Project Update

Conceptual Framework—Elements and Recognition

Latest revisions:  As of 21, April 2009 (Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the IASB and FASB (the Boards). It was prepared by the staff and is for the information and convenience of the Boards’ constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.

Project Objective
Decisions Reached at the Last Meeting
Summary of Decisions Reached to Date
Next Steps
Board/Other Public Meetings
Background Information
*Contact Information

Objectives Elements and Recognition Phase

The objectives of the Elements and Recognition phase, are to refine and converge the Boards’ frameworks as follows:

• Revise and clarify the definitions of asset and liability.

   

• Resolve differences regarding other elements and their definitions.

   

• Revise the recognition criteria concepts to eliminate differences and provide a basis for resolving issues such as derecognition and unit of account.

   

Decisions Reached at the Last Meeting

IASB Update October 2008
FASB Action Alert—October 20, 2008 joint meeting

Summary of Decisions Reached to Date (10/31/2008)

Asset Definition

The Boards agreed that the current frameworks’ existing asset definitions have the following shortcomings:

• Some users misinterpret the terms “expected” (IASB definition) and “probable” (FASB definition) to mean that there must be a high likelihood of future economic benefits for the definition to be met; this excludes asset items with a low likelihood of future economic benefits.

   

• The definitions place too much emphasis on identifying the future flow of economic benefits, instead of focusing on the item that presently exists, an economic resource.

   

• Some users misinterpret the term “control” and use it in the same sense as that used for purposes of consolidation accounting. The term should focus on whether the entity has some rights or privileged access to the economic resource.

   

• The definitions place undue emphasis on identifying the past transactions or events that gave rise to the asset, instead of focusing on whether the entity had access to the economic resource at the balance sheet date.

   

The Boards have tentatively adopted the following working definition of an asset:

An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have.

Accompanying text will amplify the asset definition by describing present, economic resource, and right or other access that others do not have:

• Present means that on the date of the financial statements both the economic resource exists and the entity has the right or other access that others do not have.

   

• An economic resource is something that is scarce and capable of producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources. Economic resources that arise from contracts and other binding arrangements are unconditional promises and other abilities to require provision of economic resources, including through risk protection.

   

• A right or other access that others do not have enables the entity to use the economic resource and its use by others can be precluded or limited. A right or other access that others do not have is enforceable by legal or equivalent means.

   

Liability Definition

The Boards agreed that the current frameworks’ existing liability definitions have the following shortcomings:

• Some users misinterpret the terms “expected” (IASB definition) and “probable” (FASB definition) to mean that there must be a high likelihood of future outflow of economic benefits for the definition to be met; this excludes liability items with a low likelihood of a future outflow of economic benefits.

   

• The definitions place too much emphasis on identifying the future outflow of economic benefits, instead of focusing on the item that presently exists, an economic obligation.

   

• The definitions place undue emphasis on identifying the past transactions or events that gave rise to the liability, instead of focusing on whether the entity has an economic obligation at the balance sheet date.

   

• It is unclear how the definition applies to contractual obligations.

   

The Boards have tentatively adopted the following working definition of a liability:

A liability of an entity is a present economic obligation for which the entity is the obligor.

Accompanying text will amplify the liability definition by describing present, economic obligation, and obligor:

• Present means that on the date of the financial statements both the economic obligation exists and the entity is the obligor.

   

• An economic obligation is an unconditional promise or other requirement to provide or forgo economic resources, including through risk protection.

   

• An entity is the obligor if the entity is required to bear the economic obligation and its requirement to bear the economic obligation is enforceable by legal or equivalent means.

   

The Boards agreed that the existence of a present obligation distinguishes a liability from a general risk. A present economic obligation conceptually exists when an entity is committed to a particular action(s) that is capable of resulting in cash flows and there is a mechanism to enforce that economic obligation against the entity. The Board also agreed that laws and regulations are examples of mechanisms and are not, by themselves, present obligations.

The Boards will further develop and refine the working definition of a liability after considering the implications of comment letters and redeliberations in their joint project on Financial Instruments with Characteristics of Equity.

Stand Ready Obligations

The Boards agreed that it is helpful to analyze contracts and other binding agreements to identity whether they contain unconditional and conditional obligations. An unconditional obligation requires performance to occur now or over a period of time, whereas a conditional obligation requires performance to occur if an uncertain future event occurs. In situations where a conditional obligation is identified, it can be helpful to assess if there is an accompanying unconditional obligation that presently requires the entity to perform. The Board also agreed that noncontractual scenarios can be analyzed to identify unconditional and conditional obligations.

