An asset is identifiable if it either:
- Is separable, i.e., is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
- Arises from binding arrangements (including rights from contracts or other legal rights), regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Note: Even though the definition given requires an intangible asset to be identifiable to distinguish it from goodwill, any goodwill recognised in an acquisition is an asset.
An asset is typically identified by being explicitly specified in a contract. However, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer.
An identifiable asset is an asset of an acquired company that can be assigned a fair value and can be reasonably expected to provide a benefit for the purchasing company in the future. Identifiable assets can be both tangible and intangible assets. Assets that are not identifiable are usually considered to be goodwill.
If an asset is deemed to be identifiable, the purchasing company records it as part of its assets on its balance sheet. Identifiable assets consist of anything that can be separated from the business and disposed of such as machinery, vehicles, buildings, or other equipment. If an asset is not deemed to be an identifiable asset, then its value is considered part of the goodwill amount arising from the acquisition transaction.
For example, suppose ABC conglomerate company purchases both a smaller manufacturing firm and a smaller start-up internet marketing company. The manufacturing company would likely have most of its value tied up in property, equipment, inventory and other physical assets, so virtually all of its assets would be identifiable. The internet marketing company, on the other hand, would likely have very few identifiable assets, and its value as a company would be based on its future earnings potential. As such, the purchase of the marketing company would generate a lot more goodwill on ABC’s books, because it would gain few identifiable assets from the marketing company.
Substantive substitution rights
Substitution rights may be an obvious way to avoid lease accounting (IFRS 16). The reasoning is that if there is a substitution right, the leased asset cannot be identified and as a result, there is no lease to account for. However, the substitution right has to be substantive.
Substitution rights are substantive if the supplier:
- has the practical ability to substitute an alternative asset throughout the period of use, and
- benefits economically from substituting the asset.
Take care! ….. only if both of the conditions are met!
So the supplier’s substitution right is not substantive if the supplier has a right or obligation to substitute the asset only on or after either a particular date or the occurrence of a specified event.
The substitution right also needs to be substantive and available throughout the period of use. The evaluation of this criterion has to be based on the facts and circumstances at the inception of the contract and has to exclude consideration of future events.
Implicitly specified asset
As mentioned above, under IFRS 16, an identified asset can be either implicitly or explicitly specified in a contract. Here are two examples of an implicitly identified asset in a contract.:
Customer X enters into a five-year contract with Supplier Y for the use of rolling stock specifically designed for Customer X. The rolling stock is designed to transport materials used in Customer X’s production process and is not suitable for use by other customers. The rolling stock is not explicitly specified in the contract, but Supplier Y owns only one rolling stock that is suitable for Customer X’s use. If the rolling stock does not operate properly, the contract requires Supplier Y to repair or replace the rolling stock. Assume that Supplier Y does not have a substantive substitution right. Refer to section 2.1.3 Substantive substitution rights.
Analysis: The rolling stock is an identified asset. While the rolling stock is not explicitly specified in the contract (e.g., by serial number), it is implicitly specified because Supplier Y must use it to fulfil the contract.
|Implicitly specified at the time the asset is made available for use by the customer|
Customer X enters into a five-year contract with Supplier Y for the use of a car. The specification of the car is specified in the contract (brand, type, colour, options etc.). At inception of the contract the car is not yet built.
Analysis: The car is an identified asset. Although the car cannot be identified at inception of the contract, it is apparent that it will be identifiable at the commencement of the lease. The car is identified by being implicitly specified at the time that it is made available for use by the customer (i.e., at the commencement date).
An identified asset can be a physically distinct portion of a larger asset.
A capacity portion of an asset is an identified asset if it is physically distinct (e.g., a floor of a building). A capacity or other portion of an asset that is not physically distinct (e.g., a capacity portion of a fibre optic cable) is not an identified asset unless it represents substantially all of the capacity of the asset and thereby provides the customer with the right to obtain substantially all of the economic benefits from use of the asset.
|Physically distinct portion of a larger asset|
Customer X enters into a 12-year contract with Supplier Y for the right to use three fibres within a fibre optic cable between New York and London. The contract identifies three of the cable’s 20 fibres for use by Customer X. The three fibres are dedicated solely to Customer X’s data for the duration of the contract term. Assume that Supplier Y does not have a substantive substitution right (refer to section 2.1.3 Substantive substitution rights).
Analysis: The three fibres are identified assets because they are physically distinct and explicitly specified in the contract.
|Capacity portion of an asset|
Customer X enters into a five-year contract with Supplier Y for the right to transport oil from Country A to Country B through Supplier Y’s pipeline. The contract provides that Customer X will have the right to use of 95% of the pipeline’s capacity throughout the term of the arrangement.
Analysis: The capacity portion of the pipeline is an identified asset. While 95% of the pipeline’s capacity is not physically distinct from the remaining capacity of the pipeline, it represents substantially all of the capacity of the entire pipeline and thereby provides Customer X with the right to obtain substantially all of the economic benefits from use of the pipeline.
Assume the same facts as in Scenario A, except that Customer X has the right to use 60% of the pipeline’s capacity throughout the term of the arrangement.
Analysis: The capacity portion of the pipeline is not an identified asset because 60% of the pipeline’s capacity is less than substantially all of the capacity of the pipeline. Customer X does not have the right to obtain substantially all of the economic benefits from the use of the pipeline.
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