Discussion at the December 2005 IASB Meeting - Elements
Asset Definition
The paper proposed a definition of an asset as:
An asset of an entity is a present right, or other access, to an existing economic resource with the ability to generate economic benefits to the entity.
Some Board members were unclear of the impact of the change; what additional items would now be considered assets, or what items would no longer be considered assets. Generally, it was felt that the new definition would encompass more assets but that maybe too many would now be caught. For example, it would now cover all economic assets, rather than just accounting assets. It might also catch certain rights (such as a right to operate a store), or public facilities. It was noted that the asset definition would be tested at a later meeting.
There was discussion about what 'other access' meant. Staff agreed that this needed to be tightened. The intention was to avoid capturing only legal rights, but the current wording may be too broad.
There was general discussion about whether recognition criteria were being mixed in with the definition. For example, the definition could exclude the words 'of an entity' or 'to the entity', and still be the definition of an asset.
Discussion at the February 2006 IASB Meeting - Elements
The Board continued its discussion of the definitions of elements of financial statements, focussing on two specific items:
- The definition of assets, which the Board had discussed at previous meetings.
- The definition of liabilities, for which this meeting is the Board's initial discussion.
Definition of Assets
In December 2005, the Board had adopted the following working definition of an asset:
An asset of an entity is a present right, or other access, to an existing economic resource with the ability to generate economic benefits to the entity.
The Board discussed four key issues relating to the working definition:
- Associating assets with a particular entity.
- Present right or other access.
- An existing economic resource.
- The ability to generate economic benefits.
Associating assets with a particular entity
The staff proposed that the definition should continue to refer to an asset 'of an entity' and to the ability to generate economic benefits 'to an entity'.
Some Board members expressed concern that referring explicitly to an entity would exclude individuals from the definition. The staff commented that they had viewed entity to also include individuals.
Some Board members also commented that referring to an entity two times in the definition is redundant.
The Board agreed that the staff should continue its work on this part of the definition.
Present right or other access
Next the Board discussed the clause 'present right or other access' in the working definition. The staff had proposed to change this to 'a present right, or other present privilege, of the entity'.
The Board discussed this change and considered whether the change to 'privilege' would be too wide. Board members were concerned that widening the scope too much would affect whether an asset would actually be capable of generating economic benefits. Some Board members questioned whether the word 'privilege' would also capture the word 'right' and therefore make it redundant in the definition.
No decisions were made, and it was agreed that the staff should continue working on this part of the definition.
An existing economic resource
The working definition refers to an 'existing' economic resource. Staff proposed that 'existing' should be deleted because it appears to exclude items such as a forward contract to buy something that does not exist yet.
Some board members disagreed with this proposal, suggesting that an entity has an existing economic resource by receiving a right to lock in a price in the future. Other Board members supported the staff's proposal because retaining 'existing' might suggest that rights to future economic benefits were excluded from the definition.
The Board generally agreed that the definition with or without the word 'existing' would need amplifying text to prevent misunderstanding.
The ability to generate economic benefits
The Board discussed the words 'the ability' when it came to generate economic benefits.
Board members were concerned that this wording could permit recognition of a wide range of things as assets that are not intended to be included in the definition.
The staff had proposed to change the wording to resources 'that are capable of generating' economic benefits. Some Board members were also concerned that these words might suggest, for example, that out-of-the-money options are not assets. In the view of these Board members, the word 'capable' suggests that an item that may provide benefits in the future but does not provide benefits today cannot be an asset.
The Board commented that the definition must be able to capture economic benefits generated today, as well as economic benefits generated in the future.
The staff proposed to specify that economic benefits refer to 'direct and indirect' benefits. The Board did not support this proposal.
The staff agreed to clarify further the proposed wording.
Other characteristics of existing definition of assets
The staff had proposed to specify separately that cash is an asset. The Board discussed this briefly and concluded that the definition of an asset should be able to encompass cash without having to specify separately that cash is an asset.
