An Overview of Accounting For Assets

Chapter 4
An overview of
accounting for assets
Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 6e
4-1
Objectives of this lecture

Understand the definition of an asset and the
associated asset recognition criteria
Understand the process involved in determining
whether particular expenditures should be
recognised as assets (capitalised) or expensed
Be able to describe some of the various asset
measurement rules currently being applied within
Australia

4-2
Objectives (cont.)
Be aware of the disclosure requirements contained
in AASB 101 Presentation of Financial Statements as
they pertain to a reporting entitys assets
Be able to explain how to calculate the acquisition
cost of an asset

4-3
Post-2004 numbering of Australian

Accounting Standards
As we will be discussing particular accounting standards, it is
useful to discuss how the standards are numbered
Accounting standards issued by the International Accounting
Standards Board (IASB) were until 2003 referred to as
International Accounting Standards (IAS)older standards
Accounting standards issued by the IASB from late 2003 are
referred to as International Financial Reporting Standards
(IFRSs)newer standards
The number allocated to AASB standards will depend on
whether the adopted standard relates to an old or new
international standard

4-4
Post-2004 numbering of Australian

Accounting Standards (cont.)
Where the adopted standard relates to a standard
with an IAS prefix, the Australian standard will be
numbered from AASB 101 to AASB 199. For
example, IAS 38 would be AASB 138
Where the Australian standard relates to a standard
with an IFRS prefix, the Australian standard will be
numbered from AASB 1 to 99. For example, IFRS 4
would become AASB 4
Where Australia releases a standard that does not
have an international equivalent, the numbering
system will be from AASB 1001 to AASB 1099
.

4-5
Definition of assets
The AASB Frameworks definition of an asset:
A resource controlled by the entity as a result of past

events and from which economic benefits are expected to
flow to the entity
The above is the definition of assets. Apart from the
definition we also need to consider:
When we recognise assets
How we are to measure assets
How we are to classify and disclose assets

4-6
Definition of assets (cont.)
Following from the definition, three essential characteristics

are required of an asset:
1. Expected to provide future economic benefits
2. Must be controlled by the entity
3. Transaction or event giving rise to the control must have
occurred
Future economic benefits
Service potential being the essence of assets
Common to both profit-seeking and not-for-profit entities
Future economic benefits can be described as the scarce
capacity to provide benefits to the entities that use them,
and is common to all assets irrespective of their physical
or other form

4-7
Definition of assets (cont.)

Concept of control
Control concept not specifically defined in the AASB
Framework
Control not restricted to legal ownership
Control would represent the capacity of the entity to
benefit from the asset in pursuit of the entitys
objectives and to deny or regulate access of others
to those benefits

4-8
Recognition criteria for assets

Under AASB Framework (par. 49)
An asset is to be recognised in the statement of
financial position (also referred to as the balance
sheet) only when:
it is probable that future economic benefits embodied in
the asset will eventuate; and
the asset possesses a cost or other value that can be
measured reliably

4-9
Recognition criteria for assets (cont.)

Probable
Not defined specifically in the AASB Framework
Considered to mean when 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, the asset needs to be expensed in the
statement of comprehensive income (AASB
Framework, par. 90)
Probability is a matter for professional judgment

4-10

Evaluating the probability of future benefits
What was once considered an asset might need to be
expensed later
Dr
Loss on write-down of asset
Cr
Asset
Professional judgment call that machine will generate positive

cash flows is assessed at less than 50%
If, at a given time, expenditure not deemed likely to generate
future economic benefits then the asset should be expensed
in the period when it becomes apparent that insufficient
benefits will be realisedreferred to as an impairment loss
Refer to Worked Example 4.1 on pp. 139140Asset recognition
and probable economic benefits

4-11

Impairment of assets
AASB 136
when recoverable amount of an asset is less than its
carrying amountthe carrying amount of the asset must
be reduced to recoverable amount (impairment loss)
recoverable amount is the higher of an assets net selling
price and its value in use
carrying amount is the amount at which an asset is
recorded in the accounting records (after deducting
accumulated depreciation and accumulated impairment
losses)

4-12

Impairment of assets (cont.)
Reinstatement of assets
If in a subsequent period the recoverable amount
of a previously written down asset increases
(benefits now probable)
the asset can be recognised when it so qualifies
Dr Asset
Cr Gain from reinstatement of asset previously written
off

