June 2021
Tom Clendon keeps in simple with his analysis of assets – stuff that you really ought to know about…
I love getting back to basics! Keeping it simple and stripping away the layers and complexities that dog financial reporting and making sure that we understand the fundamental terms as used by accountants.
So this article – and its accompanying video at https://vimeo.com/545939340 – will be as useful to those starting out in their studies as it will be to qualified accountants to keep them both up-to-date and grounded.
Types of assets
Assets are basically good things to have. If you were to consider what assets your employer reports on its statement of financial position it might include cash, motor vehicles and you might even think that you should also be included because your line manager said in your last review that you were “an asset to the business”! More of that later.
On the statement of financial position, assets can be listed as non-current or current. Here, the distinction is based on how long the asset will be with the business.
Assets like land and buildings will be non-current where they have been acquired for use in the business. Whereas inventory that has been bought for resale will be classified as current assets. Assets can be further classified as tangible (capable of being touched) or intangible (like purchased goodwill) or they can be investments.
But what exactly is the definition of an asset?
Formal definition
In my lifetime, the technical definition of an asset has changed.
It was revised again a couple of years ago when the IASB’s Conceptual Framework for Financial Reporting was revised and is now defined as: “A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.”
For me, the key word here is control. To be included on the statement of financial position an asset has to be controlled. That is why you will not be included in your employer’s statement of financial position – despite the warm words of your boss! After all you are not controlled by the business (you can resign) and the wages paid to you are accounted for as an expense and not the purchase of an asset.
The Curious Incident of the Dog in the Night-Time
This is the title of a book by Mark Haddon that I would highly recommend, and comes from a reference in the Sherlock Holmes story The Adventure of Silver Blaze.
In both stories, the curious incident was that a dog did not bark. The absence of a bark by the dog was instrumental in solving the crime.
In the definition of an asset there is also an absence of a bark so to speak – and that is legal title.
Actually, owning an asset is not a prerequisite to including an asset in a statement of financial position.
Is a car that is leased an asset?
When the business leases a car for three years, then the business does not own the asset. However, it will still recognise the car as an asset because it controls the asset and has a right to use the asset.
This treatment was only recently introduced recently by IFRS16 Leases.
• Tom Clendon is ACCA SBR online lecturer. See www.tomclendon.co.uk