The Board had a short discussion on stand-ready assets. However, no decisions were made. Staff will bring a proposal to the Board in the future.
Liability Definition
This was the Board's first discussion of the definition of liabilities. Staff proposed the following working definition of liabilities:
Liabilities of an entity are its present obligations to other entities that compel potential outflows or other sacrifices of economic benefits.
The staff presented a paper that identified similarities and differences between definition of liabilities in the IASB Framework and the FASB Concepts Statements. The paper also considered definitions adopted by a number of other standard setters.
The staff indicated that its approach to developing a liability definition involved (a) mirroring the asset definition and (b) relying on notion of economic benefits in the definition of an asset. Staff did not explore a liability definition that was independent of the asset definition.
The Board discussed this briefly and expressed agreement with the staff's approach.
The working definition of a liability uses the term 'compel' to describe an obligation that gives rise to a liability.
Board members discussed the use of 'compel'. Some were concerned that this could imply that a liability would only be recognised and measured based on what an entity would pay, rather than what the entity is obliged to pay.
The Board discussed compulsion in the context of legal, equitable, and constructive obligations. Board members discussed different types of compulsion – such as moral, legal, and economic compulsion – and considered this in conjunction with different examples set out in the staff paper. Some members again expressed their concern that nothing would be recognised if compulsion is the primary criterion for recognising a liability.
The staff noted that its definition of a liability requires an obligation to another entity. Board members agreed with this statement, but added that this should not mean that the counterparty necessarily needs to be identified before an entity will recognise a liability.
The Board concluded discussion by stating that they were pleased with the material provided by staff and thought that staff had taken the right approach in its initial work on the definitions.
Definitions of Elements of Financial Statements
The Board held a preliminary discussion related to the definitions of elements of financial statements. The Board will continue these discussions at the joint meeting of the IASB and FASB. No decisions were made during this discussion.
The Board also began discussions of the conceptual distinction between liabilities and equity and perhaps between classes of equity. Although no decisions were made during this session, a significant number of Board members were of the view that obligations to sacrifice economic resources or conveyance of returns and risks differing from ownership both matter in the determining the existence of a liability. This is viewed as consistent with some recent standards decisions made by both the IASB and the FASB.
Discussion at the April 2006 Joint IASB-FASB Meeting - Elements
During the discussion on the conceptual framework project, the Boards deliberated on the following:
- The elements phase of the working definitions of an asset and a liability
- The proposed plan for the measurement portion of the conceptual framework project
Asset Definition and Liabilities Definition
The purpose of this session was for the staff to present the working definitions of an asset and of a liability together with amplifying text, and ask the Boards whether these provide a sufficient basis for further work on the project.
The staff recommendation for the asset and the liability definition is as follows:
- Asset definition. An asset is a present economic resource of an entity.
- Liability definition. A liability is a present economic obligation of an entity.
At the meeting the staff handed out an addendum to the agenda paper reflecting some last minutes refining of the essential characteristics of the asset and liability definitions. This addendum explained that an asset has three essential characteristics (which were proposed as amplifying text):
- a) There is an underlying economic resource.
- b) The entity has rights or other privileged access to the economic resource.
- c) The economic resource and the rights or other privileged access both exist at the financial statement date.
Likewise a liability has three essential characteristics:
- a) The obligation is economic - it requires the entity to provide or stand read to provide its economic resources to others, or forgo economic resources that it might otherwise be able to obtain.
- b) The entity is obligated to others to act or perform in a certain way (or refrain from acting or performing).
- a) The economic obligation and the legal enforceability (or its equivalent) both exists at the financial statement date.
The Boards started the session by discussing the asset definition and the amplifying text proposed. Board members challenged the wording set out in c), as the text implied that both an economic resource and a right have to exist for an asset to be recognised. There seemed to be general agreement amongst Board members that this sentence was not clear and should be revised.
Other Board members commented on the term 'economic resource' as they found it to be a very wide and general expression with no specific meaning. A proposal was put forward to change this to 'potential cash flows'.
