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Conceptual Framework

Date recorded:

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.

Measurement: Planning

The staff presented the Board with the progress plan for the Measurement phase of the Conceptual Framework project. (The progress plan timetable was not handed out to observers).

As the staff considered the current milestones under the measurement phase to lack organisational rationale for addressing fundamental and difficult measurement issues, they presented the Boards a new measurement phase based on three milestones:

  • a. Milestone I: Defining and describing the properties of measurement bases
  • b. Milestone II: Evaluating measurement bases using the qualitative characteristics
  • c. Milestone III: Conceptual conclusions and practical applications

Some Board members expressed their concern that characteristics for considering a measurement basis was not indented to be a part of Milestone I of the measurement phase while other Board members had a perception that this was unnecessary at the first stage.

The Boards agreed to the staff's proposal for a single measurement phase and agreed the proposed restatement of measurement milestones and issues.

The Boards were asked whether they would agree to the proposal regarding public consultations for each milestone in the measurement phase.

Many Board members were supportive to the proposal, and commented that this would give the opportunity to have a two way communication with constituents. It was also noted that this could result in more constituents getting involved, considering the alternative, which is asking for comments in the form of letters.

The Boards supported the proposal. Staff added that they were aiming to do some consultations before the year end.

Eventually it was decided that the Boards would issue a Staff Paper at the end of the first milestone, a Preliminary Views document after reaching decisions in the second milestone, and an exposure draft after making decisions in the third milestone.