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On this topic;one of the contents;the last point states-That all charges and assets have been disclosed;that any assets that have been pledged for security of the loan for example-that would affect the rights and obligation assertion of those assets..
My question is regards to the last part- pledged for security of the loan for example-that would affect the rights and obligation assertion of those assets.
It Just got me thinking actually;How are the the rights towards an asset affected;when an asset has been pledged for security of a loan? How do we account for such an asset? I know it would overstate the assets in the SOFP and hence the depreciation/if depreciable if not freehold land in the income statement.But my question is how do we account for it? Do we use lessor/lessee principles?
Thanking you in advance
If an asset is pledged/mortgaged as security (typically for a bank loan), it is still owned, exists, etc and is treated no differently to any other asset of the same class that is not pledge/mortgaged. (So no – this has nothing to do with leasing.)
If material, however, that the loan is secured and that assets are pledged will be disclosed in the notes. This is useful information to users – particularly other creditors – as it shows that not all assets will be generally available to satisfy obligations in the event of the company’s winding up.
This disclosure is required by IAS 16 “The financial statements shall also disclose:
(a) the existence and amounts of restrictions on title, and property,
plant and equipment pledged as security for liabilities …” it may also be required by legislation (e.g. Companies Act 2006 in the UK).
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