Assets Future Economic Benefit
Asset Future Economic Benefit is the potential contribution or expected cash flow which the entity expects to generate from the asset. It is the benefit that company expects to receive from the assets in the future, it can be in form of revenue or other service usages. The company may use the assets to generate sale of goods or services to the customers.
The asset can generate direct and indirect contributions as it is not the cash flow. It may generate service which is consumed by its own entity so there will be no cash flow. Economic benefit is the quantity of cash that can save or generate from the asset.
Asset Future Economic Benefit Example
There are many kinds of assets future economic benefit as it depends on their usage:
- Assets may be used by the company to produce goods or services. The company use plant and equipment to produce the goods for sale. This kind of asset will be able to generate cash flow as those goods and services can be sold to the customers.
- Assets may be used by the company to support daily operations. Company uses the car to support business activity. They do not sell or rent the car to get cash flow, but the car enables the business operation to continue. The future economic benefit of the car is not the cash flow but in form of contribution.
- Assets may be used to exchange or acquire other assets. Cash and cash equivalents are the best examples in this case. company uses cahs to acquire other assets which will have other forms of future economic benefit.
- Assets are used to settle the entity liability. The company uses cash and cash equivalent to settle the entity liability.
- To Settle future purchases or liability. Company uses advance purchase to settle with the supplier when the purchase transactions are completed.
Why do we need to know future economic benefits?
The future economic benefit is one of the criteria to recognize assets in the financial statement. Accounting Standard allows the company to record assets when there is economic benefit expect to flow into the company in the future. If there is no expected economic benefit, there is no point to record the assets. On the other hand, the company should recognize expenses immediately.