Conceptual Framework Phase B — Elements and Recognition
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.