31/03/2015

Australian
School of
Business

Australian School of Business

Australian
School of
Business

Objective

1. Understand the definition and recognition criteria, and why they are
important.
2 Be technically competent in calculating depreciation and gains/
losses on disposals and be able to do related journal entries as well as
constructing T-accounts.

ACCT1511
Topic:

3. Understand the link between costs, assets and expenses.

Assets (1)
General Principles

Australian
School of
Business

Asset Definition

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 (AASB Framework,
para. 49)

Asset recognition

Australian
School of
Business

The item must satisfy both recognition criteria (Framework, para 83):
1.

It is probable that any future economic benefit associated with the

item will flow to the entity; and

2.

The item has a cost or value that can be measured with

reliability.

Consequently, assets have three essential characteristics:

1. Future economic benefit (or service potential)
2. Controlled by the entity
3. Result of past events

Australian
School of
Business

Assets: Definition & Recognition

Does the item have all the essential
characteristics of an Asset ?

No

Yes

Cost vs. Assets vs. Expenses

Australian
School of
Business

Cost/expenditure = Amount of cash/equivalents paid or fair value of

consideration given.
We can account for that cost in two different ways:
1. Not capitalise the cost and record it as an expense
Cost Expense

Does the Asset meet both

the recognition criteria?

Details might appear in

the annual report

2. Capitalise the cost and record it as an asset

Yes
A recognised in the
entitys balance sheet

Dr Per Tronnes

No
Might be separately
disclosed in the notes

Cost Assets
Cost Assets Expense

31/03/2015

Assets & Expense : Another Approach

Australian
School of
Business

It must meet the essential characteristic of an asset: i.e.

control, FEB, past event/transaction

Does the item have all the essential characteristics of an Asset?

Yes

No
No

In addition, it must be identifiable.

Expense

Typical intangible assets include, among others:

patents,
licences,
copyrights,
franchises,
trademarks

Yes

ASSET

Intangible Assets:
Acquisition vs. Internally Generated

Australian
School of
Business

An intangible asset is an identifiable non-monetary asset without

physical substance (AASB 138, para 8)

We have incurred a cost/expenditure.

Dr Asset or Expense? XXX
Cr Cash/Accounts Payable XXX

Does the Asset meet both

the recognition criteria?

Intangible Assets: Definition

Australian
School of
Business

Goodwill A special case

Australian
School of
Business

Goodwill is a non-current intangible asset, but it is not identifiable....

We treat intangible assets differently depending on whether they were

acquired or whether they were internally generated.
Accounting for intangible assets when there is a separate acquisition
is straight forward.
Accounting for internally generated assets is harder. An entity
classifies the generation of the asset into:

Goodwill is an accounting concept meaning the value of an entity

over and above the value of its separate identifiable assets less
liabilities.
- because of synergies, reputation, loyalty of clients, staff
knowledge etc.
- so goodwill is the value of all the things that is hard to identify,
and not separately listed on the balance sheet such as
buildings, inventory and so on.

a) A research phase
b)

Can only recognise purchased Goodwill.

Internally generated Goodwill is not recognised.

A development phase

Depreciation an expense (ACCT1501)

Australian
School of
Business

References

Australian
School of
Business

Asset usually have limited useful lives:

That is, the economic benefits are consumed over time.
For example, if a machine was purchased 10 years ago, the
future economic benefits are likely to be much less now than
when the machine was originally purchased.

Trotman, Gibbins & Carson (TGC) Ch. 6.3

Trotman, Gibbins & Carson (TGC) Ch. 10.1-10.5 (inclusive),
and 10.7-10.8 (inclusive)
The Accounting Framework

Depreciation is a process of systematically ALLOCATING COST

over the useful life of the asset.
(Remember the Matching Principle)
It is NOT a method of VALUATION

Dr Per Tronnes

Comprehensive legacy notes.