BUS1AFBAssets

Topic 2Accounting and Finance for Business (BUS1AFB)Semester 1, 2014Statement of Financial PositionTopic Intended Learning Outcome 1By the end of this presentation you should be able to:Understand and apply the criteria for defining and recognising assets.

2La Trobe Business SchoolAssets - QuestionsWhy does a business need assets?What is the definition of an asset?What are the characteristics of an asset? (Asset recognition)What are the categories of assets? (Asset classification)What does the listing of assets tell us about the business?3La Trobe Business SchoolLandEquipmentBuildingsCashMotorVehiclesInventoryNotes ReceivableAccounts ReceivableResources owned or controlled by a businessAssets4Q1: Why does a business need assets?The function of assets is to generate sales for the business. Ultimately, the function of assets is to generate cash for the business, so that the business can be continue carrying on the business into the future (a sustainable business).

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La Trobe Business SchoolQ1: Why does a business need assets?Money is invested by the business in a variety of assets such as inventory, equipment, motor vehicles, buildings, computer systems etc., the objective of this investment in assets is to assist the business in generating sales.

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La Trobe Business SchoolQ1: Why does a business need assets?Assets are required by a business to create wealth for the business, its owner(s) and (arguably) society/community/local, national and global economy.

7La Trobe Business SchoolQ2: What is the definition of the term assets?Assets are a businesss economic resources that it expects will provide future benefits to the business.Assets are resources that are invested in the business intended to generate revenue and profit.8La Trobe Business SchoolQ2: What is the definition of term assets?Assets are economic resources that are objectively measurable, that result from a prior transaction and that will provide future economic benefit.The Australian Accounting Standards Board (AASB) definition of an asset is on the next slide. 9La Trobe Business SchoolQ2: What is the definition of assets? the AASB definition a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity

Paragraph 49 (a) AASB Framework for the Preparation and Presentation of Financial Statements, September 2009 (AASB = Australian Accounting Standards Board)10La Trobe Business SchoolApplying the definition of the term assetsAn example of an asset of a business is cash:It can be counted (measurable).It is received via a transaction with someone else (for a business it is usually results from a prior transaction with a customer).AndIt can be used to buy things in the future (future economic benefit).11La Trobe Business SchoolQ3: What are the characteristics of an asset? Main identifying characteristics of an asset are:Expected future economic benefit.The business has exclusive right to control the benefit.The benefit must arise from some past transaction or event.The asset must be capable of reliable measurement in monetary terms.12La Trobe Business SchoolQ3: What are the characteristics of an asset? These characteristics limit the kind of items that may be referred to as assets in the financial statements (statement of financial position).All four characteristics must be present for an asset to be recognised and included in the financial statements of a business.Lets have a closer look at these characteristics. 13La Trobe Business SchoolQ3: What are the characteristics of an asset? Expected to have future economic benefit.What does this statement mean?An asset is expected to have the potential to generate cash flows (in the form of cash and/or cash equivalents) through either its use or through its sale for the business.In other words, to be considered an asset, an asset must be able to generate cash for the business in the future.14La Trobe Business School

Q3: What are the characteristics of an asset? Future economic benefits can be generated in a number of ways:Assets may be used individually or with other assets in combination to produce goods (inventory) that will be ultimately sold to customers generating cash or cash equivalents.Assets may be used individually or with other assets to provide services to customers generating cash or cash equivalents.

15La Trobe Business SchoolQ3: What are the characteristics of an asset?Assets may be used to settle liabilities in kind or by converting into cash.Assets may be used for exchange purposes to acquire other assets.Assets may be distributed to owners of the business (e.g. at the time of liquidation or when dividends are paid).

