With gratitude to Paul Jennings for this clever idea.
Some students find it difficult to appreciate that assets are rights, not things in and of themselves. I used to tell students that in the old days we put motor vehicles on balance sheets but they kept falling off. It didn’t get many laughs.
My friend Paul Jennings has an elegant way to explain this idea, using two train tickets.
Point out that these two tickets are physically identical: printed on the same kind of paper, with the same kind of ink.
Imagine that it is 27 January 2021. Ask what value each ticket has.
It is usually obvious that the value of each ticket is not related to its physical nature, but is related to the rights attached to the ticket.
The right to travel on a day that has passed has no current value [without a time machine], but the right to travel in the future has current value.
Extensions and facilitated conversations:
- Deferred expenses (or prepayments): the expense is recognised when the train journey takes place. In advance of the period of travelling the ticket is an asset.
- Context and events matter: if the train journey on 25 January was cancelled, the holder of the ticket may be entitled to a refund, in which case it may have value. The train ticket valid until 19 May 2021 may have less or no value if it cannot be used for any reason.
- Travel takes place in the future but the ticket’s value is the value of ticket-holder’s rights at the accounting date. There are nuanced differences between the definition of assets according to IASB and FASB on this point, so adapt your conversation to address local regulations.
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