4-13

Impairment of assets
AASB 136
An impairment loss recognised for an asset in prior years
must be reversed when, and only when, there has been a
change in the estimates used to determine the assets
recoverable amount since the last impairment loss was
recognised. If this is the case, the carrying amount of the
asset must be increased to its recoverable amount

4-14

Impairment of assets (cont.)
Some accounting standards specifically exclude reversal for
particular types of assets
For example, once an intangible asset (brand name, patent,
development expenditure) is written off it cannot be
reinstated, even where future economic benefits are
deemed probable (is this conceptually sound?)
Effect
Statements of financial position can understate the assets
controlled by an entity
AASB 136 (reversal of prior period impairment losses)
Overridden by other accounting standards that provide
requirements for specific classes of assets

4-15

Asset measurement
Rules of measurement may vary across different
types of assets
Various measurement rules currently in use in
Australia
For example, inventory at lower of cost and net
realisable value and non-current assets at fair
value
Result
Sum of total assets will not reflect either cost or net
market value
.

4-16

Asset measurement (cont.)
One method of valuation to ultimately apply to all
assets might be conceptually logical but is unlikely,
e.g. market value or fair value
Measurement practices (under AASB Framework)
need to be consistent with accounting standards
Significant changes to generally accepted
accounting practice likely to be opposed by
significant proportion of financial statement
preparers

4-17

Determining appropriate measurement bases for some assets

is problematic
Are there economic benefits?
Museums, art galleries, botanical gardens?
heritage assets: often negative cash flows
Valuation of biological assets, e.g. trees on plantations

Based on cost of seedlings?
Take into account maintenance costs?
Consider present value (with assumptions)?

4-18

Refer to Table 4.1 on page 142Some classes of
assets and their associated measurement rules
what does the number total assets actually
represent given that we are combining the values
derived from so many different measurement
bases?

4-19
General classification of assets

Current assets
AASB 101 Presentation of Financial Statements
Current asset (with the balance sheet) if:
(a) it is expected to be realised in, or intended for sale or
consumption in, the entitys normal operating cycle
(b) it is held primarily for the purpose of being traded
(c) it is expected to be realised within 12 months after the
reporting date; or
(d) it is cash or a cash equivalent (under AASB 107
Statement of Cash Flows)

4-20
General classification of liabilities

Current liabilities
AASB 101 Presentation of Financial Statements
Current liability (balance sheet) if:
(a) it is expected to be settled in the entitys normal operating
cycle
(b) it is held primarily for the purpose of being traded
(c) it is due to be settled within 12 months after the reporting
date; or
(d) the entity does not have an unconditional right to defer
settlement of the liability for at least 12 months after the
reporting date
When an entitys normal operating cycle is not clearly
identifiable, its duration is assumed to be 12 months

4-21
How to present a balance sheet
Two basic approaches (under AASB 101, par. 51)

1. Current/non-current presentation
2. Liquidity presentation
Current and non-current assets and current and

non-current liabilities are to be presented
separately, except:
when presentation in order of liquidity provides
information that is reliable and more relevant
In which case all assets and liabilities to be

presented broadly in order of liquidity

4-22
How to present a balance sheet (cont.)

AASB 101
Does not prescribe a single format
Commentary (pars 53 and 54)
If goods and services supplied within clearly identifiable
operating cycle, classification into current/non-current
deemed useful for decision making, e.g. working capital
vs long-term operations
If financial institutiona decreasing order of liquidity
format more suitable, i.e. more relevant for decision
makers

4-23

AASB 101 (cont.)
Requires specific disclosures in relation to the
duration of an operating cycle
If current vs non-current method adopted and entity
has a single, clearly identifiable operating cycle
greater than 12 months, the length of the operating
cycle must be disclosed

4-24

AASB 101 (cont.)
Appendices offer illustrations of alternative formats
Current/Non-current approach (see Exhibit 4.3, p. 149)
Liquidity approach (see Exhibit 4.2, p. 147)
Entities may elect to provide subtotals, e.g.:

(a) total assets less total liabilities equals net assets/equity,
or
(b) total assets equals total liabilities plus total equity

