Classification Business Model

This page is a compilation of blog sections we have around this keyword. Each header is linked to the original blog. Each link in Italic is a link to another keyword. Since our content corner has now more than 4,500,000 articles, readers were asking for a feature that allows them to read/discover blogs that revolve around certain keywords.

The keyword classification business model has 2 sections. Narrow your search by selecting any of the keywords below:

• financial statements (5)
• financial assets (4)
• intangible assets (4)
• asset recognition analysis (3)
• tangible assets (3)
• amortized cost (3)
• credit risk (3)
• non-current tangible assets (2)
• disclosure requirements (2)
• comprehensive income (2)
• recognition criteria (2)
• carrying amounts (2)
• asset impairment (2)

1.Understanding Asset Recognition Analysis[Original Blog]

asset recognition analysis is a process of identifying and measuring the assets that a company owns and reports in its financial statements. Assets are resources that have economic value and can generate future benefits for the company. They can be classified into different categories, such as current assets, non-current assets, tangible assets, intangible assets, and financial assets. Each category has its own recognition criteria, measurement methods, and disclosure requirements. In this section, we will explore the concept of asset recognition analysis, its importance, its challenges, and its best practices. We will also provide some examples of how to apply asset recognition analysis to different types of assets.

1. The importance of asset recognition analysis. Asset recognition analysis is essential for ensuring the accuracy, reliability, and comparability of financial statements. It helps to provide a clear picture of the company's financial position, performance, and cash flows. It also helps to comply with the accounting standards and regulations that govern the recognition and measurement of assets. Asset recognition analysis can also help to identify and manage the risks and opportunities associated with the company's assets, such as impairment, depreciation, amortization, valuation, and disposal.

2. The challenges of asset recognition analysis. Asset recognition analysis can be complex and subjective, depending on the nature and characteristics of the assets. Some of the challenges that may arise in asset recognition analysis are:

- Determining the existence and ownership of the assets. Some assets may be difficult to verify or may be subject to legal disputes or claims.

- Determining the recognition criteria and measurement methods for the assets. Some assets may have multiple components, alternative uses, or uncertain future benefits. Some assets may also require fair value measurement, which can involve significant estimates and assumptions.

- Determining the disclosure requirements and presentation formats for the assets. Some assets may have specific disclosure requirements, such as the nature, amount, and timing of the expected benefits, the risks and uncertainties, and the changes in the carrying amounts. Some assets may also require separate presentation or classification in the financial statements, such as assets held for sale, assets pledged as collateral, or assets subject to impairment testing.

3. The best practices of asset recognition analysis. Asset recognition analysis requires a systematic and consistent approach, based on the relevant accounting standards and principles. Some of the best practices of asset recognition analysis are:

- Applying the recognition criteria and measurement methods that are appropriate for the specific category and characteristics of the assets. For example, current assets are usually recognized at their net realizable value, while non-current assets are usually recognized at their cost or fair value. Tangible assets are usually measured using the cost model or the revaluation model, while intangible assets are usually measured using the cost model or the fair value model. Financial assets are usually measured at amortized cost, fair value through profit or loss, or fair value through other comprehensive income, depending on their classification and business model.

- Reviewing the assets regularly and adjusting their carrying amounts and disclosures accordingly. For example, assets may need to be revalued, impaired, depreciated, amortized, or derecognized, depending on the changes in their conditions, expectations, or circumstances. Assets may also need to be disclosed in more detail, such as the methods and assumptions used for their measurement, the sensitivity of their fair values, or the impairment indicators and recoverable amounts.

- Maintaining adequate documentation and evidence to support the asset recognition analysis. For example, assets may need to be supported by invoices, contracts, agreements, valuations, appraisals, or other relevant documents. Assets may also need to be verified by physical inspection, confirmation, reconciliation, or other audit procedures.

To illustrate how to apply asset recognition analysis to different types of assets, let us consider the following examples:

- Example 1: A company purchases a piece of land for $1 million and constructs a building on it for $2 million. The land and the building are both classified as non-current tangible assets. The company uses the cost model to measure its non-current tangible assets. The company recognizes the land and the building at their cost, which is $1 million and $2 million, respectively. The company also recognizes the depreciation expense for the building, which is calculated using the straight-line method over its useful life of 20 years. The company discloses the cost, accumulated depreciation, and carrying amount of the land and the building in its financial statements. The company also discloses the depreciation method, rate, and expense for the building in its financial statements.

- Example 2: A company acquires a patent for $500,000 from another company. The patent is classified as a non-current intangible asset. The company uses the cost model to measure its non-current intangible assets. The company recognizes the patent at its cost, which is $500,000. The company also recognizes the amortization expense for the patent, which is calculated using the straight-line method over its useful life of 10 years. The company discloses the cost, accumulated amortization, and carrying amount of the patent in its financial statements. The company also discloses the amortization method, rate, and expense for the patent in its financial statements.

