Definition
Asset Classification refers to the categorization of assets on a balance sheet as per the requirements of various accounting standards, such as the Companies Act and the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102). Assets are classified into:
- Fixed Assets: Assets held for long-term use, further divided into:
- Intangible Assets: Non-physical assets such as goodwill.
- Tangible Assets: Physical assets such as land, buildings, plant, and machinery.
- Current Assets: Assets not intended for long-term use but held on a short-term basis like stock, debtors, prepayments, and cash.
Fixed Assets might be shown at historical cost minus accumulated depreciation or at fair value. Intangible assets, once recognized, should be amortized to reflect their consumption over time. Current assets are displayed at the lower value between historical cost and net realizable value.
International Financial Reporting Standard (IFRS) 5 introduced an additional classification for non-current assets held for sale.
Examples
- Fixed Assets:
- Tangible: Land and buildings, machinery, vehicles used in manufacturing.
- Intangible: Goodwill from company acquisitions.
- Current Assets:
- Stock of raw materials.
- Money owed by customers (debtors).
- Prepaid expenses for services.
- Cash held in hand or at the bank.
Frequently Asked Questions (FAQs)
What is the main purpose of asset classification?
Asset classification ensures accurate and compliant financial reporting, assists in the assessment of liquidity, and helps stakeholders evaluate a company’s financial health and performance.
How are intangible assets amortized?
Intangible assets, such as goodwill, are amortized over their useful economic life or otherwise impaired if their carrying value exceeds their recoverable amount.
What is the difference between historical cost and fair value?
Historical cost is the original purchase price of an asset, whereas fair value is the current market value at which the asset can be sold or a liability settled.
Why are current assets shown at the lower of cost or net realizable value?
To ensure conservative financial reporting and reflect the actual recoverable amount, minimizing the risk of overstating asset value.
What does IFRS 5 define regarding non-current assets?
IFRS 5 classifies non-current assets as “held for sale” and requires them to be measured at the lower of carrying amount and fair value less costs to sell.
Related Terms with Definitions
- Balance Sheet: A financial statement that displays a company’s assets, liabilities, and shareholders’ equity at a specified point in time.
- Historical Cost: The original monetary value of an asset or liability.
- Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
- Amortization: The process of gradually writing off the initial cost of an intangible asset over its useful life.
- Net Realizable Value: The estimated selling price of an asset in the ordinary course of business minus any costs of completion and sale.
Online Resources
- UK Companies Act
- FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland
- IFRS 5 Non-current Assets Held for Sale
Suggested Books for Further Studies
- “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- “Accounting Standards: AS, IAS & IFRS” by CA. Kamal Garg
- “The International Financial Reporting Standard (IFRS) Workbook and Guide” by Abbas A. Mirza
Accounting Basics: “Asset Classification” Fundamentals Quiz
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