4-25
How to present a statement of financial

position (balance sheet) (cont.)
Pursuant to AASB 101, the face of the statement of
financial position is to include, at a minimum,
aggregate line items that represent:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
property, plant and equipment

investment property
intangible assets
financial assets
investments accounted for using the equity method
biological assets
inventories
trade and other receivables
cash and cash equivalents
trade and other payables

4-26

Specific disclosures (under AASB 101) (cont.)
(k) provisions
(l) financial liabilities
(m) liabilities and assets for current tax (AASB 112)
(n) deferred tax liabilities and assets (AASB 112)
(o) minority interest (presented within equity)
(p) issued capital and reserves (attributable to equity holders of
parent)
Additional lines can be presented (par. 58), taking into account:
the nature and liquidity of assets
the function of assets within the entity
the amounts, nature and timing of liabilities

4-27

Entities may choose to provide other subtotals in addition to
those provided in the exhibits, such as:
total assets less total liabilities equals net
assets/equity; or
total assets equals liabilities plus equity

4-28
Determination of future economic

benefits
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 (AASB 136)
Recoverable amount being the higher of an assets net
selling price and its value in use
Write-down referred to as recognition of impairment loss

4-29

benefits (cont.)
Where recoverable amount of asset is to be based
on market value, future cash flows are often easy to
determine
If an assets value is to be determined by its value in
use, determining this value can be highly subjective
(e.g. specialised asset)
AASB 136: value in usethe present value of
estimated future cash flows expected to arise from
the continuing use of an asset and from its disposal
at the end of its useful life

4-30

benefits (cont.)
If an asset is held for a number of periods, the
service potential of the asset is expected to decline
over timeit should be recognised as an expense
The asset should be amortised over the period of its
useful life
If there is a uniform flow of economic benefits over a
fixed period, the asset should be expensed on a time
basis

4-31

benefits (cont.)
If the benefit to the business is for an indefinite
period with a specified minimum term, the asset
should be amortised 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, amortisation should be done on a
time basis over a short period (say five years)

4-32
Acquisition cost of assets

A number of accounting standards are relevant:
Intangible assets (AASB 138)
Intangible assets are: non-monetary assets without
physical substance, e.g. patents, trademarks,
customer lists, research and development
AASB 138 excludes the recognition of certain
intangible assets for balance sheet purposes, e.g.
internally generated goodwill, mastheads, research
expenditure

4-33
Acquisition cost of assets (cont.)

Intangible assets (cont.)
For intangible assets that can be recognised for
balance sheet purposes (e.g. development
expenditure) the cost of an internally generated
intangible asset comprises all expenditure that can
be directly attributed to it and is necessary in
preparing the asset to be capable of operating in the
manner intended by management

4-34

Intangible assets (cont.)
Costs could include:
Expenditure on material and services used or consumed in
generating the intangible asset
Salaries, wages and other employment-related costs
involved directly in generating the asset
Expenditure that is directly attributable to generating the
asset (e.g. fees and amortisation of patents and licences)

4-35

Property, plant and equipment (AASB 116)
This class to be recognised as an asset when and only
when:
(a) it is probable that future economic benefits associated
with the asset will flow to the entity, and
(b) the cost of the asset or, when the asset is carried at a
revalued amount, the fair value of the asset can be
measured reliably

4-36

Property, plant and equipment (AASB 116) (cont.)
If an item qualifies as an asset it must be recognised at
cost. Cost includes:
(a) 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) initial estimates of the costs of dismantling and removing
the item and restoring the site on which it is located

4-37

Property, plant and equipment (AASB 116) (cont.)
Directly attributable costs include:
(a) costs of employee benefits arising from the construction or
acquisition of the item of property, plant and equipment
(b) costs of site preparation
(c) initial delivery and handling costs
(d) installation and assembly costs
(e) costs of testing whether asset is functioning properly, after
deducting the net proceeds from selling any items
produced while bringing the asset to that location and
condition (e.g. samples)
(f) professional fees

4-38

Acquisition of property, plant and equipment other
than by cash
If acquired in exchange for equity instruments (e.g. shares) cost
is fair value of equity instruments issued (fair value: amount for
which an asset can be exchanged between knowledgeable,
willing parties in arms length transaction)
Fair value of consideration is used to measure the acquisition
cost of an asset. When consideration is the purchasers own
equity instruments (e.g. shares not listed on the stock exchange)
the fair value of the asset acquired is used to measure the value
of the equity issue

