Question

Discuss whether an asset needs to be legally owned to be recorded as an asset on the balance sheet (No less than 500 words).

Answer 1

An asset may be defined as something which is represented as an economic resource for a company. In other words assets are those which help in creating wealth for the company. It helps in increasing the earning capacity of the business .It may also be defined as an access that others do not have. The only condition is that an asset must be legally enforceable and therefore resources can be used at the discretion of the company. Company is free to use an asset in the manner in which it wants. The use of asset can be precluded or is limited by an owner.

In order to record assets in the books it is must that right must be possessed on the date of presentation and preparation of financial assets. The main crux is that asset is an economic resource and economic resource may be defined as anything which has the capability to generate cash inflows or to decrease cash inflows.

Thus in order to record an asset in the balance sheet it is must that either ownership or control must be accessible as on the date of balance sheet. In addition to the possession of right or control it is equally important that right must be legally enforceable.

As per Para 49 ( a) of conceptual framework an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to accrue to the entity.

In most of the cases, legal ownership will give the entity a control over an asset, various types of lease arrangements can result in an arrangement through which assets are being controlled. For example in case of financial lease, risks and benefits are transferred to the lessee; it clearly means leased asset is controlled by the assesse. This means even though assets are not owned but leased asset must be recorded in the balance sheet.

Further, conceptual framework as well as accounting concept state about substance over legal form of an asset. This means that economic substance over legal form of the asset is to be reported. In case of lease, the asset is used and therefore economic benefit is earned by the assesse and therefore asset is to be recorded in the balance sheet.

Thus to conclude it can be said that even though asset is not owned by the assesse on the balance sheet date yet if asset is in the possession of the assesse on the date of presentation and preparation of balance sheet yet it must be reported.