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For this round in our series on Accounting 101, the article will explain to you what a non-financial asset is and how a non-financial asset is accounted for in the financial statements. Similar to the discussion on financial assets, this article explains the accounting for non-financial assets from the perspective of the Malaysian Financial Reporting Standards (MFRS) framework.
What is a non-financial asset?
In Accounting 101: Accounting for financial assets, we have defined a financial asset as:
Any asset that is:
- an equity instrument of another entity;
- a contractual right:
- to receive cash or another financial asset from another entity; or
- to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
- a contract that will or may be settled in the entity’s own equity instruments and is:
- a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
- a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments, subject to certain exclusion.
An item that does not meet any of the definitions above is a non-financial asset. A non-financial asset can either be tangible and physical assets such as inventories and property, plant and equipment or intangible assets like computer software, patents, and copyrights.
Unlike financial assets which are generally governed by MFRS 9 Financial Instruments, the accounting for non-financial assets is governed by a few standards. The following are the non-financial assets that commonly appear in the financial statements of an entity:
- MFRS 102 Inventories
- MFRS 116 Property, plant and equipment
- MFRS 138 Intangible assets
- MFRS 140 Investment property
- MFRS 141 Agriculture
- MFRS 16 Leases
In addition to the above, other assets that can be observed on the financial statements are as follows:
- Deferred tax assets (covered by MFRS 112 Income Taxes)
- Contract assets and assets arising from costs to obtain or fulfil a contract (covered under MFRS 15 Revenue from Contracts with Customers)
- Asset arising from employee benefits (covered under MFRS 119 Employee Benefits)
- Non-current assets (or disposal group) classified as held for sale (covered under MFRS 5 Non-current Assets Held for Sale and Discontinued Operations).
Similar to the financial assets, the accounting standards above governed the recognition, measurement and de-recognition of non-financial assets. However, in this article, we will only discuss the common assets in the financial statements – inventories, property, plant and equipment, intangible assets, investment property, right-of-use assets, and biological assets. Let’s now see them in detail below.
Recognition of non-financial assets
In general, non-financial assets that fall under MFRS 116, MFRS 138, MFRS 140 and MFRS 141 – i.e., property, plant and equipment, intangible assets, investment properties, right-of-use assets, agricultural produce and biological assets – are recognised when they meet the below recognition criteria:
- it is probable that future economic benefits associated with the item will flow to the entity; and
- the fair value or cost of the item can be measured reliably.
However, for biological assets or agricultural produce which fall under MFRS 141, there is one additional recognition criterion that needs to be met. This additional criterion is that the entity controls the asset as a result of past events.
Additionally, MFRS 138 stipulates certain exceptions for the recognition of intangible assets as an asset. For instance, internally generated goodwill should not be recognised as an asset under MFRS 138. Recognition exception is also applicable for internally generated intangible assets in the research phase. No intangible asset from the research phase shall be recognised as an asset. Only intangible assets from the development phase can be recognised as an asset, provided it meets the 6 criteria stipulated in MFRS 138.
There is no explicit requirement on the recognition of inventories under MFRS 102. Similarly, MFRS 16 also does not provide specific recognition criteria in the standard. MFRS 16 however, states the recognition of the start on the commencement date of the lease transactions.
Measurement of non-financial assets
Different measurement requirements are required for different non-financial assets. They are summarised in the table below for a brief understanding.
|Initial measurement||Subsequent measurement|
|Inventories||Cost of acquiring/producing/ purchasing the inventories.||Lower of cost and net realisable value (amount expected to be realised from their sale or use). The difference is the amount written down.|
|Property, plant and equipment||Cost of an item of the property, plant and equipment, including its purchase price, directly attributable costs, and the initial estimate of dismantling or removing costs.||Carry at cost or revalued amount (under revaluation model), depending on the entity’s accounting policy choice. Under the cost model, the initial cost of PPE is adjusted for depreciation and impairment losses.Under the revaluation model, the PPE is revalued at appropriate intervals, and adjusted for depreciation and impairment.|
|Intangible assets||An intangible asset is generally measured at cost on initial recognition. The cost comprises its purchase price and other directly attributable costs of the intangible assets. |
However, certain exceptions noted on the cost measurement – (i) an intangible asset that is acquired in a business combination, (ii) an intangible asset acquired by way of a government grant; and (iii) an intangible asset acquired in an exchange of a non-monetary asset.
|Carry at cost or revalued amount (under revaluation method), depending on the entity’s accounting policy choice.Under the cost model, the initial cost is adjusted for amortisation and impairment losses.Under the revaluation model, an intangible asset is revalued at appropriate intervals, and adjusted for amortisation and impairment losses.|
|Investment properties||Cost of the investment property including the transaction costs.||Carry at cost or fair value, depending on the entity’s accounting policy choice.Under the cost model, the initial cost is adjusted for depreciation and impairment losses. Under the fair value model, investment property is measured at fair value at the reporting date.|
|Biological assets (i.e., living plant and animal), including produce growing on bearer plants||Fair value less costs to sell if fair value can be measured reliably. Otherwise, measure at costs (if fair value presumption is rebutted).||Carry at fair value at each reporting date. However, if the presumption is rebutted, carry at cost less depreciation and impairment loss until fair value can be measured reliably.|
|Leases||The right-of-use asset is measured at cost on initial recognition.||Apply cost model, being the initial cost adjusted for depreciation, impairment losses and adjustment for remeasurement of lease liability arising from reassessment or modification of lease.|
MFRS 136 Impairment of Assets covers the impairment consideration for various non-financial assets. This standard stands on its own. An entity will need to refer to this standard whenever there is a consideration for impairment of the assets above. MFRS 136, however, does not cover the impairment consideration for inventories, investment property and biological assets that are measured at fair value and fair value less costs to sell.
De-recognition of non-financial assets
De-recognition requirements deal with taking out or de-recognising the assets from the book. This is when the asset no longer meets the recognition criteria. For instance:
- Inventories are de-recognised when they are sold or used/consumed in the production;
- Property, plant and equipment and intangible assets are de-recognised when they are disposed of or when no future economic benefits are expected from its use or disposal;
- Investment properties are de-recognised when the property is permanently withdrawn from use and no future economic benefits are expected from its disposal.
Presentation of non-financial assets
Each of the non-financial assets is presented as a separate line in the statement of financial position. This is because the nature of each asset is different from other assets. For instance, property, plant and equipment is presented separately from intangible asset and investment properties. This follows the principle of aggregation of items as per the requirements in MFRS 101 Presentation of financial statements. We have covered discussion on this principle in our previous article – Accounting 101: Considerations for the presentation of financial statements. Besides, there are other specific disclosure requirements required in the respective standards for the above assets that entities need to observe. These specific disclosures aim at informing users of the financial statements relevant information relating to specific events, transactions or circumstances relating to the assets.
This article has now concluded our discussion on the first element in the financial statements – asset. In our next article, we will continue to discuss other elements in the financial statements. Till then, read our previously published articles on Accounting 101.