16La Trobe Business SchoolQ3: What are the characteristics of an asset? Example of an asset that is generating a future economic benefit is:For a manufacturing business, a machine that is used in the manufacture of a product that is ultimately sold to a customer for cash is an asset as it assists in the generating of a future cash flow for the manufacturing business.17

Sewing machineCustomerCashQ3: What are the characteristics of an asset? The business has the exclusive right to control the benefit.What does this mean?The asset and the future monetary benefit that the asset generates must be owned or controlled by the business.The right of ownership is not essential for an item to be considered an asset as long as the future economic benefit is controlled by the business.18La Trobe Business SchoolQ3: What are the characteristics of a asset? Example of an asset that is not owned by the business but provides future benefits to the business is:Leased equipment.It provides future benefits as it is integral to the production process. The machinery is owned by the leasing company not the business using the equipment.19La Trobe Business SchoolQ3: What are the characteristics of an asset? If the business maintains the leased equipment and can locate the equipment where they want to without needing permission of the leasing company etc. The leased machinery is controlled by the business.The leased equipment meets the criteria for being an asset of the business. The asset and the future monetary benefit generated by the the asset is controlled by the business.

20La Trobe Business SchoolQ3: What are the characteristics of an asset? The benefit must arise from some past transaction or event.What does this statement mean?a transaction or other event giving the entity control over the future economic benefits must have occurred in the past. This means that a deal to purchase an asset has been done between two or more parties it is not just the planning or thinking about making the deal, the deal actually has to have taken place for an asset to be recognised. The organisation has made the purchase and can have a moral or legally enforceable obligation to pay for the purchase.21

La Trobe Business SchoolQ3: What are the characteristics of an asset? 4. The asset must be capable of reliable measurement in monetary terms.What does this statement mean?Generally establishing the cost or value of assets is straightforward, they are generally recorded at (historical) cost you would have a document detailing the description of the asset and the dollar price that you paid the supplier for the asset this is a reliable measure in monetary terms of the asset.

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La Trobe Business SchoolQ3: What are the characteristics of an asset? Sometimes, assets such as goodwill, brand names, trade marks, patents and copyrights are internally generated by the organisation and they certainly met the first three criteria for recognition as an asset however because they cannot be reliably measured in monetary terms they are not recognised in the financial statements.

23La Trobe Business SchoolQ3: What are the characteristics of an asset? However, assets such as goodwill, brand names, trade marks, patents and copyrights purchased from parties external to the organisation are included in the financial statements as their cost can be reliably measured as there is a dollar price that was paid by the organisation for the purchase of the goodwill, brand names, trade marks, patents and copyrights.

24La Trobe Business SchoolAssets - ExamplesItems that often appear as assets in a balance sheet include:Freehold premisesMachinery and equipmentFixtures and fittingsPatents and trademarksAccounts receivable (Debtors)Inventory and InvestmentsPrepaid expenses (prepaid insurance etc.)

25La Trobe Business SchoolBusiness Assets versus Personal AssetsThere are three broad business forms Sole proprietorshipPartnershipCompanyAll of these business forms account for the business separately to the owner(s) personal affairs. Personal assets must not be included in the businesss financial statements.

26La Trobe Business SchoolBusiness Entity FormsSole ProprietorshipPartnershipCompany

One owner of the business the hairdresserTwo or more owners of the businessMany owners of the business shareholders27Q4 What are the categories of assets?The business assets can be categorised on the basis of:The physical form of the asset, whether the asset is tangible or intangible. AndThe liquidity of the asset, whether the asset is current or non-current.28La Trobe Business SchoolQ4 What are the categories of assets?Assets that have real, physical substance are called tangible assets. You can see them, you can touch them.Examples of tangible assets are:InventoryFreehold buildingsPlant and equipmentFurniture and fittings29

La Trobe Business SchoolQ4 What are the categories of assets?Assets that do not have real, physical substance but still represent future benefits to the business are called intangible assets.Examples of intangible assets are:CopyrightTrademarkBrand namePatentGoodwill

30La Trobe Business SchoolQ4 What are the categories of assets?Assets are normally classified as current and non-current based on their liquidity.What does current and non-current mean?Current assets = short-term assets, those assets that are liquid, they can be converted to cash quickly or are used up within 12 months. 31La Trobe Business SchoolQ4 What are the categories of assets?Examples of current assets include:CashInventoryAccounts receivablePrepayments32La Trobe Business SchoolQ4 What are the categories of assets?33Current assets are expected to be consumed or converted to cash within 12 months or the within the businesss normal operating cycle. The operating cycle represents the time between the acquisition of the assets (raw materials etc.) and their ultimate realisation in cash or cash equivalents. La Trobe Business SchoolQ4 What are the categories of assets?34Current assets are normally held as part of the day-to-day trading activities of the business. A business holds inventory, then the business sells it for cash or on credit and business either receives cash immediately (cash sales) or on account within say 7 days or 30 days time (credit sales), the cash is then used to buy more inventory and the operating cycle continues. Figure 3.1 on the next slide shows the circular (cyclical) nature of current assets.

