By Grant Gilmour
Facts: There are three criteria for recognizing expenditure as an asset for accounting purposes. The expenditure must meet all three criteria to be considered an asset. The tax treatment is similar but not identical to accounting treatment. Generally for tax all items are expensed unless they are capital in nature as defined by tax criteria. This FAQ covers accounting not tax treatment. Tax and Accounting treatments can be different.
Discussion: There are times in which we may want to delay an expense and recognize it as an asset for accounting purposes in order to match the expense with the revenues when they occur. An example would be an intangible asset such as goodwill or a deferred development cost. In order to recognize the amount as an asset, it must meet the following three criteria:
1. The company must control access to the asset. A good test of this is whether the company is able to sell the asset. You may be able sell a car or a piece of equipment. In contrast you may have exclusive rights or a membership which is non-transferrable and thus un saleable. If it is un salable because it is non-transferrable, it cannot be claimed as an asset.
2. The transaction must have already occurred. You cannot claim an item as an asset if you made an agreement to purchase the item in the future, even if you have paid a deposit. To claim the asset, the purchase must have already taken place.
3. There must be a future economic benefit associated with the expenditure. For example, equipment purchases may help a company manufacture more items which will increase cash flows. A vehicle will allow you to visit clients or potential clients which will also increase cash flows. If there is no future economic benefit, then it is not considered an asset.
Once you have determined that the expenditure is an asset, the asset is then depreciated over its useful life.
Most expenditure are easily defined as assets or expenses, but sometimes the lines seem to blur. If you are unsure about how an expenditure should be treated for accounting purposes, please contact Gilmour Knotts Chartered Accountants for help on this issue.
Grant Gilmour B.SC. MBA, CPA, CA is the International Tax Partner of Gilmour Knotts Chartered Accountant. To connect with Grant visit: www.gilmour.ca