What is an asset?

In accounting terms an asset results from a past event, is controlled by the entity, and is expected to deliver cash flows, service potential or lower future outflows. In plain language: if you own or legally control something that helps your business earn revenue now or later, it is an asset. That includes cash and bank accounts, stock and raw materials, invoices owed to you, plant and equipment, vehicles, buildings and land, intangibles such as software licences and customer lists, and prepayments and deposits.

For individuals, assets include a car, a caravan or personal investments. For businesses they extend to specialised equipment such as excavators or medical devices, which is where equipment finance usually comes in.

Accounting and lending value assets differently. In the accounts, an asset is first recognised at historical cost (purchase price plus directly attributable costs) and then carried at cost less depreciation and impairment, or at fair value if the revaluation model is chosen for that class. Australian standards AASB 116, AASB 138 and AASB 136 cover property, plant and equipment, intangibles and impairment respectively.

Lenders look at it differently. They use market value (what the asset would sell for in a normal sale), a lower forced-sale value for conservative lending, and a residual value estimate for leases and hire agreements. Invoices, service records and market comparables support both the useful life you depreciate over and the value a lender will accept.

When a lender finances an asset it usually takes a security interest over it and registers that interest on the Personal Property Securities Register (PPSR). Registration is a public notice that perfects the interest and protects the lender's priority against other creditors and later buyers. The security agreement, and the enforcement rules in the Personal Property Securities Act, give the lender the right to repossess or sell the asset on default, subject to statutory requirements. Someone who buys an asset without checking the PPSR may take it subject to an existing security interest.

Legal ownership depends on the structure: the borrower under a chattel mortgage, the lessor under a finance lease, and the lender until the final payment under a hire purchase. An up-to-date asset register, preventive maintenance and insurance that names the lender protect the asset's value and can lower finance costs.