LESSON 3: ASSETS

Target:

At the end of the lesson, you will be able to:

 Understand the definition of assets

 Know the essential characteristics of assets
 Learn the different types of assets

EXPLORE

Fill out the graphic organizer below by writing down what you know about Assets. You
may choose to answer using the following guide questions. Compare and discuss your
answers with a partner.

Guide questions:

1. What are the examples of assets?

2. What are the essential characteristics of assets?
3. What are the classifications of assets?
4. What are considered liquid assets?
5. Is Building considered an asset?

EXAMINE

Definition of an asset

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.
Three aspects of the definition

a) right
b) potential to produce economic benefits
c) control

Right

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

1. rights that correspond to an obligation of another party, for example:

a. rights to receive cash.
b. rights to receive goods or services.
 c. rights to exchange economic resources with another party on favourable
terms. Such rights include, for example, a forward contract to buy an economic
resource on terms that are currently favourable or an option to buy an
economic resource.
d. rights to benefit from an obligation of another party to transfer an economic
resource if a specified uncertain future event occurs

2. rights that do not correspond to an obligation of another party, for example:

a. 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.
b. rights to use intellectual property.

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 recognized
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:

a. receive contractual cash flows or another economic resource;

b. exchange economic resources with another party on favourable terms;
c. produce cash inflows or avoid cash outflows by, for example:
i. using the economic resource either individually or in combination with other
economic resources to produce goods or provide services;
ii. using the economic resource to enhance the value of other economic
resources; or
iii. leasing the economic resource to another party;
d. receive cash or other economic resources by selling the economic resource; or
e. extinguish liabilities by transferring the economic resource.
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.

Classification of assets

Assets are classified only into two, namely current assets and noncurrent assets.

Current assets

PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:

a. The asset is cash or cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting
period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting
period.
d. The entity expects to realize the asset or intends to sell or consume it within the
entity’s normal operating cycle.

Current assets are usually listed in the order of liquidity. The following are the most
common line items under current assets:

a. Cash and cash equivalents

b. Accounts receivable
c. Inventories
d. Prepaid expenses

Noncurrent assets
Noncurrent assets section includes resources with useful lives of more than twelve months.
In other words, these assets last longer than one year and can be used to benefit the
company beyond the current period. Accordingly, noncurrent assets include the following:

a. Property, plant and equipment

b. Long-term investments
c. Intangible assets
d. Other noncurrent assets

Property, plant and equipment

PAS 16, paragraph 6, defines property, plant and equipment as “tangible assets which are
held by an entity for use in production or supply of goods and services, for rental to others,
or for administrative purposes, and are expected to be used during more than one period”.

Examples of property, plant and equipment include land, building, machinery, equipment,
furniture and fixtures. Most property, plant and equipment except land, are presented at
cost less accumulated depreciation.

Long-term investments

The International Accounting Standards Committee defines investment as “an asset held by
an entity for the accretion of wealth through capital distribution, such as interest, royalties,
dividends and rentals, for capital appreciation or for other benefits to the investing entity
such as those obtained through trading relationship”.

Intangible assets

An intangible asset is simply defined as “an identifiable nonmonetary asset without

physical substance”.

Common examples of identifiable intangible assets include patent, franchise, copyright,

trademark and computer software.

Other noncurrent assets

Other noncurrent assets are those assets that do not fit into the definition of previously
mentioned noncurrent assets. Examples of other noncurrent assets include long-term
advances to officers, directors, shareholders and employees, and long-term refundable
deposit.
CHECK

A. True or False: Write T if you think the statement is true and F if it is false.
1. An asset is a present economic resource controlled by the entity as a result of past
events.
2. Intangible asset is considered as current asset.
3. Property, plant and equipment can be classified as current assets.
4. Cash and cash equivalents are always presented in the current assets section.
5. Investments can be classified as either current or noncurrent assets.
6. One of the essential characteristics of an asset is that asset is controlled by the
entity.
7. Assets are resources that the entity can use to create goods or provide services and
generate revenues.
8. Accounts receivable represent a contractual right to receive cash or another
financial asset from another entity.
9. Inventories are assets which are held for sale in the ordinary course of business.
10. Prepaid expense is considered as expense.

B. Identification: Identify and classify the asset accounts accordingly.

Problem 1

The following information is provided by DEF Company on December 31, 2019: Classify
and total the assets of the company.

Cash and cash equivalent 350,000

Accounts receivable 600,000
Inventories 1,500,000
Land 6,500,000
Building 2,000,000
Accumulated depreciation-building 500,000
Equipment 3,000,000
Accumulated depreciation-equipment 1,000,000
Machinery 1,500,000
Accumulated depreciation-machinery 300,000
Prepaid expenses 200,000
Investment in associate 1,500,000
Notes payable 1,500,000
Accounts payable 2,000,000
Accrued expenses 500,000
Share capital 10,000,000
Retained earnings 3,150,000
 Problem 2

The following information is provided by GHI Company on December 31, 2019: Classify
and total the assets of the company.

Accounts payable 200,000

Accounts receivable 350,000
Accrued expenses 100,000
Cash on hand 50,000
Cash in bank 350,000
Equipment 500,000
Furniture and fixtures 200,000
Inventories 400,000
Long-term investments 1,000,000
Notes payable 600,000
Notes receivable 200,000
Patent 80,000
Retained earnings approriated 650,000
Retained earnings unapproriated 580,000
Share capital 1,000,000

EQUIP

“Assets Explained”
https://www.youtube.com/watch?v=rOsuqG_J0t4

“What is an Asset?”
https://www.youtube.com/watch?v=cEZLSRUImJM

INTEGRATE

 Are assets classifications important?

 How can you properly classify an asset?
BUILD

On December 31, 2019, the CCC Company provided the following details:

Undeposited collections 30,000

Accounts receivable 250,000
Cash in bank-PNB checking acount 750,000
Accounts payable 300,000
Cash in bank-BPI (payroll fund) 1,000,000
Accrued expenses 200,000
Cash in bank-BDO savings account 900,000
Cash in bank-PNB current account 850,000
Investment in associates 1,200,000
Time deposit - 30 days 150,000
Notes receivable 350,000
BSP treasury bill - 60 days 2,000,000
Land 1,000,000
Finished good inventories 700,000
Notes payable 3,000,000
Share capital 2,500,000
Retained earnings - appropriated 1,500,000
Retained earnings - unappropriated 1,680,000

Compute the total amount of current assets that should be reported on December 31, 2019.