Slide AKT 405 Teori Akuntansi 7 Godfrey

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GODFREY HODGSON HOLMES TARCA

CHAPTER 7

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Assets defined

• _{IASB (AASB)}_Frameworkfor the Preparation and Presentation of Financial Statements:

– _{an 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

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Assets defined

Three essential characteristics:

– _{future economic benefits} – _{control by an entity}

– _{past events}

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Future economic benefits

• _{Future economic benefits are the potential to} contribute, either directly or indirectly, to the flow of cash and cash equivalents to the entity

– _{profit seeking entity} – _{not-for-profit entity}

• _{Relate to economic resources} – _scarcity

– _utility

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Future economic benefits

• _{An asset is something that exists now}

• _{Has the capability of rendering service or} benefit currently or in the future

• _{Distinguish between the object, such as a}

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Control by an entity

• _{The economic benefit must be controlled by} the entity

• _{An entity’s right to use or control an asset is} never absolute

• _{Ownership is often concurrent with control,} but it is not an essential characteristic of an asset

• _{Does not rely on legal enforceability}

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Past events

• _{Control as a result of a past event} • _{Planned assets are excluded}

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Exchangeability

• _{Some argue that a 4}th essential characteristic is that an asset be exchangeable

• _{Separable from an entity}

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Exchangeability

• _MacNeal

A good that lacks exchangeability must lack

economic value because its purchase or sale must forever remain impossible, and thus no market

price for it can ever exist

– _goodwill

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Asset recognition

• _{The extent and timing of the recognition of} assets is important because it can have

economic consequences for preparers and users of financial statements

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Asset recognition

• _{Recognising assets on the balance sheet} involves recognition rules

– _{conventions and authoritative pronouncements} • _{Recognition criteria}

– _{the future economic benefits must be probable} – _{the asset must be capable of being measured}

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Asset recognition

• _{Past recognition criteria} – _{reliance on the law}

– _{determination of economic substance of the}

transaction or event

– _{use of the conservatism principle: anticipate}

losses, but not gains

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Asset measurement

• _{All the elements of accounting are linked and} measurement of profit flows from

measurement of the change in net assets • _{The rules and practices governing asset}

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Asset measurement

• _{Once the definition and recognition criteria have}

been met, the accountant must decide how to measure the asset

– _{several measurement approaches available}

– _{qualitative characteristics of financial information}

• _{Once measured} – _{on balance sheet}

– _{restricted to just note disclosure}

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Tangible assets

• _{Traditional approach has been to measure}

assets at historical cost

• _{IASB standards permit subsequent}

remeasurement using a number of approaches

– _{fair value}

• _{exit value or value in use}

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Intangible assets

• _{Accounting measurement has generally been} conservative

– _{cost (less accumulated amortisation and}

impairment) is commonly used

– _{fair values from an active market}

– _{internally generated intangibles cannot be}

recognised

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What are the divergent arguments for recognising customer relationships in a business combination? Is

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Financial instruments

• _FASB/IASB

– _{derivatives are measured at fair value rather than}

cost • _IASB

– _{committed to the use of fair value measurement}

for financial instruments

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Challenges for standard setters

• _{FASB/IASB intend to address the issue of} measurement in Phase C of the conceptual framework project

– _{consider measurement concepts, principles and}

terms

– _{evaluate and rank measurement methods}

• _{qualitative characteristics}

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Which measurement model?

• _{Fair value is the frontrunner}

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What are the arguments for and

against fair value measurement?

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How to calculate fair value

measurement

• _{Various valuation techniques to calculate fair} value

– _{the market approach}

• _{observable prices}

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How to calculate fair value

measurement

– _{the income approach}

• _{conversion of future amounts - cash flows or earnings}

– to a single discounted present amount

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How to calculate fair value

measurement

– _{the cost approach}

• _{the amount that currently would be required to replace}

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In response to the credit crisis the IASB changed the rules to allow entities to choose to reclassify some financial instruments from a fair value measurement basis to a cost basis. Under what circumstances is this

reclassification allowed?

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How to calculate fair value

measurement

• _{The valuation must emphasise market inputs} – _{assumptions and data that market participants}

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How to calculate fair value

measurement

• _{Three hierarchical levels for the inputs}

– _{Level 1 – quoted prices for identical items in active}

markets, without adjustment

– _{Level 2 – quoted prices for similar items in active}

markets, adjusted as appropriate for differences

– _{Level 3 – estimated fair value using multiple}

valuation techniques consistent with the market, income and cost approaches

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Issues for auditors

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Issues for auditors

• _{Auditors need to}

– _{understand the client firm’s processes and relevant}

controls for determining fair values

– _{make a judgement on whether the client firm’s}

measurement methods and assumptions are

appropriate and likely to provide a reasonable basis for the fair value measurement

– _{appreciate management’s potential biases and likely}

errors

• _incentives

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Issues for auditors

• _{There is the potential that corporate failures} will lead to legal action against auditors who failed to approach their audit of asset fair

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Summary

• _{Defining assets}

• _{Recognition and measurement criteria}

• _{Asset recognition and the measurement of income and capital}

are interrelated

• _{Mixed attribute measurement model and fair value}

measurement methods

• _{Issues arising for standard setters and auditors}

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Key terms and concepts

• _Assets

• _Definitions

• _{Future economic benefits} • _Control

• _{Past events}

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