Asset definition

Asset definition

There are two asset definitions in current IFRS Standards, in IAS 38 Intangible assets and in the Conceptual Framework for Financial Reporting. The wording deviated but the meaning is exactly the same, here they are:

IAS 38 Intangible assets

The asset definition as per IAS 38 Intangible assets is as follows – an asset is a resource:

1. controlled by an entity as a result of past events; and
2. from which future economic benefits are expected to flow to the entity.

Before providing examples of assets, let’s analyse the asset definition.

Analysis of the asset definition

Aspect	Explanation
controlled by an entity	An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way.
as a result of past events	Assets are recorded only after past transactions; the intention to purchase some assets may not be considered as a sufficient basis for recording of assets. The event referred to is the acquisition, construction or attribution of the asset. See below the definition of cost in IAS 38 to recognise the event. Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or, when applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs.
future economic benefits	The future economic benefits flowing from an asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity. For example, the use of any kind of property in a production process may reduce future production costs rather than increase future revenues.
expected to flow to the entity	The future economic benefit tied in the asset is the potential that may either directly or indirectly flow into the company cash assets or cash asset equivalents. An asset may be an item that can be: – used in the production of goods and services sold by the company; exchanged for other assets; used for redemption of liabilities; distributed among the company owners. Resources, which are not capable of providing a certain future economic benefit, are either a potential loss or current operating expenses and may not be classified as assets.

Other aspects to be considered in the asset definition are:

• The physical form is not required for the existence of an asset (assets, for example, include patents and copyright, if a company acquires them for cash and expects an inflow of future economic benefits from their use).
• Property rights are not a requirement for recognition of the existence of an asset (leased property is considered to be an asset as long as a company controls the lessee’s right to use an underlying asset for the lease term (IFRS 16 right-of-use asset definition)).
• Resources acquired without any consideration from which a company expects the inflow of future benefits are also included in assets. The lack of expenses does not therefore exclude the possibility of asset creation in some circumstances. However, this should be based on IFRS standards, refer to for example the difference between (fundamental) research (expensed) and (product) development (capitalised under conditions)
• Company expenses, on their turn, do not presuppose yet the acquisition of an asset. There should be justifiable assurance for gaining of future economic benefits, otherwise such expenditure should be attributed to current period expenses.
• When identifying the assets in accounts it is necessary to take into account the legislation of the country of operation of the company.
• In order for an asset to be represented in the balance sheet it should have a cost or its value should be reliable.

Conceptual Framework for Financial Reporting

The asset definition as per the Conceptual Framework for Financial Reporting (chapter 4) is essentially the same but differently worded:

• An asset is a present economic resource controlled by the entity as a result of past events.
• An economic resource is a right that has the potential to produce economic benefits.

Right

Rights that have the potential to produce economic benefits take many forms, including:

1. rights that correspond to an obligation of another party (see paragraph 4.39), for example:
   1. rights to receive cash.
   2. rights to receive goods or services.
   3. rights to exchange economic resources with another party on favorable terms. Such rights include, for example, a forward contract to buy an economic resource on terms that are currently favorable or an option to buy an economic resource.
   4. rights to benefit from an obligation of another party to transfer an economic resource if a specified uncertain future event occurs (see paragraph 4.37).
2. rights that do not correspond to an obligation of another party, for example:
   1. rights over physical objects, such as property, plant and equipment or inventories. Examples of such rights are a right to use a physical object or a right to benefit from the residual value of a leased object.
   2. rights to use intellectual property.

Many rights are established by contract, legislation or similar means. For example, an entity might obtain rights from owning or leasing a physical object, from owning a debt instrument or an equity instrument, or from owning a registered patent. However, an entity might also obtain rights in other ways, for example:

1. by acquiring or creating know-how that is not in the public domain (see paragraph 4.22); or
2. through an obligation of another party that arises because that other party has no practical ability to act in a manner inconsistent with its customary practices, published policies or specific statements (see paragraph 4.31).

Some goods or services—for example, employee services—are received and immediately consumed. An entity’s right to obtain the economic benefits produced by such goods or services exists momentarily until the entity consumes the goods or services.

Not all of an entity’s rights are assets of that entity—to be assets of the entity, the rights must both have the potential to produce for the entity economic benefits beyond the economic benefits available to all other parties (see paragraphs 4.14–4.18) and be controlled by the entity (see paragraphs 4.19–4.25). For example, rights available to all parties without significant cost —for instance, rights of access to public goods, such as public rights of way over land, or know-how that is in the public domain—are typically not assets for the entities that hold them.

An entity cannot have a right to obtain economic benefits from itself. Hence:

1. debt instruments or equity instruments issued by the entity and repurchased and held by it—for example, treasury shares—are not economic resources of that entity; and
2. if a reporting entity comprises more than one legal entity, debt instruments or equity instruments issued by one of those legal entities and held by another of those legal entities are not economic resources of the reporting entity.

