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Conceptual framework — Additional guidance to support the asset and liability definition

Date recorded:

It is currently intended that the Conceptual Framework will include the following additional guidance on:

definition of an asset

  • the meaning of 'economic resource'
  • the meaning of 'control'

definition of a liability

  • constructive obligations
  • the impact of future events
  • the meaning of 'transfer of economic resources'

definition of both an asset and a liability

  • reporting the substance of contractual rights and obligations
  • executory contracts.

Main changes compared to the last draft relate to the discussions on:

  • future events that depend on the entity’s future actions (contingent liabilities)
  • constructive obligations
  • past events
  • contractual obligations – whether the economic compulsion should be considered?

The main discussion during the meeting was about the future events that depend on the entity’s future actions. The paper listed three approaches to determining whether a present obligation exists:

  1. an obligation must be unconditional;
  2. an obligation arises when an entity receives benefits for which it accepts a responsibility to transfer a resource; and
  3. focus on past events instead of future events.

The paper also included several examples which were assessed for each of the above Approaches sometimes with similar and sometimes with differing conclusions.

Then followed an extensive discussion on various examples; there were a number of comments and questions from various Board members, one of whom proposed that perhaps the DP should not provide definitive answers. One of the main difficulties in applying the definition seemed to relate to the 'obligating event', i.e. it was not always obvious.

None of the Board members appeared to like Approach 1. Many of the Board members appeared to be inclined towards Approach 2 as a preference because the liability would be built over time; however when the vote was drawn the views were split between Approaches 2 and 3.

One Board member suggested (and many supported this suggestion) that the Approaches should be re-ordered as Approach 1 (last event is an obligating event); Approach 3 (first event is an obligating event) and Approach 2 (first event and benefits).

Another Board member questioned the assumption in the paper about an unavoidable obligation (paragraph 72(c)) which states that the entity cannot stop operating as a going concern (and therefore the obligation is unavoidable), which, that Board member believed, was inconsistent with current IAS 37. It was suggested that this issue should be raised as a question to respondents.

The Staff will revise the paper based on the feedback from the discussion.

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