Introduction
Within the different transactions carried out by a company in the business environment, some disbursements can be made to obtain goods or services. In this regard, it often happens that doubts arise regarding the proper identification and treatment to be granted, that is if they qualify as Assets or Expenses.
The first thing we should note is that, although they are concepts that are very close since both categories represent an expense made by the company to obtain a profit as a result of economic activity, the difference between them is that, while in the case of disbursements that qualify as Assets we are faced with an expense aimed at financing a good or service that will generate a future benefit, the expense is an expense that finances a specific activity for the benefit of the company, being consumed in that instant.
The consequences of the different nature that corresponds to both concepts are not trivial, since, in the case of disbursements of considerable magnitude or a significant amount, severe distortions could originate in the financial information that could even originate that they do not reasonably present the situation and performance, therefore, causing non-compliance with the requirements of IAS 1: Presentation of Financial Statements.
In effect, paragraph 15 of IAS 1 states: “The financial statements must fairly present the financial situation and financial performance, as well as the cash flows of an entity. This fair presentation requires the true presentation of the effects of transactions, as well as other events and conditions, by the definitions and criteria for recognizing assets, liabilities, income, and expenses established in the Conceptual Framework. It is presumed that the application of IFRS, accompanied by additional information when necessary, will result in financial statements that provide a fair presentation.
ASSETS
Definition and recognition criteria
The Conceptual Framework for Financial Information for the year 2010
– hereinafter Conceptual Framework, defines and establishes the recognition criteria for the elements of the financial statements, such as Assets and Expenses.
Regarding the asset, literal (a) of paragraph 4.4 of the Conceptual Framework defines it as “A resource controlled by the entity as a result of past events, from which the entity expects to obtain economic benefits in the future.”
In turn, paragraph 4.44 prescribes that “An asset is recognized in the balance sheet when it is probable that future economic benefits will be obtained for the entity, and in addition, the asset has a cost or value that can be measured reliably.”
IFRS also specifically develops the definition of the type of asset on which they deal and indicate the criteria by which it corresponds to recognize disbursements as assets or, failing that, proceed to recognize them as an expense.
Thus, IAS 16: Property, plant, and equipment, establishes the recognition principle in paragraph 7, which must be met for both initial disbursements and subsequent disbursements that are incurred to be recognized as Cost.
Criteria for recognizing disbursements as part of the cost of the asset
A relevant aspect to consider when dealing with an asset is that the disbursements made will constitute Cost until the time they are found in the current location and conditions, as well as in the established form. to operate by the provisions of management.
Among other standards, we detail what is regulated in IAS 2: Inventories, IAS 16: Property, plant and equipment, and IAS 17: Leases about this assumption:
Inventories
Paragraph 10: “The cost of inventories shall include all the costs derived from their acquisition and transformation, as well as other costs incurred to give them their current condition and location.”
Paragraph 15: “Other costs will be included in the cost of inventories, provided that they were incurred to give them their current condition and location. For example, it may be appropriate to include, as the cost of inventories, some indirect costs not derived from production, or the costs of designing products for specific customers.”
Property, plant, and equipment
Paragraph 16: “The cost of items of property, plant, and equipment comprises:
(a) Their acquisition price, including import tariffs and non-recoverable indirect taxes that fall on the acquisition, after deducting any discounts or rebates from the price.
(b) All costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
Paragraph 20: “The recognition of costs in the carrying amount of an item of property, plant, and equipment will end when the item is in the place and conditions necessary to operate in the manner intended by management (…)”.
Leases
Paragraph 24 of IAS 17 prescribes that:
“It is common to incur certain initial direct costs when undertaking specific leasing activities, such as those that arise when negotiating and securing the corresponding agreements and contracts. The costs that are directly attributable to the activities carried out by the lessee in a finance lease will be included as part of the value of the asset recognized in the transaction.”
a) Decrease in future economic benefits (decrease in assets or an increase in liabilities).
b) Reliable measurement.
Therefore, disbursements incurred will be recognized as expenses to the extent that they imply a decrease in economic benefits and that may arise from a decrease in the value of assets (such as the disposal or consumption of goods) or an increase in liabilities.
In short, those disbursements that no longer generate future economic benefits qualify as expenses. Therefore, this item includes the so-called “expired costs” that correspond to assets that have been disposed of or consumed.
Paragraph 4 of IAS 17 provides the following definition:
“Initial Direct Costs, are the incremental costs directly attributable to the negotiation and contracting of a lease, except when such costs have been incurred by a lessor that is both a manufacturer or a distributor.
2. EXPENDITURE Based
on the foregoing, it can be concluded that those disbursements that are attributable and necessary for the negotiation and execution of the Financial Leasing Agreement, constitute initial Direct Costs and must be part of the value of the asset.
Subparagraph b) of paragraph 4.25 of the Conceptual Framework conceptualizes expenses as follows: (…) are the decreases in economic benefits, produced throughout the accounting period, in the form of outflows or decreases in the value of assets, or by the generation or increase of liabilities that result in decreases in equity, and are not related to the distributions made to the owners of this equity.
For its part, in paragraph 4.33 of the Conceptual Framework, it prescribes that: “The definition of expenses includes both losses and expenses that arise in the ordinary activities of the entity. Ordinary business expenses include, for example, the cost of sales, wages, and depreciation. Expenses usually take the form of an outflow or depreciation of assets, such as cash and other cash equivalent items, inventories, or property, plant, and equipment.
Paragraph 4.49 of the Conceptual Framework regulates the conditions for the recognition of expenses in the income statement and that correspond to:
a) Decrease in future economic benefits (decrease in assets or an increase in liabilities).
b) Reliable measurement.
Therefore, disbursements incurred will be recognized as expenses to the extent that they imply a decrease in economic benefits and that may arise from a decrease in the value of assets (such as the disposal or consumption of goods) or an increase in liabilities.
In sum, those disbursements that no longer generate future economic benefits qualify as expenses. Therefore, this item includes the so-called “expired costs” that correspond to assets that have been disposed of or consumed.
