Conceptual Framework Phase B — Elements and Recognition

Date recorded:

Definition of an asset

The staff presented the following modified version of the definition of an asset and the essential characteristics of an asset incorporating the decisions made at the July 2006 meeting:

An asset is a present economic resource to which the entity has a present right or other privileged access

An asset of an entity has three essential characteristics:

  1. Present means that both the economic resource and the right or other privileged access to it exist on the date of the financial statements.
  2. An economic resource is something that has positive economic value. It is scarce and capable of being used to carry out economic activities such as production and exchange. An economic resource can contribute to producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources. Economic resources include non-conditional contractual promises that others make to the entity, such as promises to pay cash, deliver goods, or render services. Rendering services includes standing ready to perform or refraining from engaging in activities that the entity could otherwise undertake.
  3. A right or other privileged access enables the entity to use the present economic resource directly or indirectly and precludes or limits its use by others. Rights are legally enforceable or enforceable by equivalent means (such as by a professional association). Other privileged access is not enforceable, but is otherwise protected by secrecy or other barriers to access.
The Board debated this definition and the related elaboration of the 'essential characteristics' in depth and made the following decisions:
  • Remove the second 'present' in the definition as it is redundant
  • Rephrase the wording of the elaboration of an economic resource by bringing together sentences two and three.
  • Remove the last two sentences of the elaboration of an economic resource and include them in an amplifying text or similar.

Board members tested various items that might represent an asset against the proposed definition in order to work out what an asset represented. Particularly it was discussed what represents the asset for the holder of a call option for goods. It was noted that in this case the option is the right to the resource and that the promise of the counterparty to deliver the goods is the resource.

The Board agreed to proceed on the basis of the definition outlined by the staff (with amendments noted above) and asked the staff to continue investigations including the FASB work regarding this issue.

Distinguishing liabilities from equity

The staff presented a paper discussing issues relating to the definitions of liabilities and equity and the distinction between them. The paper identified a number of cross-cutting items associated with liabilities and equity. The Board was asked to decide whether the staff should explore on the following key issues:

  • Should there be a distinction between liabilities and equity?
  • Should there by only two elements?

The first issue considers whether a single element should be defined to comprise what liabilities and equity now comprise.

Such an element might be termed 'claims' and would be the counterpart to assets. The second issue considers whether three or more elements should be defined in place of what the existing framework define as liabilities and equity. One approach would be to restrict the terms liability and equity to those items that are either 'pure' liabilities or 'pure' equity, and to define one or more elements.

The Board decided to undertake the project and asked the staff to present a revised paper at a future meeting.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.