Statutes, Laws, and Regulations

The Board noted that an entity may be subject to the requirements of a statute, law, or regulation, yet a government or other party cannot enforce those requirements until the entity violates the statute, law, or regulation or until an event occurs that triggers the requirements. The Boards decided the following:

1. An entity does not have a present unconditional obligation

    

   1. To comply with a statute that is not yet effective,

       

   2. For future actions it expects or intends to take but cannot be compelled to take, and

       

   3. To transfer economic resources merely because it must comply with the law. An obligating event must also have occurred.

       

2. An entity has a present unconditional obligation

    

   1. At the reporting date when the entity violates a requirement or when another obligating event has occurred,

       

   2. That has an associated conditional obligation (a stand-ready obligation) when a statute requires the entity to provide risk protection. That requirement results in an implicit contractual obligation between the two parties, and

       

   3. That has an associated conditional obligation when the entity separately agrees to bear another’s risk that arises from being subject to a statute.

       

Dealing with Uncertainties

Uncertainties result from situations where evidence is lacking or facts are unclear. The Board considered whether to address uncertainties about whether a liability exists in the guidance accompanying the definition or in the criteria for recognition. The Boards decided to address uncertainty in the guidance accompanying the definitions of an asset and a liability. If an entity is uncertain about whether a liability exists, that entity should make a neutral judgment based on its understanding of the facts and circumstances at the end of the reporting period. If it is judged that a liability exists, uncertainty about the amount of the liability would be taken into account in measurement. The Boards also decided that additional guidance should be developed on how those judgments can be made in a comparable manner at a standards level.

Next Steps

The boards will consider at future meetings how the working definition of a liability interacts with the boards’ joint project on financial instruments with characteristics of equity.

As well, the staff plans to begin discussions with the Boards on three areas that have not previously been addressed:

1. Other Elements

    

   The FASB Concepts Statements presently identify more elements than does the IASB Framework, and the two frameworks define differently those elements that are common. The Boards’ approach will focus initially on converging and defining only those key elements that are defined today in the IASB and FASB Frameworks. As well, the Boards will need to consider the extent to which, and if so how, to define elements that are not defined today, such as comprehensive income.

2. Unit of Account

    

   The Boards' current frameworks provide little or no guidance on how the unit of account should be determined. Discussions of various standard projects have raised the following issues regarding the identification of the appropriate unit of account:

   1. Should similar things be accounted for together (rather than separately)?

       

   2. Should an entity recognize assets and/or liabilities for contracts that are still fully executory? If so, which assets and liabilities should it recognize, and should the entity account for and report them separately or as a single net item?

       

   3. Should some "related" assets and liabilities be accounted for together or netted?

       

   In this part of Phase B, the Boards will consider whether and how to develop guidance to assist in analyzing such issues.

3. Recognition and Derecognition

    

   Each Board’s current framework describes specific recognition criteria, some of which are similar and some of which are different. Neither Board's frameworks contain criteria as to when an item should be derecognized. The Boards plan to revise their recognition criteria concepts to eliminate those differences and provide a framework for resolving derecognition issues.

Board/Other Public Meetings

View the FASB and IASB meeting handouts, minutes, and updates.

Background Information

The Boards expect that their joint conceptual framework project will benefit from their standard-setting projects and research being conducted by others on behalf of the Boards. Activities related to elements and recognition include the following:

Revenue Recognition

The joint FASB and IASB Revenue Recognition project is developing guidance for revenue recognition.

FASB Revenue Recognition Project
IASB—Liabilities and Revenue Recognition.

Financial Instruments with Characteristics of Equity (formerly Liabilities and Equity)

The Financial Instruments with Characteristics of Equity project is considering improvements to the definitions of liabilities, equity, and assets. The FASB issued Preliminary Views (PV), Financial Instruments with Characteristics of Equity and IASB issued Discussion Paper, Financial Instruments with Characteristics of Equity—Invitation to Comment, based on the FASB PV. The FASB and IASB plan to use the input received on these documents as the basis for a joint project to develop a high-quality standard.

FASB Financial Instruments with Characteristics of Equity Project
IASB Financial Instruments with Characteristics of Equity Project
Preliminary Views, Financial Instruments with Characteristics of Equity

Derecognition

The IASB Derecognition of Financial Instruments project is developing a new approach to derecognition with an initial focus on financial assets. The project will later consider the feasibility of developing a broader derecognition standard that would apply to all types of assets.

IASB Derecognition Project

*Contact Information

Li Li Lian
IASB Project Manager
llian@iasb.org