Intermediate Accounting 1 by Justin Philip Batao

CHAPTER 2 – ASSETS – Definition, Recognition and Measurement

The term "asset" refers to an economic resource that is owned or controlled by an individual, organization, or
entity and has the potential to provide future economic benefits. Assets represent the value or potential value
that an entity possesses.

Detailed definition of assets according to the respective frameworks:

 PAS - Philippine Accounting Standards:
According to PAS, an asset is defined as a present economic resource controlled by an entity as a result
of past events. It is expected that future economic benefits will flow to the entity, and the resource can
be obtained or controlled by the entity due to its past actions or transactions.

 PFRS - Philippine Financial Reporting Standards:

PFRS, which is largely based on IFRS, adopts a similar definition for assets. Under PFRS, assets are
defined as present economic resources controlled by the entity as a result of past events. It is expected
that future economic benefits will flow to the entity. Assets represent the entity's rights or other access
to future economic benefits that are controlled by the entity.

 IFRS - International Financial Reporting Standards:

According to IFRS, assets are defined as resources controlled by the entity as a result of past events.
These resources have the potential to generate future economic benefits, and it is expected that the
entity has the ability to control the benefits from the asset.

 ASC - Accounting Standards Codification (United States):

The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) provides
guidance for financial reporting in the United States. The definition of assets in ASC is similar to the
definitions in other frameworks. Assets are defined as probable future economic benefits obtained or
controlled by an entity as a result of past transactions or events.

Here is a concise definition of assets:

Assets: Economic resources controlled by an entity as a result of past events, from which future
economic benefits are expected to flow to the entity.

Key points to note about assets are:

A. Economic Resource: Assets can be physical (tangible) items like cash, inventory, or property,
plant, and equipment. They can also be intangible, such as intellectual property rights, patents,
or goodwill. Assets can even be financial instruments like stocks, bonds, or accounts receivable.

B. Control: An entity has control over an asset when it has the ability to obtain the benefits from it
and can restrict others' access to those benefits. Control can be established through legal
ownership, contractual agreements, or other means that grant the entity the right to use, sell, or
otherwise benefit from the asset.
 C. Past Events: Assets arise from past events, such as purchase, production, or contribution. These
events have led to the entity having rights or access to the asset.

D. Future Economic Benefits: Assets are expected to generate future economic benefits for the
entity, either through their use or by being exchanged or sold. These benefits can be in the form
of increased cash flows, reduced expenses, or other advantages that enhance the entity's value
or financial position.

E. Recognition of Assets: The recognition of assets in the financial statements involves assessing
whether the asset meets the recognition criteria set out in the relevant PFRS standard. The
recognition criteria typically require that:

e.1. It is probable that future economic benefits associated with the asset will flow to the
entity.
e.2. The asset's cost or value can be reliably measured.

When these criteria are met, the asset is recognized in the financial statements.

F. Measurement of Assets: The measurement of assets under PFRS depends on the type of asset
and its classification. Here are the common measurement bases used:

a. Historical Cost: This is the most common initial measurement basis for assets. Historical
cost represents the amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire or construct the asset.

b. Fair Value: Fair value is used for certain types of financial assets and liabilities, such as
financial instruments held for trading or available for sale. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.

c. Cost Less Depreciation (or Amortization) and Impairment: Property, Plant, and Equipment
(PPE), intangible assets, and investment property are generally measured at cost less accumulated
depreciation (or amortization) and any accumulated impairment losses. These assets are subject
to periodic depreciation (or amortization) and impairment tests to ensure that their carrying
amounts reflect their economic benefits and recoverable amounts.

d. Net Realizable Value: Assets such as inventories and accounts receivable are measured at the
lower of cost and net realizable value. Net realizable value is the estimated selling price in the
ordinary course of business, less the estimated costs of completion, disposal, and any applicable
impairment losses.

e. Other Measurement Bases: Some specific types of assets have their own measurement bases.
For example, biological assets, investment properties, and financial instruments may have
specialized measurement requirements based on their unique characteristics and circumstances.
SAMPLE SCENARIO

Scenario: XYZ Corporation, a software development company, has recently acquired a patent for a
groundbreaking technology. Let's explore how various aspects of an asset, such as economic resource,
control, past event, future economic benefits, recognition, and measurement, are demonstrated in this
scenario.

Explanation:

Economic Resource: The patent represents an economic resource for XYZ Corporation. It provides the
company with exclusive rights to the technology and allows them to prevent others from using or
exploiting it without authorization. The patent can potentially generate future economic benefits for the
company through licensing agreements or the development of innovative products.

