Case 1 Research

1) What asset(s), if any, should be recognized by the company at the date the invoice is sent to the customer (assume the magical internet machine ensures it is sent and received on the same day)? Provide the conceptual justification for your answer.
a. If you argue that an asset(s) should be recognized at this date, when, if ever, and how will the company need to alter the value of this asset. Provide conceptual justification for your answer.
b. If you argue that no asset should be recognized at this date, when, if ever, and what asset(s) should be recognized and when, if ever, and how will the company need to alter the value of this asset. Provide conceptual justification for your answer.

SFAC 6, 25. Assets are probable18 future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
SFAC 6, 26. An asset has three essential characteristics: (a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash in- flows, (b) a particular entity can obtain the benefit and control others’ access to it, and (c) the transaction or other event giving rise to the entity’s right to or control of the benefit has already occurred. Assets commonly have other features that help identify them—for example, assets may be acquired at a cost19 and they may be tangible, exchangeable, or legally enforceable. However, those features are not essential characteristics of assets. Their absence, by itself, is not sufficient to preclude an item’s qualifying as an asset. That is, assets may be acquired without cost, they may be intangible, and although not exchangeable they may be usable by the entity in producing or distributing other goods or services. Similarly, although the ability of an entity to obtain benefit from an asset and to control others’ access to it generally rests on a foundation of legal rights, legal enforceability of a claim to the benefit is not a prerequisite for a benefit to qualify as an asset if the entity has the ability to obtain and control the benefit in other ways.

SFAC 6, 27. The kinds of items that qualify as assets under the definition in paragraph 25 are also commonly called economic resources. They are the scarce means that are useful for carrying out economic activities, such as consumption, production, and exchange.

SFAC 6, 28. The common characteristic possessed by all assets (economic resources) is “service potential” or “future economic benefit,” the scarce capacity to provide services or benefits to the entities that use them. In a business enterprise, that service potential or future economic benefit eventually results in net cash inflows to the enterprise. In a not-for-profit organization, that service potential or future economic benefit is used to provide desired or needed goods or services to beneficiaries or other constituents, which may or may not directly result in net cash inflows to the organization. Some not-for-profit organizations rely significantly on contributions or donations of cash to supplement selling prices or to replace cash or other assets used in providing goods or services. The relationship between service potential or future economic benefit of its assets and net cash inflows to an entity is often indirect in both business enterprises and not-for-profit organizations.
SFAC 6, 29. Money (cash, including deposits in banks) is valuable because of what it can buy. It can be exchanged for virtually any good or service that is available or it can be saved and exchanged for them in the future. Money’s “command over resources”—its purchasing power—is the basis of its value and future economic benefits.20

SFAC 6, 30. Assets other than cash benefit an entity by being exchanged for cash or other goods or services, by being used to produce goods or services or otherwise increase the value of other assets, or by being used to settle liabilities. To carry out their operating purposes, both business enterprises and not-for-profit organizations commonly produce scarce goods or services that have the capacity to satisfy human wants or needs. Both create utility and value in essentially the same way—by using goods or services to produce other goods or services that their customers or constituents desire or need. Business enterprises expect customers to pay for the utility and value added, and they price their outputs accordingly. Many not-for profit organizations also distribute some or all of their outputs of goods or services at prices that include the utility and value they have added. Other not-for profit organizations commonly distribute the goods or services they produce to beneficiaries gratis or at nominal prices. Although that may make measuring the value of their outputs difficult, it does not deprive them of value.
SFAC 6, 31. Services provided by other entities, including personal services, cannot be stored and are received and used simultaneously. They can be assets of an entity only momentarily—as the entity receives and uses them—although their use may create or add value to other assets of the entity. Rights to receive services of other entities for specified or determinable future periods can be assets of particular entities.

2. What liability(ies), if any, should be recognized by the company at the date the invoice is sent to the customer (assume the magical internet machine ensures it is sent and received on the same day)? Provide conceptual justification for your answer.
a. If you argue that a liability(ies) should be recognized at this date, when, if ever, and how will the company need to alter the value of this liability. Provide conceptual justification for your answer.
b. If you argue that no liability should be recognized at this date, when, if ever, and what liability(ies) should be recognized and when, if ever, and how will the company need to alter the value of this liability. Provide conceptual justification for your answer.

SFAC 6, 35. Liabilities are probable future sacrifices of economic benefits arising from present obligations22 of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
SFAC 6, 36. A liability has three essential characteristics: (a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand, (b) the duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice, and (c) the transaction or other event obligating the entity has already happened. Liabilities commonly have other features that help identify them—for example, most liabilities require the obligated entity to pay cash to one or more identified other entities and are legally enforceable. However, those features are not essential characteristics of liabilities. Their absence, by itself, is not sufficient to preclude an item’s qualifying as a liability. That is, liabilities may not require an entity to pay cash but to convey other assets, to provide or stand ready to provide services, or to use assets. And the identity of the recipient need not be known to the obligated entity before the time of settlement. Similarly, although most liabilities rest generally on a foundation of legal rights and duties, existence of a legally enforceable claim is not a prerequisite for an obligation to qualify as a liability if for other reasons the entity has the duty or responsibility to pay cash, to transfer other assets, or to provide services to another entity. 37. Most liabilities stem from human inventions— such as financial instruments, contracts, and laws— that facilitate the functioning of a highly developed economy and are commonly embodied in legal obligations and rights (or the equivalent) with no existence apart from them. Liabilities facilitate the functioning of a highly developed economy primarily by permitting delay—delay in payment, delay in delivery, and so on.23

SFAC 6, 38. Entities routinely incur most liabilities to acquire the funds, goods, and services they need to operate and just as routinely settle the liabilities they incur. For example, borrowing cash obligates an entity to repay the amount borrowed, usually with interest; acquiring assets on credit obligates an entity to pay for them, perhaps with interest to compensate for the delay in payment; using employees’ knowledge, skills, time, and efforts obligates an enterprise to pay for their use, often including fringe benefits; selling products with a warranty or guarantee obligates an entity to pay cash or to repair or replace those that prove defective; and accepting a cash deposit or prepayment obligates an entity to provide goods or services or to refund the cash. In short, most liabilities are incurred in exchange transactions to obtain needed resources or their use, and most liabilities incurred in exchange transactions are contractual in nature— based on written or oral agreements to pay cash or to provide goods or services to specified or determinable entities on demand, at specified or determinable dates, or on occurrence of specified events.

SFAC 6, 39. Although most liabilities result from agreements between entities, some obligations are imposed on entities by government or courts or are accepted to avoid imposition by government or courts (or costly efforts related thereto), and some relate to other nonreciprocal transfers from an entity to one or more other entities. Thus, taxes, laws, regulations, and other governmental actions commonly require business enterprises (and sometimes not-for-profit organizations) to pay cash, convey other assets, or provide services either directly to specified governmental units or to others for purposes or in ways specified by government. An entity may also incur liabilities for donations pledged to educational or charitable organizations or for cash dividends declared but not paid.