Assets are rights

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.

Teaching notes and high quality images avaiable to download below

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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2 thoughts on “Assets are rights”

  1. This is an interesting and thought-provoking example to illustrate the concept of an asset and rights attaching to an asset.
    Imagine that it is 31st January and the owner of the ticket has to draw up a statement of financial position. What is the value of the asset to be recognised in the SFP?
    Would the answer be different if the ticket is non-refundable and non-transferable?
    Would it be different if, on 30th January, the train operator announced an increase of 20% for all tickets from London to Edinburgh purchased after that date?
    And what if, on 30th January, because of excess capacity, the train operator released hundreds of tickets priced at £60 for this route, effective until the end of May.
    Finally, what is the impact of these ‘what ifs’ on the recognition of revenue from the original sale by the train operator?
    And one more thought – replace the train tickets by two lottery tickers, one dated after the lottery has taken place and one dated beforehand with a maximum prize of £100m.

  2. Hello Richard, I will have a go at answering these questions (actually I have used a couple of these, or similar, in class to illustrate some points about assets).
    The train tickets could actually be lottery tickets, or actually anything else which gives rights, and I do ask students if a lottery ticket is an asset just to check that they’ve understood that ‘capable of generating economic benefit’ doesn’t mean ‘will generate economic benefit’.
    – The *value* of the asset is debatable but the *measurement* of the asset is simple *if* we follow the rule that it should be measured at either cost or fair value à la IFRS. Actually in this case cost and fair value are probably equal.
    – I have introduced the ‘refundable’ idea in class as a twist, after the students have told me that the ‘expired’ ticket is worthless. If it is refundable then it is still capable of producing economic befits (the cash refund) whereas if not, not. Turning this round, and looking at revenue recognition from the train company’s point of view, for a non-refundable ticket, their performance obligation is to offer to carry the passenger from A to B on date X at time Y, so as soon as the passenger misses the train the train company have no further obligation and the passenger has no value in the ticket. For a refundable ticket, there is still benefit to be had or the passenger and still a performance obligation for the train company.
    – Price increase: well if the ticket were transferable (they never are, not legally anyway) then its fair value would have increased. (Though I don’t think we’d measure this at fair value in IFRS financial statements [why not? – cue another meander…]) We can think of a comparable situation when the price of stamps goes up but NVI stamps are still valid as full payment even if they were bought at the old rate.
    – If the market price goes down then obviously the fv goes down and maybe we are back to looking at whether the ticket is refundable or not (ie could now refund the ticket for £325 and repurchase it for £60). I won’t mention the possibility of keeping the original receipt for £325 and what you could do with that 🙂

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