Control: XYZ Corporation exercises control over the patent as a result of acquiring the exclusive rights.
The company can determine how the technology is used, licensed, or sold. They have the ability to
exploit the patent's potential economic benefits and decide on its strategic utilization within their
business operations.

Past Event: The past event in this scenario is the acquisition of the patent. It represents a transaction or
event that occurred in the past, where XYZ Corporation secured the legal rights to the technology by
obtaining the patent through the appropriate intellectual property authorities.

Future Economic Benefits: By possessing the patent, XYZ Corporation expects to derive future economic
benefits. These benefits may include potential licensing revenues from other companies seeking to use
the technology or an advantage in the marketplace through the development of innovative software
products based on the patented technology.

Recognition and Measurement: The recognition and measurement of the patent as an asset involve
several steps. Initially, upon acquisition, XYZ Corporation recognizes the patent as an intangible asset on
its balance sheet. The cost incurred to acquire the patent, including legal fees and filing expenses, is
typically recorded as the initial measurement of the asset.

Subsequently, the patent is usually measured at cost less any accumulated amortization or impairment
losses. Amortization expense is recognized over the patent's useful life, reflecting the consumption of its
economic benefits over time.

It's important to note that the specific recognition and measurement requirements may vary depending
on the applicable accounting standards, such as PFRS or IFRS, and any subsequent updates or
amendments to those standards.

Overall, this scenario exemplifies how a patent, as an intangible asset, demonstrates the various aspects
of economic resource, control, past event, future economic benefits, recognition, and measurement. The
acquisition of the patent provides XYZ Corporation with a valuable resource that can generate future
economic benefits and is recognized and measured in accordance with accounting standards.
CLASSIFICATION OF ASSETS

Assets can be classified into different categories based on their nature, characteristics, and intended use.
Here are some common types of assets:

1. Current Assets: Current assets are short-term assets that are expected to be converted into cash
or consumed within the normal operating cycle of the business, usually within one year.
Examples include:

 Cash and Cash Equivalents: Currency, bank accounts, and highly liquid investments.
 Accounts Receivable: Amounts owed to the company by customers for goods or services
provided on credit.
 Inventory: Goods held for sale or used in production.
 Short-Term Investments: Investments intended to be converted into cash within a short period,
such as marketable securities.

2. Non-Current (Long-Term) Assets: Non-current assets are those that have a useful life extending
beyond one year and are not expected to be readily converted into cash. Examples include:

 Property, Plant, and Equipment (PPE): Land, buildings, machinery, vehicles, and other tangible
assets used in business operations.
 Intangible Assets: Non-physical assets that lack a physical presence but have value to the
business, such as patents, trademarks, copyrights, and goodwill.
 Investments: Long-term investments in equity securities, debt securities, or other entities, such
as subsidiaries, associates, or joint ventures.
 Long-Term Receivables: Amounts owed to the company that are expected to be collected after
one year.

3. Financial Assets: Financial assets are instruments representing a contractual right to receive cash
or another financial asset. They can be classified as current or non-current based on the
company's intention for their holding period. Examples include:

 Stocks (Equity Securities): Ownership interests in other companies.

 Bonds (Debt Securities): Fixed-income securities representing loans made to governments or
corporations.
 Derivatives: Financial contracts with values derived from underlying assets, such as options,
futures, or swaps.

4. Tangible Assets: Tangible assets are physical assets that can be seen and touched. They have a
physical presence and can be measured and valued. Examples include:

 Land: Property or real estate.

 Buildings: Structures used for business operations.
 Machinery and Equipment: Tools, appliances, and other equipment used in production or
operations.
 5. Intangible Assets: Intangible assets lack a physical presence but possess value to the business.
They are often long-term in nature and can provide economic benefits through legal rights or
advantages. Examples include:

 Patents: Exclusive rights to inventions or discoveries.

 Trademarks: Distinctive signs or symbols representing a brand or product.
 Copyrights: Rights to artistic, literary, or intellectual creations.
 Goodwill: The excess of the purchase price over the fair value of net identifiable assets acquired
in a business combination.

