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The Secretariat of the ASB has received several queries from preparers about assets and whether they are only accounted for based on legal title.
The purpose of financial statements is to reflect the economic characteristics of transactions, events and arrangements. This means that accounting reflects economic substance and not legal form. This is why the Standards of GRAP refer to recognising assets based on “control” rather than “ownership”.
“Control” is a broad term that refers to whether an entity is able to control the economic benefits and/or service potential of an asset. Control of the economic benefits or service potential is assessed based on the rights an entity possesses. These rights could be ownership rights but could also be rights to use assets (whether in exchange for consideration like leases, or other rights of use).
Control means that an entity has the ability to direct the benefits of the asset such that the entity will receive economic gain or receive value in terms of providing services. When there are arrangements to use assets, an important factor to consider may be the period of use in relation to the asset’s economic life. Rights to use an asset for substantially all its economic life mean that the entity will receive substantially all the benefits associated with the asset. Options to acquire assets at the end of an arrangement and whether they are below fair value may also be a key consideration.
The concept of control applies regardless of the type of asset. However, the considerations and conclusions may vary depending on the nature of the asset. For example, because land has an unlimited useful life, rights of use would need to be for a very long period to conclude that control exists.
As accounting for assets based on control is a topical issue, the Board has provided guidance on control and related issues for specific assets: - IGRAP 18 on Recognition and Derecognition of Land.
- Guideline on Accounting for Housing Arrangements Undertaken in terms of the National Housing Programme.
- Guideline on Accounting for Landfill Sites.
These can be accessed on our website on www.asb.co.za |
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