Question

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

Answer 1

First of all

Let us define assets:

Assets are resources under the control of entity due to result of past event from which future economic benefits are expected to flow.

So to qualify as an asset two things are important:

a)They should be under control

b)Future economic benefit should be derived from such asset

Although in most cases legat ownership will give the entity control over an asset m certain types of lease agreemnet can result in the entity controlling the asset.For exmple , finance leases transfer the risks and benefits of ownership to the lessee, which means the leases asset is now controlled by the lessee .Subsequently the leased asset should be recorded as an asset on the lessee's balance sheet even though the lessee does not own the asset just yet , i.e it will be transferred after coompletion of lease term or final lease payment.

Also , accounting principle of substance over form comes into play. It is important that the economic substance rather than the legal form of the transaction is reported. In a finance lease ,legal title to the leased asset still remains with the lessor until the end of the relevant lease term when hte lessee has made all the lease payments.however,the lessee has use of and earns economic benefits from the leased asset during the lease period and hence leased asset should be recorded as an asset in lessee's balance sheet during this term.

To conclude:an asset does not need to be legaly owned by the entity to be recorded as an asset on the balance sheet,as long as the entity controls the asset , then the asset must be reported on the entity's balance sheet.