- Example 3: A company invests $100,000 in the shares of another company. The shares are classified as financial assets. The company uses the fair value through profit or loss model to measure its financial assets. The company recognizes the shares at their fair value, which is $100,000 at the date of acquisition. The company also recognizes the changes in the fair value of the shares in its profit or loss. The company discloses the fair value and the fair value hierarchy of the shares in its financial statements. The company also discloses the gains or losses from the changes in the fair value of the shares in its financial statements.

---

2.How to Apply the Asset Impairment Rules to Different Types of Assets?[Original Blog]

Asset impairment is a serious issue that can affect the financial performance and position of a business. It occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. When this happens, the business has to recognize an impairment loss in its income statement, which reduces its net income and its equity. Asset impairment can be caused by various factors, such as changes in market conditions, technological obsolescence, legal restrictions, damage, or deterioration.

Different types of assets have different rules and methods for applying the asset impairment test. In this section, we will look at some examples of how to apply the asset impairment rules to different types of assets, such as:

1. Property, plant, and equipment (PPE): PPE are tangible assets that are used in the production or supply of goods or services, or for administrative purposes. PPE are subject to depreciation, which is the allocation of their cost over their useful lives. PPE are tested for impairment whenever there is an indication that they may be impaired, such as a significant decline in their market value, a change in the way they are used, or a physical damage. To test for impairment, PPE are grouped into cash-generating units (CGUs), which are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The carrying amount of each CGU is compared with its recoverable amount, and an impairment loss is recognized if the former exceeds the latter. The impairment loss is allocated to the assets of the CGU on a pro rata basis, but not below their fair value less costs of disposal or their value in use. For example, suppose a company has a CGU that consists of a factory building, machinery, and inventory, with carrying amounts of $10 million, $8 million, and $2 million, respectively. The recoverable amount of the CGU is estimated to be $15 million, which is lower than the carrying amount of $20 million. Therefore, an impairment loss of $5 million is recognized, and allocated to the assets of the CGU as follows:

| Asset | Carrying amount | Impairment loss | Revised carrying amount |

| Factory building | $10 million | $2.5 million | $7.5 million |

| Machinery | $8 million | $2 million | $6 million |

| Inventory | $2 million | $0.5 million | $1.5 million |

| Total | $20 million | $5 million | $15 million |

2. Intangible assets: Intangible assets are non-monetary assets that lack physical substance, such as patents, trademarks, goodwill, or software. Intangible assets are either amortized over their useful lives, or tested for impairment annually if they have indefinite useful lives or are not yet available for use. The impairment test for intangible assets is similar to that for PPE, except that intangible assets with indefinite useful lives or not yet available for use are tested individually, rather than as part of a CGU. For example, suppose a company has a patent that has an indefinite useful life and a carrying amount of $1 million. The fair value less costs of disposal of the patent is estimated to be $800,000, and the value in use of the patent is estimated to be $700,000. The recoverable amount of the patent is the higher of the two, which is $800,000. Since the carrying amount of the patent exceeds its recoverable amount, an impairment loss of $200,000 is recognized, and the carrying amount of the patent is reduced to $800,000.

3. Financial assets: Financial assets are assets that represent a contractual right to receive cash or another financial asset from another entity, such as receivables, investments, or derivatives. Financial assets are measured at either amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVTPL), depending on their classification and business model. Financial assets measured at amortized cost or FVOCI are tested for impairment using the expected credit loss (ECL) model, which requires the recognition of a loss allowance based on the present value of the expected future cash shortfalls due to credit risk. The ECL model applies a three-stage approach, depending on whether the credit risk of the financial asset has increased significantly since initial recognition. For example, suppose a company has a receivable of $100,000 from a customer, which is measured at amortized cost. The receivable has a contractual term of one year, and an effective interest rate of 10%. At initial recognition, the receivable has a low credit risk, and the company estimates a 12-month ECL of 1%, or $1,000. Therefore, the company recognizes a loss allowance of $1,000, and the carrying amount of the receivable is $99,000. After six months, the customer experiences financial difficulties, and the company estimates a lifetime ECL of 20%, or $20,000. Therefore, the company recognizes an additional loss allowance of $19,000, and the carrying amount of the receivable is $80,000. The interest income on the receivable is calculated based on the effective interest rate and the carrying amount, which is $9,900 for the first six months, and $4,000 for the next six months. The impairment loss on the receivable is recognized in the income statement, and reduces the net income and the equity of the company.

---