Hi there,
As you probably know, defining assets without first having a
definition of an asset can help tremendously. With respect to the two
sets of accounting regulations (IAS and GAAP), there is no need to
differentiate between the two since the viewpoint is the same.
Here is a definition of an asset taken from accounting lecture notes
prepared to support a university textbook:
1. "Something represented by a debit balance that is or would be
properly carried forward upon a closing of books of account according
to the rules or principles of accounting ..."
2. "Economic resources of an enterprise that are recognized and
measured in conformity with generally accepted accounting principles.
Assets also include certain deferred charges..."
3. "Assets are probable future economic benefits obtained or
controlled by a particular entity as a result of past transactions or
events. "
http://www.swcollege.com/acct/wolk/ppt/10.ppt
The insurance product that you are referring to is actually covered by
this definition; the third part of the definition, that which includes
probable future economic benefit, is the key concept to understand
here. As this same resource points out, the definition of an asset has
evolved with the way that accounting is carried out, and has come to
include economic concepts. This is reflected by updates made to both
GAAP and IAS.
This source also correctly notes that by way of this evolving
definition, the boundary of what is and is not an asset has become
"hazy and ambiguous". At this point it is the role of the accountant
to justify - at least to themselves and perhaps in some sort of diary
- why an entity was declared an asset. This provides a legal security
blanket by allowing the responsible party to recount why certain
decisions were made.
Recognizing an Asset:
Here are some points that I've come up with for this particular
insurance policy to provide some insight into the type of analysis
that leads to classification as an asset:
1. The purchaser IS making payments in return for one or two things of
the following:
(a) Future termination payment
(b) Coverage by the insurance
It is clear that one, the other, or both of the following conditions
must jointly hold for the entire period of the policy. Therefore we
can conclude that value is being received at all times.
2. There is no obligation to continue making payments. This portion of
the policy indicates that this is NOT a liability. At any time, the
payments can cease and the purchaser is able to enjoy the benefits of
the payments already made (namely the termination payment).
As you can see, this process of identifying BENEFIT and OBLIGATION is
very useful and effective in classification of assets/libilities.
Now to get to the meat of your question - the ability to book
"installment contract receivable" as an asset. By this I am assuming
to mean the potential payback if the policy is terminated. This CANNOT
be listed as an asset for the following reasons:
1. Assets and liabilities generally are initially recorded on the
basis of events in which the enterprise acquires resources from other
entities or incurs obligations to other entities.
2. The assets and liabilities are measured by the exchange prices at
which the transfers take place.
But by placing this line item as an asset you are breaking the second
rule! You have not actually received anything from the insurance
company therefore it is not yet an asset of yours...it is still
recorded as an asset of the insurance company. Remember that in order
to gain an asset, another party must give up the asset. Even if you
are certain that the installments will not be paid for the full life
of the policy, you cannot book assumptions, only actual transactions.
These types of arrangements are best recorded in an addendum of notes
attached to the financial statements.
I hope that clears everything up for you...if you have problems
understanding any of the above material you can post a clarification.
Cheers and Happy Accounting!
answerguru-ga |
