31/03/2015

Dr Per Tronnes 1

Australian

School of

Business Australian School of Business

ACCT1511

Topic:

Assets (1)

General Principles

Australian

School of

Business Objective

1. Understand the definition and recognition criteria, and why they are

important.

2 Be technically competent in calculating depreciation and gains/

losses on disposals and be able to do related journal entries as well as

constructing T-accounts.

3. Understand the link between costs, assets and expenses.

Australian

School of

Business Asset Definition

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” (AASB Framework, para. 49)

Consequently, assets have three essential characteristics: 1. Future economic benefit (or service potential) 2. Controlled by the entity 3. Result of past events

Australian

School of

Business Asset recognition

The item must satisfy both recognition criteria (Framework, para 83):

1. It is probable that any future economic benefit associated with the

item will flow to the entity; and

2. The item has a cost or value that can be measured with

reliability.

Australian

School of

Business Assets: Definition & Recognition

Does the item have all the essential

characteristics of an Asset ?

Does the Asset meet both

the recognition criteria?

Details might appear in

the annual report

Might be separately

disclosed in the notes

A recognised in the

entity’s balance sheet

Yes No

Yes No

Australian

School of

Business Cost vs. Assets vs. Expenses

Cost/expenditure = Amount of cash/equivalents paid or fair value of

consideration given.

We can account for that cost in two different ways:

1. Not capitalise the cost and record it as an expense

Cost Expense

2. Capitalise the cost and record it as an asset

Cost Assets

Cost Assets Expense

31/03/2015

Dr Per Tronnes 2

Australian

School of

Business

Assets & Expense : Another Approach

Does the item have all the essential characteristics of an Asset?

Does the Asset meet both

the recognition criteria? Expense

ASSET

Yes No

No

Yes

We have incurred a cost/expenditure.

Dr Asset or Expense? XXX

Cr Cash/Accounts Payable XXX

Australian

School of

Business Intangible Assets: Definition

An intangible asset is an identifiable non-monetary asset without physical substance (AASB 138, para 8)

It must meet the essential characteristic of an asset: i.e. control, FEB, past event/transaction

In addition, it must be identifiable.

Typical intangible assets include, among others:

– patents,

– licences,

– copyrights,

– franchises,

– trademarks

Australian

School of

Business Intangible Assets:

Acquisition vs. Internally Generated

We treat intangible assets differently depending on whether they were

acquired or whether they were internally generated.

Accounting for intangible assets when there is a separate acquisition

is straight forward.

Accounting for internally generated assets is harder. An entity

classifies the generation of the asset into:

a) A research phase

b) A development phase

Australian

School of

Business Goodwill – A special case

Goodwill is a non-current intangible asset, but it is not identifiable....

Goodwill is an accounting concept meaning the value of an entity

over and above the value of its separate identifiable assets less

liabilities.

- because of synergies, reputation, loyalty of clients, staff

knowledge etc.

- so goodwill is the value of all the things that is hard to identify,

and not separately listed on the balance sheet such as

buildings, inventory and so on.

Can only recognise purchased Goodwill.

Internally generated Goodwill is not recognised.

Australian

School of

Business Depreciation – an expense (ACCT1501)

Asset usually have limited useful lives:

– That is, the economic benefits are consumed over time.

– For example, if a machine was purchased 10 years ago, the

future economic benefits are likely to be much less now than

when the machine was originally purchased.

Depreciation is a process of systematically ALLOCATING COST

over the useful life of the asset.

(Remember the Matching Principle)

– It is NOT a method of VALUATION

Australian

School of

Business References

Trotman, Gibbins & Carson (TGC) – Ch. 6.3

Trotman, Gibbins & Carson (TGC) – Ch. 10.1-10.5 (inclusive),

and 10.7-10.8 (inclusive)

The Accounting Framework

Comprehensive legacy notes.