Question

Question 1 a) Differentiate between the 'definition of assets' and the criteria for recognition of assets' provided in the conceptual framework. b) If an asset is expensed in one financial year because future economic benefits were not deemed to be 'probable', can the same asset be reinstated in future periods if the benefits are subsequently assessed as probable? In this respect, does the ability to reinstate assets apply to all assets? Briefly explain. c) AASB 101 stipulates a number of disclosures that many reporting entities are required to make. What specific disclosures are required by AASB 101 in relation to assets? d) Is depreciation an allocation process or a valuation process? Provide reasons for your answer e) In an article that appeared in The Australian Financial Review on 26 August 2011 ('Apple could easily flounder without its founder' by Mark Ritson), it was reported: The news that Steve Jobs has resigned from Apple and will be replaced as CEO by Tim Cook made global headlines yesterday What has followed since has been a frenzied discussion of what the loss of Jobs will mean for new product development timelines, share price issues and corporate culture. Apple's share price fell 5 percent on the news of the resignation as questions were raised about Apple's prospects without its creative guru at the helm. But the real question for Apple as it enters its post-Jobs period is how well the brand will survive without the founder. Required The fact that the share prices fell following the departure of Steve Jobs is consistent with the view that Jobs was an 'asset' to the company. How do you think this 'asset' would have been disclosed in the financial statements of Apple? f) What is a contingent asset? When should a contingent asset be disclosed within the notes to the financial statements? If something is initially disclosed as a contingent asset, when can it subsequently be recognized as an asset within the financial statements? Briefly explain.

Answer 1

a. By definition, an asset is a resource controlled by an entity arising out of past events from which future economic benefits are expected to flow to the entity. And the recognition criteria for an asset depends on 2 conditions namely whether it is probably that future economic benefits associated with the asset will flow to the entity and whether cost of the asset can be measured reliably.

From the above we can point out the following differences

i. To be classified as asset, there is no mandatory requirement that future economic should flow to the entity. It only needs to be a resource with the potential to generate such benefits. However, an asset is recognized only when it is probable (i.e more likely than not >50%) that such benefits will flow from use of such asset.

Eg. As per IAS 37, Contingent assets shall be recognized in the Financial statements, only when it is virtually certain that it will result in inflow of economic benefits (i.e > 95%)

ii. Another difference would be the cost measurement. Nowhere in the definition of asset is it specified that the cost needs to be ascertained to classify an item as an asset. However the recognition criteria clearly states the reliable estimation cost of an asset with a sufficient degree of certainty for itss recognition in the Financial statements.

Eg. IAS 37 states that Internally generated Goodwill is an intangible asset, however they are never recognized as assets because it is very hard to determine the cost and expected benefits derived from internally generated intangibles.

b.

The conceptual framework allows assets to be recognized when 2 criteria are satisfied namely

i. When future economic benefits associated with the item will flow to the entity

ii. Cost of the asset can be measured reliably.

So, Yes. Any subsequent recognition of the same asset at a future date is permissible provided they meet the recognition criteria at that date and, such recognition does not contravene with the provisions of specific IFRSs dealing with the accounting of such items.

And for the second part of the question, No. Reinstatement in future periods is permissible only if it is permitted by the applicable IFRS dealing with such items.

Eg. IAS 38 Impairment losses once recognized on Goodwill shall never be reversed under any circustances. So it cannot be reinstated once such loss is recognized eventhough the recognition criteria is met.

c.

AASB 101 states that the entity shall classify assets as current and non-current in its statement of Financial position when the accounts are prepared on a going concern basis. (based on the normal operating cycle)

One of the important guidelines made by the AASB101 is strict prohibition of classifying a deferred tax asset under IAS 12 as a current asset in the Statement of Financial Position.

Another important disclosure is requirement is the strict prohibition of offsetting assets against their related liabilities unless such treatment is specifically permitted by an IFRS.

d.

Depreciation as per IAS 16, by definition is the systematic allocation of the depreciable amount of an asset over its useful life. It is an accounting estimate as per IAS 8 and is an expense by nature and accounted to reflect the decline in value that arises due to wear and tear, change in technology or change in customer preferences etc.

Thus it is an allocation process.

In comparison, Valuation process refers to the process of valuing the current price of an asset in the market, which may result in either a gain or a loss. As discussed above, depreciation never results in a gain.

Eg. Revaluation of an item of PPE following Fair value model under IAS 16, or intangible asset for that case IAS 38.

e.

As per IAS 38, An intangible asset is an identifiable non‑monetary asset without physical substance

And diving deeper, we get to know that An asset is identifiable if it is either:

(a) capable of being separated / divided from the entity and sold, transferred, exchanged etc whether or not the entity intends to do so

(b) arises from contractual or other legal rights,

In the given question, Mr. Jobs retirement has resulted in the sharp fall of the share prices by 5%. While we can all agree that he was an invaluable asset to the company in the literal sense, this is not the same when it comes to accounting. As mentioned above, to be an intangible asset, requires the satisfaction of 2 conditions, i.e being identifiable and without physical substance. Upon analysis of the above case, it is clear that Mr. Jobs’s involvement with the company is not identifiable, since it is neither capable of being separated not does it arise from contractual or legal rights. Since it does not meet the definition of the intangible assets, they cannot be recognized in the Financial statements of Apple.

f.

IAS 37 defines contingent asset as a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non‑occurrence of one or more uncertain future events not wholly within the control of the entity.

Unless an inflow of economic benefits is not probable or remote the entity is required to disclose all instances of contingent assets in the Notes accompanying the Financial Statements.

Furthermore, all Contingent assets should be continually assessed to ensure that developments are appropriately reflected in the FS.

Only when it has become virtually certain that an inflow of economic benefits will arise, the asset and related income is recognized. (Note that Virtually certain means significantly high probability of the event occuring (> 95%), and not probable / remote means (<5%) chance of the event occuring)