Assets & Liabilities: Classification, Valuation & Real-World Impact

TAKEAWAYS:

• Assets are classified into current/non-current (liquidity) and tangible/intangible (physical vs. non-physical), while liabilities are split by due date (current vs. long-term).
• Valuation rules differ: tangible assets use depreciation/amortization, intangibles use impairment tests, and financial assets use fair value (NFRS 11).
• Current assets (e.g., cash, inventory) are listed in order of liquidity in the Statement of Financial Position (SFP), while non-current assets (e.g., land, patents) are shown net of accumulated depreciation.
• Liabilities are ordered by urgency (current first), and contingent liabilities (e.g., lawsuits) are disclosed separately if probable.
• Real-world tie-ins: Daraz’s inventory (current asset), Ncell’s spectrum licenses (intangible asset), and bank loans (current/long-term liabilities) all follow these classifications.
• Exam traps: Mix-ups between revaluation model (NFRS 16) and cost model for PPE, or misclassifying prepaid expenses (current asset) as expenses.

1. Classification of Assets

Assets are economic resources controlled by a business that generate future economic benefits. They are classified based on:

• Liquidity (how quickly they convert to cash):
  • Current Assets: Expected to be realized or consumed within 12 months (e.g., cash, inventory, accounts receivable).
  • Non-Current Assets: Held for long-term use (e.g., land, machinery, patents).
• Nature (physical vs. non-physical):
  • Tangible Assets: Physical form (e.g., buildings, vehicles, inventory).
  • Intangible Assets: Non-physical (e.g., goodwill, trademarks, patents).

classDiagram
    class Asset {
        +Liquidity: Current/Non-Current
        +Nature: Tangible/Intangible
        +Valuation: Cost/Fair Value
    }
    class CurrentAsset {
        +Cash
        +Inventory
        +Accounts Receivable
    }
    class NonCurrentAsset {
        +Property, Plant & Equipment (PPE)
        +Intangible Assets
    }
    Asset <|-- CurrentAsset
    Asset <|-- NonCurrentAsset

Worked Example: Kathmandu Retail Shop (NPR)

Scenario: Kathmandu Mart (a retail shop in Thapathali) has the following assets at the end of 2080:

Task: Classify each asset into current/non-current and tangible/intangible.

2. Classification of Liabilities

Liabilities are obligations of a business to transfer economic resources in the future. They are classified as:

• Current Liabilities: Due within 12 months (e.g., accounts payable, short-term loans, salaries payable).
• Non-Current Liabilities: Due after 12 months (e.g., long-term bank loans, deferred tax liabilities).
• Contingent Liabilities: Possible obligations (e.g., pending lawsuits, warranties) disclosed if probable.

Worked Example: Ncell Nepal

Scenario: Ncell’s financial statements show:

Classification:

• Current Liabilities: Trade Payables (NPR 800M), Short-Term Loan (NPR 500M).
• Non-Current Liability: Long-Term Bank Loan (NPR 2B).
• Contingent Liability: Spectrum Fee (disclosed in notes, not on SFP).

3. Valuation of Assets

Assets are recorded at their historical cost (purchase price) unless revalued under NFRS 16 (PPE) or NFRS 36 (Impairment). Key methods:

A. Tangible Assets (PPE)

• Cost Model: Record at cost minus accumulated depreciation.
  • Depreciation: Allocation of cost over useful life (e.g., straight-line, reducing balance).
  • Example: A computer bought for NPR 100,000 with 5-year life depreciates at NPR 20,000/year.

B. Intangible Assets

• Cost Model: Record at cost minus amortization (for finite-life assets like patents) or impairment (for indefinite-life assets like goodwill).
• Revaluation Model (NFRS 16): Optional for PPE; intangibles cannot be revalued.
• Impairment Test: If asset’s recoverable amount < carrying amount, write down to fair value.

C. Financial Assets (NFRS 11)

• Valued at fair value through profit or loss (FVTPL) or amortized cost (e.g., loans, bonds).
• Example: NEPSE-listed shares are recorded at market price.

4. Valuation of Liabilities

Liabilities are recorded at:

• Amount to be paid (e.g., NPR 100,000 loan due in 6 months).
• Present value for long-term liabilities (e.g., bonds issued at discount/premium).
• Undiscounted amount for current liabilities (NFRS 23).

