Conceptual Framework Phase B — Elements and Recognition

Date recorded:

(afternoon only)

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.

Correction list for hyphenation

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