4-39

Acquisition of property, plant and equipment other
than by cash (cont.)
Acquisition can also be based on an exchange of assets
(property, plant and equipment)
Cost of asset measured as the fair value of the asset
given up, adjusted by the amount of any cash or cash
equivalents that are transferred

4-40

If fair value of an asset is given up or that of the asset being
received can be reliably determined (e.g. asset is unique), cost
of property, plant and equipment acquired in exchange for a
similar asset is to be measured at the carrying amount of the
asset given up in the exchange
Note: Subsequent accounting periods will require adjustments to
the value of the asset (post-acquisition) by way of depreciation,
recognition of impairment losses or, possibly, asset revaluations
Refer to Worked Example 4.3 on page 155Determining the
acquisition costs of assets

4-41
Determining the cost of an asset

Assume that an asset (land) is acquired for the
following consideration:
cash: $100 000
shares: 20 000 shares with a market value of $4.00 each
machinery: Cost $50 000, accumulated depreciation
$15 000
market value $30 000
What is the cost of the land, and what are the journal
entries?
What if the land had been acquired at no cost?

4-42
Allocation of cost to individual items of

property, plant and equipment
Where a number of individual items of property, plant and

equipment are acquired and a lump-sum payment is made,
the cost is to be allocated to the individual items in
proportion to their fair values at the time of acquisition
Certain classes of property, plant and equipment, for

example aircraft and ships, might comprise a number of
individual component parts, each of which has a different
useful life

4-43
Allocation of cost to individual items of

property, plant and equipment (cont.)
To ensure that the individual components are
accounted for separately, paragraph 43 of AASB 116
requires:
Each part of an item of property, plant and equipment with a
cost that is significant in relation to the total cost of the item
shall be depreciated separately
In explaining the above requirement, paragraph 44 of

AASB 116 states:
An entity allocates the amount initially recognised in respect
of an item of property, plant and equipment to its significant
parts and depreciates separately each such part. For
example, it may be appropriate to depreciate separately the
airframe and engines of an aircraft, whether owned or
subject to a finance lease

4-44
Deferred payments for assets

It is possible for an entity to acquire an item of property, plant
and equipment and arrange with the vendor of the equipment
that payment will not be made for some time into the future
The cost of an item of property, plant and equipment is the cash
price equivalent at the acquisition date
This means that the cost of the item must be determined by
discounting the amounts payable in the future to their present
value at the date of acquisition
The difference between the cash price equivalent and the total
payment is recognised as interest expense over the period of
credit
The discount rate to be used is the rate at which the acquirer
can borrow the amount under similar terms and conditions
An example of how deferred payments are accounted for is
provided in Worked Example 4.6 (page 160)

4-45

What about borrowing costs (capitalise or expense)?
AASB 123 defines borrowing costs as interest and other costs
incurred by an entity in connection with the borrowing of funds
AASB 123 provides a general rule (which it refers to as the core
principle). This core principle is provided at paragraph 1 of AASB
123, which states:
Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset form
part of the cost of that asset. Other borrowing costs are
recognised as an expense
Hence, if an asset is deemed to be a qualifying asset and
borrowing costs have been incurred to acquire, construct or
produce the asset, then such costs must be included as part of
the cost of the asset

4-46

What about borrowing costs (capitalise or expense) (cont.)?
Qualifying assetan asset that necessarily takes a
substantial period of time to get ready for its intended use or sale
months
Substantial period of timegenerally more than 12
Borrowing costs to be included are those that would have

been avoided if the expenditure on the asset had not been
incurred
Capitalisation of borrowing costs to cease when
substantially all the activities necessary to prepare the asset for its
intended use or sale are complete
Capitalising borrowing costs results in deferring expenses
to later periods (e.g. depreciation or cost of sales)

4-47

Resources acquired at no cost (e.g. donation)
To be recognised as an asset to the extent that it is expected to
provide probable and measurable future economic benefits
Dr Asset
Cr Donation income (or similar)
In the books of the entity donating the asset:
Dr Donation expense (or similar)
Cr Provision for depreciation
Cr Asset

