Conceptual framework

Date recorded:

The session has three topics—Asset definition and supporting concepts (Agenda paper 10B); Recognition (Agenda paper 10C); and Measurement (Agenda paper 10D.  Agenda paper 10A is a summary of decisions made to date.

Conceptual Framework — Asset definition and supporting concepts- Agenda paper 10B

This paper discusses the comment letters received and the staff recommendation on: (a) the proposed definitions of an asset and an economic resource; and (b) the proposed supporting concepts.  The agenda paper discusses the comments that apply to the proposed asset and liability definitions.  Comments on the terms that include “present” and “as a result of past events” will be discussed at a future meeting.

The staff presents a table summarising the existing and proposed definitions:


Existing definition

Proposed definition

Proposed supporting concept

Asset (of an entity)

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A present economic resource controlled by the entity as a result of past events.


Economic resource


A right that has the potential to produce economic benefits.


Liability (of an entity)

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

A present obligation of the entity to transfer an economic resource as a result of past events.

An entity’s obligation to transfer an economic resource must have the potential to require the entity to transfer an economic resource to another party.

Topic 1 — replacing “expected” with “potential to produce” and “potential to require”

Some respondents disagreed with the proposed definitions, stating that the change would increase the population of items identified as assets and liabilities; increase complexity and inefficiency; be inconsistent with the definitions in IAS 37 and IAS 28; and are not necessary.

The staff considers that the issues should be addressed by considering whether the proposed definitions provide sufficient guidance for items with a low probability of inflows or outflows (see agenda paper 10C and the discussion of recognition). The staff agrees with the suggestion to note in Chapter 4 that not all items meeting the definition of an asset or a liability would necessarily be recognised in the financial statements.

The staff recommends: (a) the requirements for ‘expected’ inflows or outflows of economic benefits  be removed from the definitions of an asset and a liability; and  (b) the Conceptual Framework should instead specify that:  (i) to meet the definition of an economic resource and, hence, an asset, a  right should have the ‘potential to produce’ economic benefits; and  (ii) to meet the definition of a liability, an obligation should have the ‘potential to require’ the entity to transfer an economic resource.

Topic 2 — Defining an asset as a “right”

Most respondents raised concerns on the proposal to define an asset as a right.  Some were concerned about omitting “or other source of value” and others said that the most common understanding of the term right does not encompass items such as know-how and goodwill.  There were also concerns in relation to the right of access to public goods.  They agree that those rights are not assets of an entity but they disagreed with the rationale in the ED.  Instead, they consider that they do not meet the definition of assets because the economic resources are not controlled by the entity.

The staff is recommending that the Board confirm the proposals, and that decisions about specific items should be taken when the Board is developing IFRS standards for those items.

The staff recommends retaining the proposal in the ED.

Topic 3 — Concepts explaining “controlled by the entity”

The staff noted that there was little feedback received on this topic and recommends retaining the proposal in the ED.

Conceptual Framework-recognition — Agenda paper 10C

The ED proposes that assets and liabilities should be recognised if this provides users of financial statement with (a) relevant information; (b) a faithful representation of the item; and (c) the benefits of providing that information exceeds its costs. The staff noted the following issues raised by respondents:

Overall approach and removal of probability criterion

Many of the respondents expressed general support for the proposal. However, some respondents disagreed with the approach.  Those respondents thought they were too abstract and subjective and that entities will recognise more assets and liabilities with a low probability of inflows or outflows of economic benefits.

The staff is recommending that the Board confirm the proposed approach in the ED. They considered prescribing probability criteria but concluded that it is difficult to set out a probability approach that could be applicable across all of the Standards.  They think it would be more helpful to provide more direction by enhancing the discussion on assets and liabilities with a low probability of inflows or outflows of economic benefits.

Application of the cost constraint

Some respondents expressed concerns about the proposal to identify cost-benefits considerations as one of the three criteria to be considered in recognition decisions. They argue that the cost constraint should not be given a level of importance similar to that of relevance and faithful representation.  Rather, it is a general constraint, or overarching concept, in financial reporting and that materiality provides a more conceptually sound basis for the decision of whether or not to recognise an asset or liability.

The staff accepts the first concern because it will be consistent with chapter 2 and 6. The staff also noted that the concepts of materiality and cost constraints are not alternatives and have different purposes.  They are recommending that the revised Conceptual Framework identify only relevance and faithful recognition as the criteria for recognition, and not cost-benefit. 

Conceptual Framework — Measurement — Factors to consider when selecting a measurement basis — Agenda paper 10D

Measurement basis

The staff propose including a description of the information provided by current cost and a discussion of the advantages and disadvantages of current cost.  However, in response to respondents who thought it was illogical to discuss current cost under the heading of historical cost that discussion will be moved to be part of the current rather than historical measurement basis.

Characteristic of the asset or liability

Some respondents said that the Conceptual Framework should not identify the characteristics of the asset or liability as a factor to consider when selecting a measurement basis and that the ED failed to explain why sensitivity to changes in value is relevant because the ED did not discuss the notion of value. The staff are recommending confirming that the characteristic of the asset or liability needs to be considered when selecting a relevant measurement basis, but they propose adding more guidance and deleting the reference to variability in cash flows. 

Contributions to cash flows

The ED identified how an asset (or liability) contributes to cash flows as another factor to consider in selecting a measurement basis. The staff noted that a few respondents did not support the idea of referring to business activities. The staff believes that the Conceptual Framework would be enhanced by separating the principle from the supporting discussion. They think it is important to clarify situations in which a cost measurement basis provides more relevant information and cases where current value provides more relevant information, and to explain the rationale for such assessment.

Faithful representation and the enhancing qualitative characteristics

Many respondents agreed that the qualitative characteristic should be considered in the selection of a measurement basis. There were no major concerns on this area.


The staff is recommending that the measurement chapter (under the heading of current value); state that the characteristic of the asset or liability and the contribution it makes to future cash flow need to be considered when selecting a relevant measurement basis; and retain the discussion in the ED if faithful representation.

The staff noted that these recommendations are consistent with the ED.

Next steps

At the next meeting the staff expect to bring papers on (a) asymmetric treatment of gains and losses; (b) the reporting entity and going concern assumptions; (c) the definition of equity; (d) derecognition; (e) remaining aspects of the measurement chapter; (f) presentation and disclosure; (g) capital maintenance; (h) materiality; and (i) business activities and long-term investment.

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