Asset is any resource used by the entity in the course of business to achieve its objectives.
A resource can be anything that can provide benefit to the entity. They can take many forms like cash or non-cash. Non-cash assets are also called in-kind assets.
Why classification of asset is important?
Once a resource qualifies the definition of asset and also meets the recognition criteria then preparers of financial statements also have to decide about the classification of such asset. To determine the correct classification of asset one has to consider the physical attributes, useful life, nature and use of asset.
Classification is important not only for presentation purposes but also because certain classifications require specific measurement techniques and wrong classification may lead to application of wrong accounting standard and ultimately materially misstated financial statements.
Classification: Physical attributes
On the basis of their physical attributes, assets can be of two types:
- Tangible Assets
- Intangible Assets
Tangible Assets are those assets that can identified and also have physical existence or substance. For example, computer system, office table, building, machinery, stocks are all examples of tangible assets as these can be touched and seen.
Intangible Assets on the other hand are those non-monetary assets (other than cash and cash equivalents) which can be distinguished separately from other assets of the entity but do not have any physical existence or substance. For example, goodwill, copyrights, patents, software etc are intangible assets.
Note: Although cash is an asset, however, it is neither tangible nor intangible asset. It is a financial asset. Such types of assets are discussed later in the course at advanced stages.
Classification: Term of use
Assets whether tangible or intangible are classified in two categories based on how long they will be providing benefits to the entity and they can be classified as:
- Non-Current Assets
- Current Assets
These are the assets (tangible or intangible), which provide future economic benefit for more than one year/financial period. As these assets have useful lives of more than one year so their economic benefit is obtained in two or more financial years.
Examples of these assets are;
These are the assets (tangible or intangible), which provide future economic benefit for the period of one year or less. Usually these assets are consumed within one year or there benefit is short term.
Examples of these assets are:
- Stock in trade
- Cash in Hand
- Cash at Bank
On the basis of use assets can be classified in yet another way. Considering the application and how entity extracts benefits from the asset they can be classified in following ways:
|Type of asset||Description of asset||Applicable standard|
|1||Owner-occupied property or property plant and equipment||held (acquired or constructed) for use in production process or provision of services to other||IAS 16|
|held for rental to others|
|held for administrative puroses|
|2||Inventory||held (acquired or constructed) to be sold in the ordinary course of the business||IAS 2|
|3||Investment Property||owned or taken under finance lease and sub-leased under operating lease to another party||IAS 40|
|held vacant to be leased out under operating lease to another party|
|constructed with an intention to be used as investment property|
|4||Asset held for sale||classified as ‘held for sale’ as:|
carrying amount will be recovered principally by sale (not in the ordinary course of business) instead of use. It is available to sold immediately in its present state and condition and it is highly probable that sale will take place with in next 12 months with no change of plans in consideration
|5||Leased asset||Asset given out by the entity under finance lease to another party||IAS 17|
|Asset taken up by the entity under operating lease from another party|
In reality things can go more complex that require specific discussion in detail. For example there can be assets that are partly held for use and partly for investment purposes. In such cases there are specific provision of relevant standard. Similarly, we have cases of substance over form as well in terms of sale and leaseback transactions and sale and repurchase transactions that require classification and accounting treatment on case to case basis sometimes.