Asset

An asset is an economic resource or right that is controlled by a person, business, government, or other entity and has the potential to provide value or economic benefits. Assets are central to accounting, finance, economics, lending, investing, taxation, and business management.

Under the Financial Accounting Standards Board's conceptual framework, an asset is described as a present right of an entity to an economic benefit. The IFRS Conceptual Framework similarly describes an asset as a present economic resource controlled by an entity as a result of past events, with an economic resource being a right that has the potential to produce economic benefits.

The precise recognition, classification, and measurement of an asset depend on the accounting framework being applied and the facts surrounding the resource or right.

Role in financial reporting

Assets are normally reported on an entity's balance sheet, also called a statement of financial position. A balance sheet presents what an organization owns or controls, what it owes, and the residual interest belonging to its owners at a particular date.

The accounting equation is commonly expressed as:

<math>\text{Assets} = \text{Liabilities} + \text{Equity}</math>

This equation reflects the relationship between an entity's resources, its obligations, and the owners' residual claim.

An item is not necessarily recorded as an asset merely because it is useful or valuable. Recognition may depend on whether the entity controls the relevant right, whether the item can be measured appropriately, and whether recognition would provide useful financial information.

Types of assets

Assets can be classified in several ways.

Current and noncurrent assets

Current assets are resources expected to be used, sold, collected, or converted into cash during the entity's normal short-term operating period. Common examples include:

• cash and cash equivalents;
• accounts receivable;
• inventory;
• short-term investments;
• prepaid expenses.

Noncurrent assets are held or used over a longer period. Examples include:

• land;
• buildings;
• machinery and equipment;
• long-term investments;
• patents and other intangible rights;
• goodwill recognized in a business combination.

The exact boundary between current and noncurrent classification depends on the reporting framework and an entity's operating cycle.

Tangible and intangible assets

Tangible assets have a physical form. Land, vehicles, buildings, computers, inventory, and manufacturing equipment are examples.

Intangible assets do not have a traditional physical form but may represent enforceable rights or other resources capable of producing benefits. Examples can include:

• patents;
• copyrights;
• trademarks;
• licenses;
• certain software;
• contractual rights;
• customer-related intangible assets.

Recognition of internally developed brands, reputation, workforce knowledge, and similar items is often restricted because control, identifiability, or reliable measurement may be difficult to establish.

Financial and nonfinancial assets

Financial assets arise from contractual or ownership relationships. Examples include cash, loans receivable, bonds, shares, and certain derivative instruments.

Nonfinancial assets include physical property, inventory, equipment, natural resources, and qualifying intangible assets.

Recognition

Recognition means including an asset in the financial statements with a monetary amount. An item may satisfy the conceptual definition of an asset without necessarily qualifying for recognition under every accounting standard.

Recognition decisions consider whether presenting the asset would provide relevant information and whether that information can be represented faithfully. Accounting standards may impose additional requirements for particular categories such as inventory, leases, financial instruments, property, software, or intangible assets.

Control is especially important. Legal ownership can be evidence of control, but accounting may focus on the entity's present rights and its ability to obtain benefits or restrict others' access to those benefits.

Measurement

Assets can be measured using different bases depending on the applicable standard and the nature of the item.

Common measurement approaches include:

• historical cost, based on the amount paid or consideration transferred;
• current cost, based on the amount that would be paid for an equivalent asset at the measurement date;
• fair value, based on an applicable market-participant measurement;
• value in use, based on expected future cash flows or benefits from continued use;
• net realizable value, based on the amount expected from sale after relevant costs.

Financial statements may therefore contain assets measured using more than one basis.

Depreciation and amortization

Many long-lived assets are allocated as expenses over the periods in which they are used.

Depreciation commonly applies to tangible assets such as buildings, vehicles, and machinery. Amortization commonly applies to qualifying intangible assets with finite useful lives.

Land is generally not depreciated when it has an indefinite useful life, although land improvements or extractive resources may receive different treatment.

Depreciation and amortization are accounting allocations. They do not necessarily represent the asset's market-value decline during a particular period.

Impairment

An asset may be impaired when its recorded amount is no longer supported by the benefits expected from it. Accounting standards provide different impairment models for financial assets, inventory, property, goodwill, and intangible assets.

An impairment can cause the recorded amount to be reduced and an expense or loss to be recognized. Whether a later recovery can be reversed depends on the applicable accounting rules and the type of asset.

Assets and cash flow

An asset is not the same as cash. Inventory, receivables, equipment, intellectual-property rights, and investments can all be assets even though they are not immediately spendable.

A business can report substantial assets while experiencing cash-flow problems. For example, it may hold slow-moving inventory, customers may not have paid their receivables, or most of its resources may be tied up in property and equipment.

Liquidity analysis therefore considers how quickly assets can be converted into cash and whether the conversion would require a significant loss of value.

Personal and household assets

In personal finance, assets can include:

• bank-account balances;
• investments;
• retirement accounts;
• real estate;
• vehicles;
• valuable personal property;
• ownership interests in businesses.

Personal net worth is commonly calculated by subtracting liabilities from assets. The result depends heavily on how the assets are valued and which obligations are included.

Asset valuation and limitations

The amount reported for an asset is not always the amount for which it could immediately be sold. Historical cost, depreciation, market movements, impairment rules, transaction costs, taxes, and limited marketability can all create differences between carrying amount and sale value.

Some economically valuable resources may not appear as separately recognized assets. Employee knowledge, customer loyalty, internally developed reputation, and organizational experience may be important to a business while failing one or more accounting-recognition requirements.

For this reason, financial-statement users often evaluate both reported assets and qualitative information about the organization.

See also

• Liability
• Equity (finance)
• Net income
• Net worth
• Balance sheet
• Depreciation
• Intangible asset
• Financial asset