Furthermore, the debate also seemed to indicate that Board members had difficulty distinguishing between the term 'economic resource' and the term 'economic benefit'.
The Boards then concentrated the debate on the definition of a liability around stand ready obligations and obligations arising from foregoing economic resources that otherwise could be obtained, and whether these should be recognised as liabilities. Specifically they discussed a situation in which an entity is paid not to engage in certain business activities that could generate future economic benefits. The entity has an obligation that requires it to forego a possible future economic cash flow. The entity would be required to make repayment if it breached the contract, and therefore it has a liability until the contract expires.
Board members differed in their view whether this should result in recognition of a liability.
The Boards decided not to take any decisions during this session. They instructed staff to redraft the amplifying text of assets and liabilities based on the debate as well as comments made by Board members.
Discussion at the June 2006 IASB Meeting - Elements
The Board continued their deliberation of the working definitions of an asset and a liability from the April 2006 meeting.
The Board focussed their discussion on the asset definition during this session. The following asset definition working definition was presented to the Board:
An asset is a present economic resource of an entity.
An asset of an entity has three essential characteristics:
- a. There is an underlying economic resource.
- b. The entity has rights or other privileged access to the economic resource.
- c. The economic resource and the rights or other privileged access both exist at the financial statement date.
|
First, the Board discussed what is the economic resource? An example to buy/sell corn forward was presented to the Board as a way to explain that the existence of the product-corn-is irrelevant, as the present economic resource is the promise to deliver/accept the corn by the parties. The Board was asked whether they agreed that it was the promise rather than the corn that defined the economic resources by the parties.
The majority of Board members agreed to the statements as set out in the working paper. However one Board member commented that it was hard to accept the promise as the asset as the contract initially was executory.
The Board agreed that it is the promise rather than the corn that is the economic resource.
Secondly the Board discussed whether both parties in such a contract would have an asset. It was agreed that both parties have an asset as there are two promises: the seller promises to deliver (buyer's asset) and the buyer promises to accept the delivery of the corn (seller's asset).
In the end the Board discussed the application of the asset definition to an entity's own shares. During a previous meeting some Board members concluded that an entity's own issued shares would meet the proposed working definition of an asset. The staff therefore presented the Board with text to amplify the working definition as follows:
- a. A promise with no external counter party, in the form of unissued or treasury shares (or unissued debt), constitutes neither an economic resource nor an economic burden to the entity.
- b. A promise by an entity in the form of issued shares (or issued debt) constitutes an economic burden-not an economic resource.
- c. A contract that does not involve an inbound promise by a party external to the entity cannot constitute an economic resource of the entity.
This would clarify that even if an entity has a prospectus approved for the issue of debt, that does not create an asset representing the debt. The Board agreed to the proposal.
Discussion at the July 2006 IASB Meeting - Elements
The Board discussed the following proposed definition and essential characteristics of an asset:
- An asset is a present economic resource to which an entity has a present right or other privileged access.
- An asset of an entity has three essential characteristics:
- a. There is an economic resource.
- b. The entity has rights or other privileged access to the economic resource.
- c. The economic resource and the rights or other privileged access both exist at the financial statement date.
All three characteristics must be met for an item to meet the definition of an asset. That is, each characteristic is a necessary condition and, collectively, they constitute a sufficient condition for an item to be an asset.
The Board discussed this definition and the related elaboration of the 'essential characteristics' in depth. Many of the concerns raised by Board members retraced underlying concerns about what an asset represented (the resource; the right to the resource; or the right to the right) and whether a promise to provide a resource (e.g. an option) would meet the definition of an asset.
Board members requested the staff to reinstitute prior wording in the elaboration of 'economic resource' such that it was clear that, at the balance sheet date, there is the non-zero likelihood of generating inbound cash flows or reducing outbound cash flows.
It was suggested that the definition of an asset might be reworded as follows:
- An asset is an entity's present right or privileged access to an economic resource.
