Conceptual Framework - Capitalisation of a Cellphone

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RynoL
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Conceptual Framework - Capitalisation of a Cellphone

Post by RynoL »

Good Evening all

I hope everyone is doing great and keeping safe, I am a new forum user and came here out of the need to discuss accounting related things with people who are in the field and can actually discuss accounting related topics conceptually and potentially give someone guidance on said matters. I have a BSC in Accounting and I am going to be doing my post graduate (CTA) studies in the new year.

So what I want to discuss conceptually is whether a cellphone can be capitalised as an asset?

My thought process goes:

When referring to the new conceptual framework(CF), the definition of an asset is:

An asset is a present economic resource controlled by the entity as a result of past events.

The CF further explains that an economic resource is a right that has the potential to produce economic benefits.

When applying the definition of an asset we need to consider whether there is a "right" AND "a potential to produce economic benefits" AND "Control"

Depending on how you procure the cellphone if you outright buy it (para 4.6 (b)) or if you take out a contract (para 4.7) your ability to benefit from the economic use can be related to the calls you make in order to benefit economically for your "entity" or business. For example when you order inventory from a supplier you have benefitted economically from the use of the cellphone.

Furthermore you have the right to use the phone, you have the right to sell the rights over the object (if you outright bought the phone, it could probably be argued differently if the phone is on a contract), you have the right to pledge rights over the phone.

However you won't have the rights to really sell the phone if it is on a contract, you could sell the phone but you will still have the contract that you would need to pay which wouldn't make financial sense.
Obviously by virtue of ownership of the phone you would be denying anyone else the use of the phone as it would be exclusive to yourself.

I guess where the crux lies of this argument is the type of economic benefits the phone is producing. My argument is that the phone is used for business purposes and in that manner produces economic benefits for the entity. Much similar to a motor vehicle, except a motor vehicle may have a much higher residual value that would be more likely to be material than that of a cellphone.

But then what kind of value would you put on the economic benefits that the phone is producing from business phone calls as para 4.17 states an economic resource derives its value from its present potential to produce economic benefits. How would you measure that potential for a cellphone?
Because anyone can call the suppliers from any cellphone and thus it lacks the final requirement being control?

However the entity controls the resource if it has the ability to direct the use of the economic resource and obtain benefits that may flow from it, the potential just needs to exist, it doesn't need to be certain. That potential exists, benefitting from the phone calls being for business purposes

Laptops are capitalised as assets and certain cellphones even have the same value as laptops these days.

I am really trying to argue this conceptually and I am sure that my logic is probably conceptually flawed, I would really appreciate it if someone could help me figure this out.
Sorry if my discussion ability isn't great, I generally struggle with this part of accounting :oops:

Thank you for taking the time to read my post, I would really appreciate input of any kind
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by JRSB »

Hello!

I think the conceptual point is that the company has exclusive right to benefit from the phone, whether they've bought it or lease it.

So if you have it for 2 years, you use it to generate benefits (speaking to customers, easier communication between employees). You have control over that asset.

In practice it might be considered immaterial, for example as a low value item for lease purposes. So it may not end up shown as an asset, but that's on a materiality point rather than conceptual perhaps.

The issue of valuing the benefits doesn't arise if it's just held at cost. It doesn't generate any revenue or cost savings, perhaps, itself, so it's part of a bigger CGU where impairment tests are done.

You're right, some phones are as expensive as laptops and probably should be capitalized with a suitable depreciable life, subject to the above.
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by exIFRS »

I agree with JRSB's points. I would add that one of the unspoken underpinnings of the IFRS Standards is economic rationality. The fact you are willing to spend money leasing, or buying, a phone indicates your expectations about benefits. In business we spend money to make money. This a point picked up at 5.17(a) of the conceptual framework:
if an asset is acquired or a liability is incurred in an exchange transaction on market terms, its cost generally reflects the probability of an inflow or outflow of economic benefits. Thus, that cost may be relevant information, and is generally readily available.
pub_acco
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by pub_acco »

