1. GODFREY HODGSON HOLMES TARCA
CHAPTER 7
ASSETS

2. Assets defined
IASB (AASB) Framework for the Preparation and Presentation of Financial Statements:
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

3. Assets defined Three essential characteristics:
future economic benefits
control by an entity
past events
exchangeability
recognition rules

4. Future economic benefits
Future economic benefits are the potential to contribute, either directly or indirectly, to the flow of cash and cash equivalents to the entity
profit seeking entity
not-for-profit entity
Relate to economic resources
scarcity
utility

5. Future economic benefits
An asset is something that exists now
Has the capability of rendering service or benefit currently or in the future
Distinguish between the object, such as a building or machine, and the service or benefit embodied in it

6. Control by an entity
The economic benefit must be controlled by the entity
An entity’s right to use or control an asset is never absolute
Ownership is often concurrent with control, but it is not an essential characteristic of an asset
Does not rely on legal enforceability

7. Past events Control as a result of a past event
Planned assets are excluded
Event can be interpreted in different ways
executory contracts

8. Exchangeability
Some argue that a 4th essential characteristic is that an asset be exchangeable
Separable from an entity

9. Exchangeability MacNeal
A good that lacks exchangeability must lack economic value because its purchase or sale must forever remain impossible, and thus no market price for it can ever exist
goodwill
subject to evaluation not measurement

10. Asset recognition
The extent and timing of the recognition of assets is important because it can have economic consequences for preparers and users of financial statements

11. Asset recognition
Recognising assets on the balance sheet involves recognition rules
conventions and authoritative pronouncements
Recognition criteria
the future economic benefits must be probable
the asset must be capable of being measured reliably

12. Asset recognition Past recognition criteria reliance on the law
determination of economic substance of the transaction or event
use of the conservatism principle: anticipate losses, but not gains

13. Asset measurement
All the elements of accounting are linked and measurement of profit flows from measurement of the change in net assets
The rules and practices governing asset recognition and measurement will also affect measurement of profit and, in turn, capital (equity)

14. Asset measurement
Once the definition and recognition criteria have been met, the accountant must decide how to measure the asset
several measurement approaches available
qualitative characteristics of financial information
Once measured
on balance sheet
restricted to just note disclosure

15. Tangible assets
Traditional approach has been to measure assets at historical cost
IASB standards permit subsequent remeasurement using a number of approaches
fair value
exit value or value in use
UK and Australian firms could use values other than historical cost for many years

16. Intangible assets
Accounting measurement has generally been conservative
cost (less accumulated amortisation and impairment) is commonly used
fair values from an active market
internally generated intangibles cannot be recognised

17. What are the divergent arguments for recognising customer relationships in a business combination? Is it a true intangible asset?

18. Financial instruments
FASB/IASB
derivatives are measured at fair value rather than cost
IASB
committed to the use of fair value measurement for financial instruments

19. What are the objectives of the fair value measurement project?

20. Challenges for standard setters
FASB/IASB intend to address the issue of measurement in Phase C of the conceptual framework project
consider measurement concepts, principles and terms
evaluate and rank measurement methods
qualitative characteristics

21. Which measurement model?
Fair value is the frontrunner
Both the IASB and FASB support greater use of fair value measurement

22. What are the arguments for and against fair value measurement?

23. How to calculate fair value measurement
Various valuation techniques to calculate fair value
the market approach
observable prices
actual transaction data

24. How to calculate fair value measurement
Various valuation techniques to calculate fair value
the income approach
conversion of future amounts - cash flows or earnings – to a single discounted present amount

25. How to calculate fair value measurement
Various valuation techniques to calculate fair value
the cost approach
the amount that currently would be required to replace its service capacity (current replacement cost)

26. In response to the credit crisis the IASB changed the rules to allow entities to choose to reclassify some financial instruments from a fair value measurement basis to a cost basis. Under what circumstances is this reclassification allowed?

27. How to calculate fair value measurement
The valuation must emphasise market inputs
assumptions and data that market participants would use in their estimates of fair value

28. How to calculate fair value measurement
Three hierarchical levels for the inputs
Level 1 – quoted prices for identical items in active markets, without adjustment
Level 2 – quoted prices for similar items in active markets, adjusted as appropriate for differences
Level 3 – estimated fair value using multiple valuation techniques consistent with the market, income and cost approaches

29. Issues for auditors
Auditing fair values creates difficulties because it requires the application of valuation models, and, frequently, the use of valuation experts

30. Issues for auditors Auditors need to
understand the client firm’s processes and relevant controls for determining fair values
make a judgement on whether the client firm’s measurement methods and assumptions are appropriate and likely to provide a reasonable basis for the fair value measurement
appreciate management’s potential biases and likely errors
incentives

31. Issues for auditors
There is the potential that corporate failures will lead to legal action against auditors who failed to approach their audit of asset fair values appropriately

32. Summary Defining assets Recognition and measurement criteria
Asset recognition and the measurement of income and capital are interrelated
Mixed attribute measurement model and fair value measurement methods
Issues arising for standard setters and auditors

33. Key terms and concepts Assets Definitions Future economic benefits
Control
Past events
Exchangeability
Asset recognition
Asset measurement
Fair value measurement