This proposal was supported by some Board members, however other Board members wanted more emphasis given to benefits.
Board members then tested various items that might represent an asset against the proposed definition. These discussions demonstrated that there are still problems in the way the general principle is articulated that the staff must resolve before the Board is satisfied with the definition. However, a majority of the Board agreed to proceed on the basis of the definition outlined by the staff (with amendments).
Discussion at the September 2006 IASB Meeting - Elements
Asset Definition
As part of their deliberations on the development of an asset definition, the Board identified a cross-cutting issue: what constitutes the asset when an entity holds an option over an asset? The Board decided that it had to agree on the accounting for an option to acquire/sell an asset directly as part of their deliberations on treatment of options held over entities.
After a short discussion, the Board concluded that the only asset that the entity would have is the option that it holds over the asset and not the underlying asset itself.
Discussion at the November 2006 IASB Meeting - Elements
Definition of an asset
The staff presented the following modified version of the definition of an asset and the essential characteristics of an asset incorporating the decisions made at the July 2006 meeting:
An asset is a present economic resource to which the entity has a present right or other privileged access
An asset of an entity has three essential characteristics:
a. Present means that both the economic resource and the right or other privileged access to it exist on the date of the financial statements.
b. An economic resource is something that has positive economic value. It is scarce and capable of being used to carry out economic activities such as production and exchange. An economic resource can contribute to producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources. Economic resources include non-conditional contractual promises that others make to the entity, such as promises to pay cash, deliver goods, or render services. Rendering services includes standing ready to perform or refraining from engaging in activities that the entity could otherwise undertake.
c. A right or other privileged access enables the entity to use the present economic resource directly or indirectly and precludes or limits its use by others. Rights are legally enforceable or enforceable by equivalent means (such as by a professional association). Other privileged access is not enforceable, but is otherwise protected by secrecy or other barriers to access.
The Board debated this definition and the related elaboration of the 'essential characteristics' in depth and made the following decisions:
- Remove the second 'present' in the definition as it is redundant
- Rephrase the wording of the elaboration of an economic resource by bringing together sentences two and three.
- Remove the last two sentences of the elaboration of an economic resource and include them in an amplifying text or similar.
Board members tested various items that might represent an asset against the proposed definition in order to work out what an asset represented. Particularly it was discussed what represents the asset for the holder of a call option for goods. It was noted that in this case the option is the right to the resource and that the promise of the counterparty to deliver the goods is the resource.
The Board agreed to proceed on the basis of the definition outlined by the staff (with amendments noted above) and asked the staff to continue investigations including the FASB work regarding this issue.
Distinguishing liabilities from equity
The staff presented a paper discussing issues relating to the definitions of liabilities and equity and the distinction between them. The paper identified a number of cross-cutting items associated with liabilities and equity. The Board was asked to decide whether the staff should explore on the following key issues:
- Should there be a distinction between liabilities and equity?
- Should there by only two elements?
The first issue considers whether a single element should be defined to comprise what liabilities and equity now comprise.
Such an element might be termed 'claims' and would be the counterpart to assets.
The second issue considers whether three or more elements should be defined in place of what the existing framework define as liabilities and equity. One approach would be to restrict the terms liability and equity to those items that are either 'pure' liabilities or 'pure' equity, and to define one or more elements.
The Board decided to undertake the project and asked the staff to present a revised paper at a future meeting.
Discussion at the February 2007 IASB Meeting - Elements
Phase B: Elements and Recognition
The Claims Approach
(FASB staff participated by video link from Norwalk.)
The FASB staff introduced a lengthy paper prepared in response to the request from the Boards in November 2006 that, with respect to the existing definitions of liabilities and equity, it should develop the 'single element approach and to determine the potential implications of adopting that approach.' The paper focused on developing a single element, called for the purposes of the discussion 'claims', that would replace the liability and equity elements. The paper is available in the Observer Notes section of the IASB's website.
