An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.
Integral parts of the definition
1. It is a resource.
2. It is controlled by the enterprise
3. It arises due to past events.
4. Future economic benefits are expected to flow from it. (They may or may not actually flow).
Example: Debtors arising out of sale of goods of the enterprise. Let us analyse this situation vis-à-vis the above 4 points.
1. It is a resource – Yes, it is a resource since the enterprise expects to convert it into cash / equivalent.
2. It is controlled by the enterprise – Yes, no other person can ordinarily claim any right over the debtor.
3. It arises due to past events – Yes, it arises s a result of sales effected prior to the recognition of the debtor and as a result of which the right is created.
4. Future economic benefits are expected to flow from it – Yes, it is expected that cash / cash equivalent will be received from the debtors. Actual recovery may or may not take place.
It is therefore important to consider whether an item of financial statements is in fact an asset or an expense (or a liability or expense)
Recognition of assets
Asset should be recognized only when –
a. when it is probable that the future economic benefits associated with it will flow to the enterprise. Probability means the occurrence is considered more likely than not.
b. has a cost or value that can be measured reliably.
Therefore in order to be recognized as an asset in the balance sheet, dual conditions should be satisfied. Firstly it should be an asset as per the definition and secondly, it must be capable of meeting the recognition criteria.
Example : Company X acquired a machine costing $50000 from Canada which is expected to enhance efficiency by 30%. Certain specific parts used in installation of the same without which it cannot be operated are not available due to Govt. restrictions on its production in that country. There is no assurance about their availability in foreseeable future. In this case, though the machine meets all the conditions for identification of the asset, it does not meet the criteria for recognition i.e. “probability that the future economic benefits associated with it will flow to the enterprise”. In such a scenario, it would be appropriate to consider the asset as Capital WIP and recognize as fixed asset only when the parts required for installation are available and installation is complete.
This is my view on the matter. In case there are divergent views, you are free to post them on this forum. Please read the framework for preparation and presentation of financial statements issued by ICAI for further clarity.
Regards,
CA Rahul Joglekar
Partner
Gokhale & Sathe
Chartered Accountants
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