognition criteria, the Conceptual Framework provides the general recognition criteria for all elements of financial statements (assets, liabilities, income, expenses, equity). The criteria are:
An item that meets the definition of an element should be recognised if:
a) it is probable that any future economic benefit associated with the item will flow to or from the entity;
b) the item has a cost or value that can be measured with reliability.
The majority of assets, with the exception of some land, will only provide economic benefits for a finite period. To ensure that assets as at a given date are not overstated, and that expenses are not understated, it is generally accepted that
that it is imperative that depreciation/amortisation be recognised each period
. However, if an asset is determined to have an indefinite life, then
periodic amortisation may not be employed. Rather, annual impairment testing is applied, which means that if the recoverable amount of an asset is below its carrying value, then an impairment loss must be recognised. An impairment loss is not to be confused with depreciation. Annual impairment testing is now the approach that must be used in relation to purchased goodwill and other intangible assets that are considered to have an indefinite life.
In relation to internally generated intangible assets there is a general rule (paragraph 66) that:
The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.
Examples of directly attributable costs for intangible assets are
a) costs of materials and services used or consumed in generating the intangible asset;
b) costs of employee benefits (as defined in AASB 119 Employee Benefits) arising from the generation of the intangible asset;
c) fees to register a legal right;
d) amortisation of patents and licences that are used to generate the intangible asset.
Cost
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or, when applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Australian Accounting Standards
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the entity;
b) the cost of the item can be measured reliably.
The cost of an item of property, plant and equipment comprises:
a) its 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) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
When should an ‘impairment loss’ be recognised?
If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
recoverable amount
the higher of an asset’s net selling price and its value in use
Can an entity include an asset in its statement of financial position that it does not legally own? Justify your answer.
Yes. The requirement is that the asset be controlled, not owned. That is, ‘control’ is one of the important attributes of the definition of assets. If an asset is controlled by an entity, then by definition that entity can use the asset to generate economic benefits in the same manner as if it owned the asset. Readers of the financial statements should therefore be made aware of the asset’s existence. Hence, we frequently find leased assets included in the statement of financial position (and also lease liabilities). The general requirement is that all leased assets shall be recognised for financial statement purposes (together with the associated lease liability) for all leases of more 12 months and where the leased asset is not a low value item (generally assessed as anything with a value of US$5,000 or less).
Could other costs be included in the measurement of the cost of acquiring the printing machinery if its construction and installation took a substantial period of time?
Borrowing costs will be included in the carrying amount of the asset if it is a qualifying asset, that is, if it needs to be constructed over a substantial period of time, such as one year or more