The Board thanked the staff for the analysis and the work that had been done in response to the Boards' request. However, beyond that, the IASB members were divided. Some thought that the analysis should not be developed further (in the words of one Board member: 'close the door; lock it; lose the key'); others thought that the analysis should be taken a bit further, as it would help to inform the debate on elements. Some Board Members thought that the staff analysis would be an excuse not to answer difficult questions, mainly related to items in profit and loss arising from changes in claims. To develop the Claims Approach could delay any resolution on real accounting issues for several years. Others disagreed, noting that it would not solve all problems, but it would be a useful start. The chairman appreciated the staff's work, but thought the Claims Approach held more problems than promise.
The FASB staff assigned to the FASB's Liabilities and Equity project noted that the FASB had not discussed whether to include a discussion of the Claims Approach in the forthcoming FASB Preliminary Views Document. To do so would delay the issue of that document by several months. IASB members generally did not like the idea that exploring a conceptual issue should delay a Standards-level project that was needed.
IASB staff asked the IASB for proper direction. The vote that followed was characterised by a Board Member as follows:
- 7 Board Members would stop work on the Claims Approach now
- 4 Board Members want the staff to pursue the Claims Approach further
- 3 Board Members would not want exploration of the Claims Approach to hinder the progress on the FASB's Liabilities and Equity project, but would not want to lose the benefit of the work and analysis done to date.
This would seem to suggest that the IASB would not want additional staff effort to be expended on the topic. However, given that the FASB has not discussed this issue, and the project is a joint project, a final decision will not be made until the FASB had the opportunity to discuss it.
Discussion at the July 2007 IASB Meeting - Elements and Recognition
(The FASB staff joined the meeting by video link.)
The purpose of this discussion was to summarise the status of the project and to agree on the next steps.
The staff presented a summary of the informal consultation on the definition of an asset. Feedback was received mainly from the Boards' advisory councils, a conference with academics and a meeting of National Standard Setters. The staff came to the conclusion that the asset definition 'is on the right track' but that better explanation is required. The staff made the observation that responses tended to be more favourable in forums where the staff had the opportunity to explain the concepts, rather than from those who only read the proposals.
The staff proposed to temporarily set aside direct work on the definition issues regarding assets and liabilities and to begin consideration of the cross-cutting issues dealing with unit of account, recognition and derecognition for the following reasons:
- Some of the unresolved cross-cutting issues in the definitions cannot be fully resolved without commencing consideration of unit of account, recognition and derecognition. For example, considering unit of account issues will help to identify what the 'thing' is that is a candidate for meeting the definitions. As another example, consideration as to how to take into account uncertainty as to the existence of an asset or liability requires consideration of both definitional and recognition issues.
- The thinking developed in considering unit of account, recognition and derecognition might help finalising the definitions of an asset and a liability and might help find answers to disputed points. For example, in considering the boundaries between business opportunities and assets and business risks and liabilities we need to consider both definitional and recognition issues.
- Many of the reviewers from informal consultation on the definition of an asset had difficulties considering the definitions without considering unit of account, recognition and derecognition, and perhaps other concepts (some respondents suggested measurement).
- Considering some of the unit of account, recognition and derecognition issues at a conceptual level will increase the likelihood of greater consistency in decisions at the standards level. Several standards-level projects are considering issues presently that relate to those being considered in Phase B.
The Board strongly disagreed with this proposal. Most Board members noted that there needs to be a clear understanding of what assets and liabilities are before addressing any other issues. Any other approach was considered not to be helpful. In addition, some Board members pointed out that the decision to distinguish definition and recognition was made for good reasons.
Instead the Board asked the staff to finalise the working definitions of assets and liabilities. In a first step, the working definition of an asset should be applied to a range of examples and it should be analysed to whether or not the working definition makes things clearer. The FASB staff mentioned that the FASB came to a similar conclusion at its recent meeting.
