Conceptual framework
How to Answer Conceptual Framework
Questions – Asset
When answering a question relating to whether an item qualifies as an asset,
follow this approach:
1. Start with the Theory and Definitions (in your own words):
Before you apply the scenario, explain the theory briefly:
According to the Conceptual Framework, an item must meet both
the definition of an asset and the recognition criteria to be
recognised as an asset.
Definition of an asset:
An asset is a present economic resource controlled
by an entity as a result of past events.
Definition of an economic resource:
An economic resource is a right that has the
potential to produce economic benefits.
2. Apply the Four Elements of an Asset to the
Scenario:
Now assess whether the item meets all four elements of an asset. Always link the
theory back to the facts of the question.
a) Right:
If the entity has a legal title or contract giving them the ability to use or
benefit from the item, then the right exists.
📝 Example: The company has the right to use the office building as it
purchased it on [insert date].
b) Potential to Produce Economic Benefits:
Consider how the entity earns income or saves costs.
Ask: Does this item help the business make or save money?
📝 Example: The building will be rented out, resulting in inflow of rental
income, which shows it has the potential to produce economic benefits.
c) Control:
The entity must have the current ability to direct the use of the item
and to obtain benefits from it.
, It must also be able to prevent others from using it or taking its
benefits.
📝 Example: The company controls the building through legal
ownership, so it can decide how to use it and prevent others from doing
so.
d) Past Events:
The asset must arise from a past event (e.g., a purchase, contract
signed, construction completed).
📝 Example: The purchase agreement was signed in the current or
previous financial year, so the event has already occurred.
3. Conclusion:
End with a short conclusion confirming whether the item is an asset:
📝 Conclusion Example:
The item meets the definition and recognition criteria of an asset. The entity has
legal ownership of the building (right), which gives it control. The building has
the potential to produce economic benefits through rental income, and it
was acquired as a result of a past event (purchase). Therefore, it can be
recognised as an asset in terms of the Conceptual Framework.
Item Present Right Control Past events
Economic
resource
Prepaid Right to Right to Both the Signing the
expenses occupy office occupy the ability to agreement
space that office space direct use and and
was paid for can produce obtain prepayment
in advance in cash when economic of rent in the
next month. the office benefits by previous
space is used signing rental month.
to see clients. agreement
and
prepaying the
rent.
Inventory Right to sell Right to the Controlled Purchasing
the inventory Inflow of cash through legal the inventory
when the ownership as before or
inventory is the entity during current
sold. purchases the financial year.
inventory.
Trade Right to Right to Controlled Performing its
receivables collect the receive the through the obligation
amount the cash. legal contract when
customer of sale. delivering
How to Answer Conceptual Framework
Questions – Asset
When answering a question relating to whether an item qualifies as an asset,
follow this approach:
1. Start with the Theory and Definitions (in your own words):
Before you apply the scenario, explain the theory briefly:
According to the Conceptual Framework, an item must meet both
the definition of an asset and the recognition criteria to be
recognised as an asset.
Definition of an asset:
An asset is a present economic resource controlled
by an entity as a result of past events.
Definition of an economic resource:
An economic resource is a right that has the
potential to produce economic benefits.
2. Apply the Four Elements of an Asset to the
Scenario:
Now assess whether the item meets all four elements of an asset. Always link the
theory back to the facts of the question.
a) Right:
If the entity has a legal title or contract giving them the ability to use or
benefit from the item, then the right exists.
📝 Example: The company has the right to use the office building as it
purchased it on [insert date].
b) Potential to Produce Economic Benefits:
Consider how the entity earns income or saves costs.
Ask: Does this item help the business make or save money?
📝 Example: The building will be rented out, resulting in inflow of rental
income, which shows it has the potential to produce economic benefits.
c) Control:
The entity must have the current ability to direct the use of the item
and to obtain benefits from it.
, It must also be able to prevent others from using it or taking its
benefits.
📝 Example: The company controls the building through legal
ownership, so it can decide how to use it and prevent others from doing
so.
d) Past Events:
The asset must arise from a past event (e.g., a purchase, contract
signed, construction completed).
📝 Example: The purchase agreement was signed in the current or
previous financial year, so the event has already occurred.
3. Conclusion:
End with a short conclusion confirming whether the item is an asset:
📝 Conclusion Example:
The item meets the definition and recognition criteria of an asset. The entity has
legal ownership of the building (right), which gives it control. The building has
the potential to produce economic benefits through rental income, and it
was acquired as a result of a past event (purchase). Therefore, it can be
recognised as an asset in terms of the Conceptual Framework.
Item Present Right Control Past events
Economic
resource
Prepaid Right to Right to Both the Signing the
expenses occupy office occupy the ability to agreement
space that office space direct use and and
was paid for can produce obtain prepayment
in advance in cash when economic of rent in the
next month. the office benefits by previous
space is used signing rental month.
to see clients. agreement
and
prepaying the
rent.
Inventory Right to sell Right to the Controlled Purchasing
the inventory Inflow of cash through legal the inventory
when the ownership as before or
inventory is the entity during current
sold. purchases the financial year.
inventory.
Trade Right to Right to Controlled Performing its
receivables collect the receive the through the obligation
amount the cash. legal contract when
customer of sale. delivering