La Trobe Business SchoolQ4 What are the categories of assets?

35La Trobe Business SchoolQ4 What are the categories of assets?Non-current assets = longer-term assets, remain assets for longer than 12 months. Sometimes non-current assets are called fixed assets or long-term assets.Held for the purpose of generating wealth, rather than for resale.

36La Trobe Business SchoolQ4 What the categories of assets?AASB 101 Presentation of Financial Statements requires companies to classify assets according to their nature or function. Classification can be on either:Current/non-current basis orThe basis on the order of liquidity (the timing of receipt of cash).Current/non-current predominates however some companies use liquidity basis if it provides more relevant and reliable information.37La Trobe Business SchoolQ4 What does the listing of the assets tell us about the business?LiquidityIt informs on how liquid the business is. What is liquidity? Liquidity refers to the ease with which assets can be converted to cash in the normal course of business.Is there enough liquid assets such as cash and near cash equivalents available to cover the short-term debts as they become due? 38La Trobe Business SchoolQ4 What does the listing of the assets tell us about the business?LiquidityLiquidity is extremely important because business failures occur when the business cannot pay its debts when they become due. Liquidity is a very obvious indicator of the financial health (or illness) of a business. Lack of liquidity means the DEATH (bankruptcy) of the business.39

La Trobe Business SchoolQ4 What does the listing of the assets tell us about the business?In the case of the business owner, if they do not have enough cash or cash equivalents to pay their short-term debt obligations they need to find a source of cash really quickly such as an increase in bank overdraft or bank loans or other alternative sources of financing. If the business does not find the cash it needs in time the business will fail. Additionally, in Australia it is illegal for a business to trade when it is technically insolvent (doesnt have enough cash to pay its creditors). Business owners face substantial penalties if their business continues to trade when it is insolvent.

40La Trobe Business SchoolQ4 What does the listing of the assets tell us about the business?In the case of the creditors, they want to know that the debt that is owed to them will be paid in full and on time. If there isnt sufficient cash, the creditor will withdraw credit and/or supply to the business. Sufficient levels of cash and near cash equivalents held by a business are a reasonable indicator that the debt will be paid in full and on time.

41La Trobe Business SchoolQ4 What does the listing of the assets tell us about the business?The mix of assets held by the businessThe relationship between current and non-current assets is important. If a business has a too high percentage of their total assets tied up in non-current assets they may be vulnerable to financial failure, because converting non-current assets to cash to meet short-term obligations is not easy and cannot be completed very quickly.42La Trobe Business School43Assetsare defined asResources controlled by the business as a result of a past event and from which future economic benefits are expected to flowExamples of assets include cash, accounts receivable, inventory, prepaid expenses, land, equipment, buildings, motor vehicles, investments, notes receivable.Concept Map Asset definitionLa Trobe Business School44Asset Characteristicsare Concept Map Asset recognition1. Expected to have future benefit2. Controlled by the business3. A past transaction or event has occurred4. Reliably measured in monetary terms All four asset characteristics must be present for an asset to included on the statement of financial position&&&An asset is recognisedLa Trobe Business School45Are classified based on Concept Map Asset classificationAssetsReal, Physical Substance?NoIntangible AssetYesTangible AssetConversion to cash within 12 months?NoNon-current AssetYesCurrent AssetExamples: Equipment, Land. Examples: Cash, InventoryExamples:Trademarks, Patents. Examples: InventoryEquipment, LandMust be classified as current/non-current on the statement of financial position (balance sheet)Only purchased intangible assets can appear on the statement of financial positionTangible assets can also be either current or non-current assetsTopic Intended Learning Outcome 1At the end of this presentation and completing your other BUS1AFB topic tasks, you should be able to:Understand and apply the criteria for defining and recognising assets.

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