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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Himalaya Pharma Ltd. has an expense of Rs 3,00,000 for a research project. The company argues that it should be shown as an asset because it hopes the project will generate benefits in future. Under the Framework's definition of an asset, which statement is most appropriate?

The expenditure qualifies as an asset only if it is a controlled resource arising from past events with expected future economic benefits, and it is recognised only when the inflow of benefits is probable and cost is reliably measurable. Mere hope or Board approval is insufficient.

  1. ACapitalise it because any hoped-for benefit makes it an asset
  2. BCapitalise it only if the Board approves the project
  3. CTreat it as an asset only if it is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow, and recognise it only if the cost can be measured reliably and the flow of benefits is probableCorrect
  4. DAlways treat it as a liability since expenditure has been incurred

Explanation

An asset must be a resource controlled as a result of past events with expected future economic benefits. Recognition needs probable benefits and reliable measurement. Hope alone or Board approval, as in the first two options, does not satisfy the criteria.

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