5. Presentation in Financial Statements

A. Statement of Financial Position (SFP)

Assets and liabilities are listed in order of liquidity/urgency:

1. Current Assets (Cash → Inventory → Receivables).
2. Non-Current Assets (PPE → Intangibles).
3. Current Liabilities (Payables → Short-term loans).
4. Non-Current Liabilities (Long-term loans → Deferred tax).

| **Assets**                     | **Liabilities**               |
|---------------------------------|-------------------------------|
| **Current Assets**              | **Current Liabilities**       |
| Cash: 500,000                   | Trade Payables: 800,000       |
| Inventory: 800,000              | Short-term Loan: 500,000      |
| Accounts Receivable: 300,000    | **Total Current Liabilities** | 1,300,000 |
| **Total Current Assets**        | **Non-Current Liabilities**   |
| 1,600,000                      | Long-term Loan: 2,000,000     |
| **Non-Current Assets**          | **Equity**                    |
| Furniture (NPR 1,200,000 - 240,000 depreciation) | 960,000 |
| Shop Equipment (NPR 900,000 - 180,000 depreciation) | 720,000 |
| Land: 2,000,000                 | **Total Equity**              |
| Trademark: 300,000             | 4,280,000                     |
| **Total Non-Current Assets**    | **Total Liabilities + Equity**|
| 4,080,000                      | 7,580,000                     |
| **Total Assets**                |                               |
| 5,680,000                      |                               |

B. Income Statement (Profit & Loss)

• Depreciation/Amortization: Shown as an expense.
• Impairment Losses: Shown under "Other Comprehensive Income" or as separate line items.

## In the Real World

1. Daraz (Nepal)

   • Current Assets: Inventory (electronics, groceries) valued at cost or net realizable value (NRV).
   • Intangible Asset: Daraz’s brand value (goodwill) recorded when acquired by Alibaba.
   • Liability: Trade payables to suppliers (current liability).

2. Ncell Nepal

   • Non-Current Asset: Spectrum licenses (intangible, amortized over license period).
   • Long-Term Liability: Bank loans for network expansion (due in 5–10 years).
   • Contingent Liability: Pending regulatory fines disclosed in notes.

3. Khalti (Digital Payment)

   • Financial Asset: Customer deposits (current asset, valued at amortized cost).
   • Liability: Outstanding transactions (current liability until settled).
   • Intangible Asset: Payment gateway technology (amortized over useful life).

## Exam Tip

1. Classification Mix-Ups:

   • Prepaid Expenses = Current Asset (not expense).
   • Accrued Income = Current Liability (not revenue).
   • Example: If a shop prepays rent for 1 year, it’s a current asset (benefit within 12 months).

2. Depreciation vs. Amortization:

   • Depreciation: Tangible assets (e.g., machinery).
   • Amortization: Intangible assets (e.g., patents).
   • Exam Trap: Never depreciate land (indefinite life).

3. Valuation Methods:

   • PPE: Can use cost model or revaluation model (NFRS 16).
   • Intangibles: No revaluation; only cost or impairment.
   • Example: If a trademark’s fair value drops, write it down (impairment loss).

4. Order in SFP:

   • Assets: Most liquid first (Cash → Inventory → PPE).
   • Liabilities: Most urgent first (Current → Non-Current).
   • Example: If a company has NPR 1M cash and NPR 500K accounts payable, list cash before receivables.

5. Contingent Liabilities:

   • Not recorded on SFP unless probable.
   • Disclosed in notes to accounts (e.g., "Pending lawsuit: NPR 200K").

## Practice Questions (Exam Style)

1. Classify the following for Himalayan Bakery:

   • Unused oven (NPR 500,000).
   • Prepaid flour (NPR 20,000 for 2 months).
   • Brand name "Himalayan Delight" (NPR 100,000).

2. Calculate depreciation for a delivery van bought for NPR 1,500,000 with:

   • Useful life: 5 years.
   • Salvage value: NPR 100,000.
   • Method: Straight-line.

3. Journal Entry for impairment:

   • A patent (cost: NPR 200,000, carrying amount: NPR 180,000) is impaired by NPR 30,000.

## Key Formulas

## Common Mistakes to Avoid

• Treating expenses as assets: Prepaid rent is an asset, not an expense until consumed.
• Ignoring salvage value in depreciation calculations.
• Mixing up current/non-current: A loan due in 15 months is current (NFRS 1).
• Forgetting contingent liabilities: Always check if they’re probable before disclosure.