The directors are confident that a new toy in the making, Sothies, will be a best seller. During the year ended 30 June 2022, we have incurred $32,000 to identify alternative materials to manufacture this product. The initial material identified has proven difficult to obtain. Our junior accountant insists that we should recognise this amount as an expense, but the directors are adamant that the $32,000 should be included as an asset in the balance sheet as it has the potential to produce economic benefits.

We have developed a pre-production prototype for Aquadelight, another toy. Aquadelight is a swimming pool toy and aids floatation. The total amount incurred for the pre-production prototype amounted to $55,000. Our accountant says there is a possibility we can recognise this amount as an asset but has not been clear on how to make this determination. Can you please explain how to determine if we can recognise this amount as an asset? Please explain the requirements with examples that would be relevant to Aquadelight.

The directors are also confused with the terms definition and recognition of an asset. They want to know why an item that meets the definition of an asset is not always recognised as an asset? Could you please give a couple of examples to support this distinction?