I agree cellphones meet the definition of an asset under CF, but they will not show up on balance sheets as an asset if they are leased under a pure variable lease contract (IFRS 16) or if they are procured for research, training, promotion, etc. purposes (IAS 38). This kind of tricks often makes me find it challenging to connect what CF describes to the debits/credits we make every day :)
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Marek Muc
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by Marek Muc »

the CF is mostly for the IASB, not the common man ;)
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by exIFRS »

pub_acco wrote: 20 Dec 2020, 03:28 I agree cellphones meet the definition of an asset under CF, but they will not show up on balance sheets as an asset if ... they are procured for research, training, promotion, etc. purposes (IAS 38).
Hey pub_acco, just trying to make sure I understand this assertion in the broader context. Setting aside materiality, isn't the cellphone a tangible asset, and therefore IAS38 wouldn't apply? If I am a pharmaceutical company and buy say a gas chromatogram to use in my research program (which takes place in my special purpose research lab), I assume the gas chromatogram and the research building are recognised as assets on the balance sheet?
Last edited by exIFRS on 21 Dec 2020, 10:45, edited 1 time in total.
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by exIFRS »

Marek Muc wrote: 20 Dec 2020, 17:20 the CF is mostly for the IASB, not the common man ;)
Not sure I completely agree :P. Understanding the CF is important for understanding the Standards themselves, as the CF itself states (CF SP1):
The purpose of the Conceptual Framework is to:
(a) assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards) that are based on consistent concepts;
(b) assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event, or when a Standard allows a choice of accounting policy; and
(c) assist all parties to understand and interpret the Standards.
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Marek Muc
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by Marek Muc »

re. purpose of CF, you're right, we can also add IAS 8.11

re. research, it is possible that tangible assets used in research will fall under IAS 38 IMO, but it depends whether it is an asset that facilitates the research in general (i.e. the lab - IAS 16) or an asset actually used in research and purchased solely for a particular research programme (IAS 38)

same with promotion, tangible asset used as promotional merch fall under IAS 38
IAS 38 Intangible Assets—Goods acquired for promotional activities (Agenda Paper 5E): https://www.ifrs.org/news-and-events/up ... er-2017/#8
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exIFRS
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by exIFRS »

Marek Muc wrote: 21 Dec 2020, 10:54 re. research, it is possible that tangible assets used in research will fall under IAS 38 IMO, but it depends whether it is an asset that facilitates the research in general (i.e. the lab - IAS 16) or an asset actually used in research and purchased solely for a particular research programme (IAS 38)

same with promotion, tangible asset used as promotional merch fall under IAS 38
IAS 38 Intangible Assets—Goods acquired for promotional activities (Agenda Paper 5E): https://www.ifrs.org/news-and-events/up ... er-2017/#8
So is the key thing the nature of use, if it meets the definition of PPE then you are kicked out of IAS38? This seems to be the implication of 69(a) and BC46?
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Marek Muc
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by Marek Muc »

yes, I believe the nature/purpose is key and some tangible assets are within the scope of IAS 38 Intangible Assets :lol:
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by JRSB »

This Standard applies to, among other things, expenditure on advertising,
training, start‑up, research and development activities. Research and
development activities are directed to the development of knowledge.
Therefore, although these activities may result in an asset with physical
substance (eg a prototype), the physical element of the asset is secondary to its
intangible component, ie the knowledge embodied in it.
pub_acco
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by pub_acco »

Yep, I was just going to cite the para 5! But I think the exact border between IAS 16 and 38 is actually vague and in practice we need judgements to apply IAS 38 to tangible things.
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by JRSB »

Yes, going back to the topic, on what basis is a mobile phone an intangible?
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Marek Muc
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by Marek Muc »

maybe not intangible asset per se, but within the scope of IAS 38 (e.g. when it's a freebie to be given away as marketing activity)
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by JRSB »

Oh ok just seen the AD - https://cdn.ifrs.org/-/media/feature/su ... ept-17.pdf

In effect the only benefit is to create or enhance a brand or customer relationship.

To be honest I probably would have put giveaway items in inventory.
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Marek Muc
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Re: Conceptual Framework - Capitalisation of a Cellphone

Post by Marek Muc »

but now you know that they belong to P&L on the delivery date :)
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