4-48

Resources acquired at no cost (e.g. donation) (cont.)
Note: Strict interpretation of AASB 116 would mean initially no
cost or revenue recorded as a result of donation but
entity likely to revalue asset to fair value. Par. 16an
item of property, plant and equipment that qualifies for
recognition as an asset shall be measured at cost.
Refer to Worked Example 4.7, p. 163Accounting for an asset
acquired at no cost

4-49
Additional subsequent expenditure

Additional expenditure subsequent to purchase is
either:
capitalised, if expected to increase future economic
benefits, or
expensed, if expected to maintain current level of future
economic benefits
Capitalised value of a non-current asset and any

subsequent capitalised improvements are to be
depreciated over the expected useful life of the asset

4-50
Additional subsequent expenditure

(cont.)
AASB 116
An entity does not recognise in the carrying amount of an item
of property, plant and equipment the costs of the day-to-day
servicing of the item. These costs are recognised as part of
profit or loss as incurred. Costs of day-to-day servicing are
primarily the costs of labour and consumables, and may include
the cost of small parts. The purpose of these expenditures is
often described as for the repairs and maintenance of the item
of property, plant and equipment

4-51
Discovery of errors in prior periods

Example: Prior period inventory valued in excess of net realisable
value (overstated)
AASB 108 Accounting Policies, Changes in Estimates and Errors
An entity is to correct material prior period errors
retrospectively in the first financial report authorised for issue after
their discovery by:
(a) restating comparative amounts for the prior period(s)
presented in which the error occurred, or
(b) if the error occurred before the earliest prior period
presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented
Result: A retrospective basis for the correction of errors, thus
adopting the perspective that the financial statements are
presented on the basis that the error never occurred

4-52
Summary
The purpose of the lecture is to explore a number of
issues that relate to assets
Assets are defined as resources controlled by an entity as

a result of past events and from which future economic
benefits are expected to flow to the entity
Requires recognition criteria to applyAASB Framework
states that for an asset to be recognised, the future
economic benefits must be both probable and capable of
reliable measurement
Recognition of assets is therefore based on professional
judgment (see recognition criteria)
For different classes of assets (later chapters), other
criteria for recognition will need to be applied pursuant to
the relevant accounting standards

4-53
Summary (cont.)
Classes of assets are typically measured using different

measurement rules
There are no paragraphs within the AASB Framework that
provide measurement rules for assets generallyeach
accounting standard that addresses the method of accounting
for a particular class of assets typically provides
measurement rules specific to that class
AASB 116 Property Plant and Equipment and AASB 138
Intangible Assets were addressed in the chapter
Cost of acquisition of an asset is considered to be the
purchase consideration plus any costs incidental to the
acquisition
Purchase consideration is typically measured in terms of the
fair value of the assets given up in exchange
4-54

An Overview of Accounting For Assets

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Chapter 4

Copyright 2010 McGraw-Hill Australia Pty Ltd

Objectives of this lecture

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Post-2004 numbering of Australian

Copyright 2010 McGraw-Hill Australia Pty Ltd

Post-2004 numbering of Australian

Copyright 2010 McGraw-Hill Australia Pty Ltd

A resource controlled by the entity as a result of past

When we recognise assets

How we are to measure assets

How we are to classify and disclose assets

Copyright 2010 McGraw-Hill Australia Pty Ltd

Definition of assets (cont.)

Following from the definition, three essential characteristics

Copyright 2010 McGraw-Hill Australia Pty Ltd

Definition of assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Professional judgment call that machine will generate positive

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Determining appropriate measurement bases for some assets

Valuation of biological assets, e.g. trees on plantations

Copyright 2010 McGraw-Hill Australia Pty Ltd

Recognition criteria for assets (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

General classification of assets

Copyright 2010 McGraw-Hill Australia Pty Ltd

General classification of liabilities

Copyright 2010 McGraw-Hill Australia Pty Ltd

How to present a balance sheet

Two basic approaches (under AASB 101, par. 51)

Current and non-current assets and current and

In which case all assets and liabilities to be

Copyright 2010 McGraw-Hill Australia Pty Ltd

How to present a balance sheet (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

How to present a balance sheet (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

How to present a balance sheet (cont.)

Entities may elect to provide subtotals, e.g.:

Copyright 2010 McGraw-Hill Australia Pty Ltd

How to present a statement of financial

property, plant and equipment

Copyright 2010 McGraw-Hill Australia Pty Ltd