The information needed for the question:

Scenarios 12: Asset versus Expense Use the following excerpts from CON 6 to respond to Scenarios 1 and 2 that follow. Notice that CON 6 presents general principles in the body of the standard (e.g., par. 2528), while guidance in an appendix to CON 6 (e.g., Appendix B) elaborates on these principles.

Assets 25. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Characteristics of Assets

26. An asset has three essential characteristics: (a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) a particular entity can obtain the benefit and control others access to it, and (c) the transaction or other event giving rise to the entitys right to or control of the benefit has already occurred . . . . . .

28. The common characteristic possessed by all assets (economic resources) is service potential or future economic benefit, the scarce capacity to provide services or benefits to the entities that use them. In a business enterprise, that service potential or future economic benefit eventually results in net cash inflows to the enterprise . . .

Appendix B: CHARACTERISTICS OF ASSETS, LIABILITIES, AND EQUITY OR NET ASSETS AND OF CHANGES IN THEM Characteristics of Assets

171. Paragraph 25 defines assets as probable future economic benefits obtained or con- trolled by a particular entity as a result of past transactions or events. Paragraphs 2634 amplify that definition. The following discussion further amplifies it and illustrates its meaning under three headings that correspond to the three essential characteristics of assets described in paragraph 26: future economic benefits, control by a particular entity, and occurrence of a past transaction or event.

Future Economic Benefits

172. Future economic benefit is the essence of an asset (paragraphs 2731). An asset has the capacity to serve the entity by being exchanged for something else of value to the entity, by being used to produce something of value to the entity, or by being used to settle its liabilities.

173. The most obvious evidence of future economic benefit is a market price. Anything that is commonly bought and sold has future economic benefit, including the indi- vidual items that a buyer obtains and is willing to pay for in a basket purchase of several items or in a business combination. Similarly, anything that creditors or others commonly accept in settlement of liabilities has future economic benefit, and anything that is commonly used to produce goods or services, whether tangible or intangible and whether or not it has a market price or is otherwise exchangeable, also has future economic benefit. Incurrence of costs may be significant evidence of acquisition or enhancement of future economic benefits (paragraphs 178180).

174. To assess whether a particular item constitutes an asset of a particular entity at a particular time requires at least two considerations in addition to the general kinds of evidence just described: (a) whether the item obtained by the entity embodied future economic benefit in the first place and (b) whether all or any of the future economic benefit to the entity remains at the time of assessment.

175. Uncertainty about business and economic outcomes often clouds whether or not particular items that might be assets have the capacity to provide future economic benefits to the entity (paragraphs 4448), sometimes precluding their recognition as assets. The kinds of items that may be recognized as expenses or losses rather than as assets because of uncertainty are some in which managements intent in taking certain steps or initiating certain transactions is clearly to acquire or enhance future economic benefits available to the entity. For example, business enterprises engage in research and development activities, advertise, develop markets, open new branches or divi- sions, and the like, and spend significant funds to do so. The uncertainty is not about

the intent to increase future economic benefits but about whether and, if so, to what extent they succeeded in doing so. Certain expenditures for research and development, advertising, training, start-up and preoperating activities, development stage enter- prises, relocation or rearrangement, and goodwill are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain . . .

Control by a Particular Entity

183. Paragraph 25 defines assets in relation to specific entities. Every asset is an asset of some entity; moreover, no asset can simultaneously be an asset of more than one entity, although a particular physical thing or other agent that provides future eco- nomic benefit may provide separate benefits to two or more entities at the same time (paragraph 185). To have an asset, an entity must control future economic benefit to the extent that it can benefit from the asset and generally can deny or regulate access to that benefit by others, for example, by permitting access only at a price.

184. Thus, an asset of an entity is the future economic benefit that the entity can control and thus can, within limits set by the nature of the benefit or the entitys right to it, use as it pleases. The entity having an asset is the one that can exchange it, use it to produce goods or services, exact a price for others use of it, use it to settle liabilities, hold it, or perhaps distribute it to owners . . .

Occurrence of a Past Transaction or Event

190. The definition of assets in paragraph 25 distinguishes between the future economic benefits of present and future assets of an entity. Only present abilities to obtain future economic benefits are assets under the definition, and they become assets of particular entities as a result of transactions or other events or circumstances affecting the entity. For example, the future economic benefits of a particular building can be an asset of a particular entity only after a transaction or other eventsuch as a purchase or a lease agreementhas occurred that gives it access to and control of those benefits. Similarly, although an oil deposit may have existed in a certain place for millions of years, it can be an asset of a particular entity only after the entity either has discov- ered it in circumstances that permit the entity to exploit it or has acquired the rights to exploit it from whoever had them.

191. Since the transaction or event giving rise to the entitys right to the future economic benefit must already have occurred, the definition excludes from assets items that may in the future become an entitys assets but have not yet become its assets. An entity has no asset for a particular future economic benefit if the transactions or events that give it access to and control of the benefit are yet in the future. The corollary is that an entity still has an asset if the transactions or events that use up or destroy a particular future economic benefit or remove the entitys access to and control of it are yet in the future. For example, an entity does not acquire an asset merely by budgeting the purchase of a machine and does not lose an asset from fire until a fire destroys or damages some asset.

The Question:

Scenario 1: A company purchased 50 hole punchers for its office staff. Each hole puncher cost $5 and should be in service for 5 years or more. Should the cost of these hole punchers be recorded as an asset or as an expense? Support your answer using references to paragraphs from CON 6. 1. AnalysisShould the hole punchers be recorded as an asset or expense? In Scenario 1, note that while you could support your position using only the definition of an asset (par. 25), your answer is stronger if you support your conclusion with excerpts from detailed Appendix B implementation guidance, as well. For judgmental issues, reference to this detailed interpretive guidance can be essential.

Scenario 2: Using the definition and characteristics of an asset above, explain why advertising costs are generally recorded as expenses, rather than as assets. 2. AnalysisWhy are advertising costs generally recorded as expenses, rather than as assets?