Assets & Impairment

IASB Framework for the Preparation and

Presentation of Financial Statements
• 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
 Kerangka Dasar Penyusunan dan
Penyajian Laporan Keuangan (KDPPLK)
• Aset adalah sumberdaya yang dikuasai
perusahaan sebagai akibat dari peristiwa
masa lalu dan sumber manfaat ekonomik
di masa depan diharapkan akan
diperoleh perusahaan
 Essential Characteristics
• Future economic benefits
• Control by an entity
• Past events
 Future Economics Benefits
• Future economic benefits are the
potential to contribute, either directly or
indirectly, to the flow of cash and cash
equivalents to the entity
– profit seeking entity
– not-for-profit entity
• Relate to economic resources
– scarcity
– utility
• An asset is something that exists now
• Has the capability of rendering service or
benefit currently or in the future
• Distinguish between the object, such as a
building or machine, and the service or
benefit embodied in it
 Controlled by an Entity
• The economic benefit must be controlled
by the entity
• An entity’s right to use or control an
asset is never absolute
• Ownership is often concurrent with
control, but it is not an essential
characteristic of an asset
• Does not rely on legal enforceability
 Assets Recognition
• The extent and timing of the recognition
of assets is important because it can have
economic consequences for preparers
and users of financial statements
• Recognizing assets on the balance sheet
involves recognition rules
– conventions and authoritative
pronouncements
• Recognition criteria
– the future economic benefits must be
probable
– the asset must be capable of being
measured reliably
• Past recognition criteria
– reliance on the law
– determination of economic substance of
the transaction or event
– use of the conservatism principle: anticipate
losses, but not gains
 Asset Measurement
• All the elements of accounting are linked
and measurement of profit flows from
measurement of the change in net assets
• The rules and practices governing asset
recognition and measurement will also
affect measurement of profit and, in
turn, capital (equity)
• Once the definition and recognition criteria
have been met, the accountant must decide
how to measure the asset
– several measurement approaches available
– qualitative characteristics of financial information
•Once measured
– on balance sheet
– restricted to just note disclosure
 Tangible Assets
• Traditional approach has been to
measure assets at historical cost
• IASB standards permit subsequent re-
measurement using a number of
approaches  fair value  exit value or
value in use
 Tangible Assets
• Traditional approach has been to
measure assets at historical cost
• IASB standards permit subsequent re-
measurement using a number of
approaches  fair value  exit value or
value in use
 Current Assets
• Inconsistencies in the measurements
of its components
• Differences of opinion over what should be
included as the elements
• Lack of precision in defining the elements
– particularly with respect to the terms ‘liquidity’
and ‘current’
• Liquidity as the basis for asset
classification on the balance sheet
 Current Assets
• Cash & Cash Equivalents
• Temporary Investments
– Historical cost/Fair value/Lower of cost or market
– Trading securities/AFS securities/HTM securities
• Receivables  bad debts
• Inventories
– Inventory quantity
– Flow assumption
– Market fluctuations
• Prepaids
 Long Term Assets
• Property, Plants, & Equipments (PPE)
– Represent a major source of future service
potential
– Valuation is important because
• indication of physical resources available to the
firm
• and may give some indication of future liquidity
and funds flow.
 Long Term Assets
• Property, Plants, & Equipments (PPE)
– Represent a major source of future service
potential
– Valuation is important because
• indication of physical resources available to the
firm
• and may give some indication of future liquidity
and funds flow.
 Accounting for Cost
• Initial cost  sacrifice of resources given
up now to accomplish future objectives
• Problems:
– Group purchases
– Self constructed assets
– Removal of existing assets
– Non-monetary exchange
– Donated or discovery values
• Cost Allocation
– Capitalization implies future service
potential
– Matching concept requires expiration of
future service potential to be recorded in
the period incurred  cost allocation
– Actual expiration of future service potential
difficult to ascertain  method of cost
allocation should be systematic and rational
– Depreciation is a form of cost allocation
• The Depreciation Process
– Establishing the proper depreciation base
– Determining useful service life
– Choosing a cost allocation method
• Straight-line/Accelerated/Units of Activity
• Capital vs Revenue Expenditure
– Whether to capitalize or charge to expense
expenditures required for an existing long-
term asset
– Criteria
• Prolong life or increase efficiency  Capitalize
• Ordinary and necessary  Expense
• Impairment of Value
– Long-term asset accounting should be
similar to accounting for other assets
– Asset should be written down when value
diminishes
– Impairment occurs when carrying amount is
not recoverable [SFAS 121]
– Future cash flow < Book value
• Investments
– Classification as long-term is based on the
concept of managerial intent
– Equity Method
• The concept of significant influence
• The twenty percent guideline
• Other methods of determining
• How to account  Earnings & Dividends
– Cost Method  lack of significant influence
 Issues
• Fair value is the frontrunner
• Both the IASB and FASB support greater
use of fair value measurement
• Auditing fair values creates difficulties
because it requires the application of
valuation models, and, frequently, the
use of valuation experts
• Auditors need to
– understand the client firm’s processes and
relevant controls for determining fair values
– make a judgement on whether the client
firm’s measurement methods and
assumptions are appropriate and likely to
provide a reasonable basis for the fair value
measurement
– appreciate management’s potential biases
and likely errors
• There is the potential that corporate failures
will lead to legal action against auditors who
failed to approach their audit of asset fair
values appropriately
 Liabilities
• Theory of Liabilities
– Entity Theory 
Assets = Equities
– Proprietary Theory 
Assets – Liabilities = Equity
 Equity
• Theories of Equity
– Proprietary
– Entity
– Fund
– Commander
– Enterprise
– Residual equity