No technical decisions were made. However, some Board members raised the concern that the working definition of an asset simply replaces certain ambiguous terms by other ambiguous terms. One Board member noted that, as an example, different understandings of 'control' led to problems with the existing definition and doubted that the term 'right or other privileged access' would make things better.
Discussion at the October 2007 IASB Meeting – Phase B: Elements and Recognition
The Board continued its discussion of the definition of an asset. The objective of the discussion was to decide on a definition that could be used as a working definition of an asset as the Board proceeds with other aspects of Phase B of the Conceptual Framework project.
The Board tentatively agreed that:
- the focus of the definition of an asset should be on a present economic resource rather than on future economic benefits; and
- an assessment of likelihood should be remove from the definition of an asset.
The Board concluded that the definition should focus on the present rather than on past transactions or events.
The Board then considered whether the term 'control' should be replaced with the phrase 'present rights or other access', and whether the definition should include the phrase 'to the exclusion of others'.
The Board tentatively agreed that the working definition of an asset should focus on 'present rights or other access'. It did not agree to including 'to the exclusion of others'. It requested that staff consider how better to express the notion of 'other access'.
The Board did not decide on the sequencing within the definition, and it asked staff to prepare a paper outlining how the definition would read:
The Board then considered whether the term 'control' should be replaced with the phrase 'present rights or other access', and whether the definition should include the phrase 'to the exclusion of others'.
The Board tentatively agreed that the working definition of an asset should focus on 'present rights or other access' and include the phrase 'to the exclusion of others'. However, the Board did not decide on the sequencing within the definition, and it asked staff to prepare a paper outlining how the definition would read:
- if the 'right' is discussed first; and
- if 'resource' if discussed first.
This paper will be discussed at the joint meeting with the FASB to be held next week.
Discussion at the December 2007 IASB Meeting
Way forward: The alternative approach
The Board discussed the way forward regarding the definition of a liability. The staff noted that Phase B of the Conceptual Framework overlaps with the Liabilities and Equity project and raised the concern that this may result in issuing two contradictory discussion papers. Therefore, the staff presented the following alternative approach:
- In a first step, define the 'credit side' of the statement of financial position containing liabilities and equity in co-operation with the Liabilities and Equity project team.
- In a second step, elaborate the distinction between liabilities and equity.
Some Board members expressed sympathy for the alternative approach. Other Board members noted that a robust definition of a liability needs to be developed anyway, that is, independent of the outcome of the Liabilities and Equity project. In addition, those Board members were concerned that the alternative approach could significantly hold up the Conceptual Framework project.
By majority vote the Board decided not to adopt the alternative approach but to proceed with the development of the working definition of a liability.
Definition of a liability
The Board then discussed a revised working definition of a liability. The objective of the discussion was to decide which definition should be used as the working definition of a liability as the Board proceeds with other aspects of Phase B of the Conceptual Framework project.
Based on the existing IASB and FASB definitions of a liability, the staff presented the following improved and converged definition of a liability:
A liability is a present economic obligation of the entity.
The following justifications were offered:
- The key convergence change proposed is the use of 'economic obligation' rather than 'sacrifices of economic benefits' to indicate that the focus is on a stock, rather than on a flow, and the use of present rather than future to indicate that the resource must presently exist.
- Both the IASB and FASB definitions have been misinterpreted as implying that there must be a high likelihood of future outflow of economic benefits for the definition to be met. That is not the intent and, therefore, the terms expressing any form of likelihood have been removed.
- To avoid undue emphasis on identifying the past transaction or other event that gave rise to an asset, the Boards decided to improve the definition of an asset by focusing on the present, rather than on past transactions or other events.
In a parallel manner, by focusing on a present economic obligation in the proposed definition of a liability, it becomes redundant to refer to the need for a past event.
The Board agreed with the proposed definition.
Based on the improved and converged definition, as an interim step the staff developed the following proposed working definition of a liability:
A liability of an entity is a present economic burden or requirement to which the entity has an enforceable obligation.