In principle, each of an entity’s rights is a separate asset. However, for accounting purposes, related rights are often treated as a single unit of account that is a single asset (see paragraphs 4.48–4.55). For example, legal ownership of a physical object may give rise to several rights, including:

1. the right to use the object;
2. the right to sell rights over the object;
3. the right to pledge rights over the object; and
4. other rights not listed in (a)–(c).

In many cases, the set of rights arising from legal ownership of a physical object is accounted for as a single asset. Conceptually, the economic resource is the set of rights, not the physical object. Nevertheless, describing the set of rights as the physical object will often provide a faithful representation of those rights in the most concise and understandable way.

In some cases, it is uncertain whether a right exists. For example, an entity and another party might dispute whether the entity has a right to receive an economic resource from that other party. Until that existence uncertainty is resolved—for example, by a court ruling—it is uncertain whether the entity has a right and, consequently, whether an asset exists. (Paragraph 5.14 discusses recognition of assets whose existence is uncertain.)

Potential to produce economic benefits

An economic resource is a right that has the potential to produce economic benefits. For that potential to exist, it does not need to be certain, or even likely, that the right will produce economic benefits. It is only necessary that the right already exists and that, in at least one circumstance, it would produce for the entity economic benefits beyond those available to all other parties.

A right can meet the definition of an economic resource, and hence can be an asset, even if the probability that it will produce economic benefits is low. Nevertheless, that low probability might affect decisions about what information to provide about the asset and how to provide that information, including decisions about whether the asset is recognised (see paragraphs 5.15–5.17) and how it is measured.

An economic resource could produce economic benefits for an entity by entitling or enabling it to do, for example, one or more of the following:

1. receive contractual cash flows or another economic resource;
2. exchange economic resources with another party on favorable terms;
3. produce cash inflows or avoid cash outflows by, for example:
   1. using the economic resource either individually or in combination with other economic resources to produce goods or provide services;
   2. using the economic resource to enhance the value of other economic resources; or
   3. leasing the economic resource to another party;
4. receive cash or other economic resources by selling the economic resource; or
5. extinguish liabilities by transferring the economic resource.

Although an economic resource derives its value from its present potential to produce future economic benefits, the economic resource is the present right that contains that potential, not the future economic benefits that the right may produce. For example, a purchased option derives its value from its potential to produce economic benefits through exercise of the option at a future date. However, the economic resource is the present right—the right to exercise the option at a future date. The economic resource is not the future economic benefits that the holder will receive if the option is exercised.

There is a close association between incurring expenditure and acquiring assets, but the two do not necessarily coincide. Hence, when an entity incurs expenditure, this may provide evidence that the entity has sought future economic benefits, but does not provide conclusive proof that the entity has obtained an asset. Similarly, the absence of related expenditure does not preclude an item from meeting the definition of an asset. Assets can include, for example, rights that a government has granted to the entity free of charge or that another party has donated to the entity.

Control

Control links an economic resource to an entity. Assessing whether control exists helps to identify the economic resource for which the entity accounts. For example, an entity may control a proportionate share in a property without controlling the rights arising from ownership of the entire property. In such cases, the entity’s asset is the share in the property, which it controls, not the rights arising from ownership of the entire property, which it does not control.

An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource.

An entity has the present ability to direct the use of an economic resource if it has the right to deploy that economic resource in its activities, or to allow another party to deploy the economic resource in that other party’s activities. Control of an economic resource usually arises from an ability to enforce legal rights.

However, control can also arise if an entity has other means of ensuring that it, and no other party, has the present ability to direct the use of the economic resource and obtain the benefits that may flow from it. For example, an entity could control a right to use know-how that is not in the public domain if the entity has access to the know-how and the present ability to keep the know-how secret, even if that know-how is not protected by a registered patent.

For an entity to control an economic resource, the future economic benefits from that resource must flow to the entity either directly or indirectly rather than to another party. This aspect of control does not imply that the entity can ensure that the resource will produce economic benefits in all circumstances. Instead, it means that if the resource produces economic benefits, the entity is the party that will obtain them either directly or indirectly.

Having exposure to significant variations in the amount of the economic benefits produced by an economic resource may indicate that the entity controls the resource. However, it is only one factor to consider in the overall assessment of whether control exists.

Sometimes one party (a principal) engages another party (an agent) to act on behalf of, and for the benefit of, the principal. For example, a principal may engage an agent to arrange sales of goods controlled by the principal. If an agent has custody of an economic resource controlled by the principal, that economic resource is not an asset of the agent.

Furthermore, if the agent has an obligation to transfer to a third party an economic resource controlled by the principal, that obligation is not a liability of the agent, because the economic resource that would be transferred is the principal’s economic resource, not the agent’s.

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