Conceptual Framework Phase B — Elements and Recognition

Date recorded:

Before the staff could introduce the topic, a Board member challenged the meeting's working definition of a liability, which he saw as precluding performance obligations (and thus contrary to the Board's work in the revenue section of the Framework project). In his view the clause addressing 'economic obligations' displayed tortured reasoning:

An economic obligation is something that is capable of resulting in cash outflows or reduced cash inflows, directly or indirectly, alone or together with other economic obligations.

The Board member warned that restricting the definition to cash outflows/ reduced cash inflows would have serious unintended consequences-especially for the Board's standards on share-based payments. After some debate, the staff agreed that 'economic resource' could be substituted for 'cash'. In addition, the staff noted that the FASB, in education session, had suggested that the introduction to the definition should be amended as follows:

A liability of an entity is a present unconditional economic obligation that is enforceable against the entity.

The Board noted the amendment and agreed.

When do Statutes, Laws and Regulations give rise to a Liability?

The Board agreed that when an event occurs that triggers the requirements of a statute, another party can demand that the entity perform as specified by the statute. The triggering events and the performance required vary by statute and can depend on the facts and circumstances of the situation. The Board discussed two of the three staff examples.

Carbon emissions: At an interim reporting date a company emitting carbon is within its emissions limit and has sufficient emission rights to cover those emissions. It expects to emit more carbon during the whole of its financial year than it is allowed or for which it hold emission rights.

The Board (by a majority) agreed that, at the interim reporting date, the entity does not have a liability. It has sufficient emission rights to cover its current emissions. As such, it has not breached its statutory obligations and has no liability. Board members noted that the expected exceeding of the emissions limit later in the fiscal year would be a matter for disclosure at the interim reporting date.

Speeding ticket: Whether an obligation exists would depend on facts and circumstances. For example, if a driver triggers a speed camera, it may take several days before the speeding ticket is delivered. In other cases, it will be delivered by the roadside. Thus, there may be some element of estimation of 'incurred but not reported' obligations.

In addition, the Board agreed that statutory obligations could be either unconditional; conditional; or unconditional with an associated conditional element. The Board cautioned the staff to be careful in how they explained this: the obligation was unconditional, but it can only be measured by reference to the conditionality.

Dealing with Uncertainty about the Existence of a Liability

The Board agreed that uncertainty about existence of an asset or a liability should be addressed when ascertaining whether the definition of the element is met. Thus, uncertainty will be addressed in how the definitions are to be applied-in the accompanying guidance for applying the definition.

The staff was encouraged by some Board members not to be apologetic about this approach. The purpose of the Framework was not to give preparers 'safe harbours' in difficult areas. There were plenty of examples of when determining whether there is a liability is a difficult judgement call.

Applying the definition

The Board had a tortured debate about applying the definition to specious/ frivolous lawsuits and 'The Hamburger'. There was eventual agreement that The Hamburger was an 'incurred but not reported' type of obligation. The lawsuit was more problematical because even in a specious lawsuit, the defendant will (i) expect to win and pay nothing; but (ii) will need to be represented by a lawyer. However, a majority of the Board agreed that the correct measure of the liability in this example would be zero (with disclosure).

The Board agreed that additional standards-level guidance should be developed on how to apply the concepts in the Framework.

Summary of Tentative Decisions/ Liability Definition Examples

The Board agreed two documents without debate: a summary of the Tentative Decisions taken on this phase of the Framework project and a series of examples of applying the liability definition. Both documents would form the basis for drafting the Discussion Paper on this Phase of the Framework project.

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