There seemed to be a consensus that this definition overemphasises symmetry to the working definition of an asset. The Board disagreed with the term 'present economic burden or requirement' and, in particular, raised the concern that the term 'burden' may be too wide. In addition, some Board members requested further research on 'enforceability' and the implications of economic compulsion.
The Board could not agree on a working definition and asked the staff to revise the wording for discussion at a future meeting.
Discussion at the June 2008 IASB Meeting
Before the staff could introduce the topic, a Board member challenged the meeting's working definition of a liability, which he saw as precluding performance obligations (and thus contrary to the Board's work in the revenue section of the Framework project). In his view the clause addressing 'economic obligations' displayed tortured reasoning:
An economic obligation is something that is capable of resulting in cash outflows or reduced cash inflows, directly or indirectly, alone or together with other economic obligations.
The Board member warned that restricting the definition to cash outflows/ reduced cash inflows would have serious unintended consequences-especially for the Board's standards on share-based payments. After some debate, the staff agreed that 'economic resource' could be substituted for 'cash'. In addition, the staff noted that the FASB, in education session, had suggested that the introduction to the definition should be amended as follows:
A liability of an entity is a present unconditional economic obligation that is enforceable against the entity.
The Board noted the amendment and agreed.
When do Statutes, Laws and Regulations give rise to a Liability?
The Board agreed that when an event occurs that triggers the requirements of a statute, another party can demand that the entity perform as specified by the statute. The triggering events and the performance required vary by statute and can depend on the facts and circumstances of the situation. The Board discussed two of the three staff examples.
Carbon emissions: At an interim reporting date a company emitting carbon is within its emissions limit and has sufficient emission rights to cover those emissions. It expects to emit more carbon during the whole of its financial year than it is allowed or for which it hold emission rights.
The Board (by a majority) agreed that, at the interim reporting date, the entity does not have a liability. It has sufficient emission rights to cover its current emissions. As such, it has not breached its statutory obligations and has no liability. Board members noted that the expected exceeding of the emissions limit later in the fiscal year would be a matter for disclosure at the interim reporting date.
Speeding ticket: Whether an obligation exists would depend on facts and circumstances. For example, if a driver triggers a speed camera, it may take several days before the speeding ticket is delivered. In other cases, it will be delivered by the roadside. Thus, there may be some element of estimation of 'incurred but not reported' obligations.
In addition, the Board agreed that statutory obligations could be either unconditional; conditional; or unconditional with an associated conditional element. The Board cautioned the staff to be careful in how they explained this: the obligation was unconditional, but it can only be measured by reference to the conditionality.
Dealing with Uncertainty about the Existence of a Liability
The Board agreed that uncertainty about existence of an asset or a liability should be addressed when ascertaining whether the definition of the element is met. Thus, uncertainty will be addressed in how the definitions are to be applied-in the accompanying guidance for applying the definition.
The staff was encouraged by some Board members not to be apologetic about this approach. The purpose of the Framework was not to give preparers 'safe harbours' in difficult areas. There were plenty of examples of when determining whether there is a liability is a difficult judgement call.
Applying the definition
The Board had a tortured debate about applying the definition to specious/ frivolous lawsuits and 'The Hamburger'. There was eventual agreement that The Hamburger was an 'incurred but not reported' type of obligation. The lawsuit was more problematical because even in a specious lawsuit, the defendant will (i) expect to win and pay nothing; but (ii) will need to be represented by a lawyer. However, a majority of the Board agreed that the correct measure of the liability in this example would be zero (with disclosure).
The Board agreed that additional standards-level guidance should be developed on how to apply the concepts in the Framework.
Summary of Tentative Decisions/ Liability Definition Examples
The Board agreed two documents without debate: a summary of the Tentative Decisions taken on this phase of the Framework project and a series of examples of applying the liability definition. Both documents would form the basis for drafting the Discussion Paper on this Phase of the Framework project.
| 
Print