MULTIPLE CHOICE

1. According to accounting standards, an asset is defined as:

a. A physical object owned by a company
b. A resource controlled by an entity with future economic benefits
c. Money held by a company for immediate use
d. An obligation owed by a company to a third party

2. Which of the following is a key criterion for recognizing an asset in financial statements?
a. The asset's fair value exceeds its book value
b. The asset is physically tangible
c. The asset is expected to generate future cash outflows
d. The asset meets the definition of an asset and satisfies the recognition criteria

3. Which of the following is true about the recognition of assets?

a. Assets are recognized only when they are fully paid off
b. Assets are recognized when they are acquired or created and meet the recognition criteria
c. Assets are recognized only when they are sold or disposed of
d. Assets are recognized when their fair value exceeds their historical cost

4. Which of the following best describes the initial measurement of an asset?

a. The cost incurred to acquire the asset
b. The fair value of the asset at the reporting date
c. The historical cost of the asset adjusted for inflation
d. The net present value of the expected future cash flows from the asset

5. Which of the following is an example of an intangible asset?

a. Land and buildings
b. Inventory of goods for sale
c. Patents and trademarks
d. Accounts payable

6. What is the primary basis for measuring an asset after initial recognition?
a. Net realizable value
b. Historical cost
c. Replacement cost
d. Fair value.
7. When an asset is impaired, it is measured at:
a. Historical cost
b. Net realizable value
c. Fair value less costs to sell
d. Recoverable amount

8. Which of the following is true about the recognition and measurement of financial assets?
a. Financial assets are always measured at fair value
b. Financial assets are recognized only if they are held for trading purposes
c. Financial assets can be measured at cost, fair value, or amortized cost
d. Financial assets are recognized only if they have a maturity period of less than one year

9. Which of the following is an example of a non-current asset?

a. Accounts receivable
b. Cash and cash equivalents
c. Inventory held for sale
d. Property, plant, and equipment

10. Which accounting principle requires an asset to be recorded at its original cost?
a. Matching principle
b. Revenue recognition principle
c. Historical cost principle
d. Full disclosure principle

11. Which of the following is an example of a current asset?

a. Land
b. Accounts Receivable
c. Buildings
d. Goodwill

12. Which of the following is a non-current asset?

a. Inventory
b. Prepaid Expenses
c. Cash and Cash Equivalents
d. Machinery

13. Which of the following is an intangible asset?

a. Land
b. Accounts Payable
c. Patents
d. Inventory

14. Investments in associates or joint ventures are classified as:

a. Current Assets
b. Non-current Assets
c. Intangible Assets
d. Financial Assets
15. Which of the following is a financial asset?
a. Trademarks
b. Buildings
c. Stocks
d. Inventory

16. Goodwill is an example of:

a. Current Asset
b. Non-current Asset
c. Tangible Asset
d. Intangible Asset

17. Which of the following is a tangible asset?

a. Copyrights
b. Bonds
c. Land
d. Accounts Receivable

18. Which of the following is a characteristic of current assets?

a. Expected to be converted into cash within one year
b. Have a useful life extending beyond one year
c. Represent ownership interests in other companies
d. Lack a physical presence

19. Which of the following is a non-current financial asset?

a. Accounts Receivable
b. Marketable Securities
c. Prepaid Expenses
d. Inventory

20. Which of the following is a type of non-current tangible asset?

a. Stocks
b. Patents
c. Cash and Cash Equivalents
d. Machinery and Equipment

21. Which of the following is a non-current intangible asset?

a. Inventory
b. Land
c. Copyrights
d. Accounts Payable.

22. What category of assets does prepaid rent belong to?

a. Current Assets
b. Non-current Assets
c. Intangible Assets
d. Financial Assets
23. Which of the following is a characteristic of non-current assets?
a. Converted into cash within one year
b. Used in business operations
c. Represent legal rights or advantages
d. Consumed within the normal operating cycle

24. Which of the following assets is typically reported at fair value?

a. Land
b. Inventory
c. Financial Investments
d. Buildings

25. Which of the following is an example of a non-current investment?

a. Accounts Receivable
b. Cash and Cash Equivalents
c. Bonds
d. Prepaid Expenses

26. Which of the following is a current financial asset?

a. Trademarks
b. Goodwill
c. Treasury Stock
d. Marketable Securities

27. Which of the following is a tangible non-current asset?

a. Accounts Payable
b. Prepaid Rent
c. Equipment
d. Trade Receivables

28. What type of asset is an account with a contractual right to receive cash?
a. Current Asset
b. Non-current Asset
c. Intangible Asset
d. Financial Asset

29. Which of the following is an example of a non-current intangible asset?

a. Inventory
b. Land
c. Patents
d. Accounts Receivable

30. Which of the following assets is typically subject to depreciation?

a. Land
b. Accounts Payable
c. Machinery
d. Marketable Securities