Recognition Criteria of Assets

Hi Everyone,

We talked about key component of Balance Sheet earlier. 

Let’s talk about the criteria for Assets Recognition this time. Let’s first define what an asset is

“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 (IASB Framework).”

How do we recognize an asset, to qualify its inclusion to the balance sheet? 

• When expenditure is made, it can either be either recognized as an expense or an asset. The primary criterion for asset recognition is that the expenditure will result in economic benefits flowing to the owner in future reporting periods. The asset is then charged to expense over the expected number of periods during which economic benefits will be realized. (Land is one exception in this case, it has indefinite life)

• There must be an objective way to measure the asset. The purchase price of a fixed asset is an objective measurement, since the buyer is expending a specific amount of funds. However, it is not possible to objectively measure an internally-generated intangible asset, such as the value of customer relationships. Thus, given the difficulty of measurement, this type of asset cannot be recognized as an asset unless it relates to an acquisition, in which case a portion of the purchase price is allocated to the intangible assets of the acquirer.

• Another criterion for asset recognition is the materiality of the expenditure. Asset tracking is time-consuming, and so is to be avoided from a clerical perspective. A business typically imposes a threshold, below which all expenditures are charged to expense, in order to reduce the number of its asset records. For example, a business sets its "cap limit" at $2,500, which means that all laptops purchased are charged to expense, even though they will clearly provide benefits over the next few years

Here is a diagrammatic illustration on how we can recognize an element as an asset 

  This is was a little explanation on the criteria for asset recognition. Feel free to contact for any related query. Have a good day! :)

LinkedIn

And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(