The IASB’s Conceptual Framework
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liability if the terms of the exchange are currently unfavourable. Whether such an asset
or liability is included in the financial statements depends on both the recognition
criteria (see 8 below) and the measurement basis (see 9 below) selected for the asset or
liability, including, if applicable, any test for whether the contract is onerous. [CF 4.57].
To the extent that either party fulfils its obligations under the contract, the contract is
no longer executory. If the reporting entity performs first under the contract, that
performance is the event that changes the reporting entity’s right and obligation to
exchange economic resources into a right to receive an economic resource. That right
is an asset. If the other party performs first, that performance is the event that changes
the reporting entity’s right and obligation to exchange economic resources into an
obligation to transfer an economic resource. That obligation is a liability. [CF 4.58].
7.1.3
Substance of contractual rights and contractual obligations
The terms of a contract create rights and obligations for an entity that is a party to that
contract. To represent those rights and obligations faithfully (discussed at 5.1.2 above),
financial statements report their substance. In some cases, the substance of the rights
and obligations is clear from the legal form of the contract. In other cases, the terms of
the contract or a group or series of contracts require analysis to identify the substance
of the rights and obligations. [CF 4.59].
All terms in a contract, whether explicit or implicit, are considered unless they have no
substance. Implicit terms could include, for example, obligations imposed by statute,
such as statutory warranty obligations imposed on entities that enter into contracts to
sell goods to customers. [CF 4.60].
Terms that have no substance are disregarded. A term has no substance if it has no
discernible effect on the economics of the contract. Terms that have no substance could
include, for example:
• terms that bind neither party; or
• rights, including options, that the holder will not have the practical ability to
exercise in any circumstances. [CF 4.61].
A group or series of contracts may achieve or be designed to achieve an overall
commercial effect. To report the substance of such contracts, it may be necessary to treat
rights and obligations arising from that group or series of contracts as a single unit of
account. For example, if the rights or obligations in one contract merely nullify all the
rights or obligations in another contract entered into at the same time with the same
counterparty, the combined effect is that the two contracts create no rights or obligations.
Conversely, if a single contract creates two or more sets of rights or obligations that could
have been created through two or more separate contracts, an entity may need to account
for each set as if it arose from separate contracts in order to represent faithfully the rights
and obligations (see the discussion of unit of account at 7.1.1 above). [CF 4.62].
7.2 Definition
of
assets
As noted at 7 above, the definition of an asset is an economic resource subject to three
criteria: it is a right of the entity; it has the potential to produce economic benefits; and
it is controlled by the entity. Each is discussed in turn in the following sections. [CF 4.5].
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7.2.1 Rights
It is observed that rights that have the potential to produce economic benefits take many
forms, including:
• rights that correspond to an obligation of another party (see 7.3.2 below), for
example, rights to:
• receive cash;
• receive goods or services;
• exchange economic resources with another party on favourable terms. Such rights
include, for example, a forward contract to buy an economic resource on terms
that are currently favourable or an option to buy an economic resource; and
• benefit from an obligation of another party to transfer an economic resource
if a specified uncertain future event occurs;
• rights that do not correspond to an obligation of another party, for example, rights:
• over physical objects, such as property, plant and equipment or inventories.
Examples of such rights are a right to use a physical object or a right to benefit
from the residual value of a leased object; and
• to use intellectual property. [CF 4.6].
Many rights are established by contract, legislation or similar means. For example, an
entity might obtain rights from owning or leasing a physical object, from owning a debt
instrument or an equity instrument, or from owning a registered patent. However, an
entity might also obtain rights in other ways, for example:
• by acquiring or creating know-how that is not in the public domain (see discussion
of control at 7.2.3 below); or
• through an obligation of another party that arises because that other party has no
practical ability to act in a manner inconsistent with its customary practices,
published policies or specific statements – that is, a constructive obligation
discussed at 7.3.1 below. [CF 4.7].
Some goods or services, for example, employee services, are received and immediately
consumed. An entity’s right to obtain the economic benefits produced by such goods or
services exists momentarily until the entity consumes the goods or services. [CF 4.8].
Not all of an entity’s rights are assets of that entity; to be assets the rights must also satisfy
the other two criteria noted above (the potential to produce economic benefits,
discussed at 7.2.2 below; and, control, discussed at 7.2.3 below). For example, rights
available to all parties without significant cost – for instance, rights of access to public
goods, such as public rights of way over land, or know-how that is in the public domain
– are typically not assets for the entities that hold them. [CF 4.9].
An entity cannot have a right to obtain economic benefits from itself. Accordingly:
• debt instruments or equity instruments issued by the entity and repurchased and held
by it (for example, treasury shares) are not economic resources of that entity; and
• if a reporting entity comprises more than one legal entity, debt instruments or
equity instruments issued by one of those legal entities and held by another of
those legal entities are not economic resources of the reporting entity. [CF 4.10].
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In principle, each of an entity’s rights is a separate asset. However, for accounting
purposes, related rights are often treated as a single unit of account that is a single asset
(unit of account is discussed at 7.1.1 above). For example, legal ownership of a physical
object may give rise to several rights, including:
• the right to use the object;
• the right to sell rights over the object;
• the right to pledge rights over the object; and
• other rights. [CF 4.11].
In many cases, the set of rights arising from legal ownership of a physical object is
accounted
for as a single asset. Conceptually, the economic resource is the set of rights,
not the physical object. Nevertheless, describing the set of rights as the physical object
will often provide a faithful representation of those rights in the most concise and
understandable way. [CF 4.12].
In some cases, it is uncertain whether a right exists. For example, an entity and another
party might dispute whether the entity has a right to receive an economic resource from
that other party. Until that existence uncertainty is resolved, for example, by a court
ruling, it is uncertain whether the entity has a right and, consequently, whether an asset
exists (see 8.2.1.A below). [CF 4.13].
7.2.2
Potential to produce economic benefits
An economic resource is a right that has the potential to produce economic benefits.
For that potential to exist, it does not need to be certain, or even likely, that the right
will produce economic benefits. It is only necessary that the right already exists and
that, in at least one circumstance, it would produce for the entity economic benefits
beyond those available to all other parties. [CF 4.14].
A right can meet the definition of an economic resource, and hence can be an asset,
even if the probability that it will produce economic benefits is low. Nevertheless, that
low probability might affect decisions about what information to provide about the asset
and how to provide that information, including decisions about whether the asset is
recognised (see 8.2.1.B below) and how it is measured (see 9 below). [CF 4.15].
An economic resource could produce economic benefits for an entity by entitling or
enabling it to do, for example, one or more of the following:
• receive contractual cash flows or another economic resource;
• exchange economic resources with another party on favourable terms;
• produce cash inflows or avoid cash outflows by, for example:
• using the economic resource either individually or in combination with other
economic resources to produce goods or provide services;
• using the economic resource to enhance the value of other economic
resources; or
• leasing the economic resource to another party;
• receive cash or other economic resources by selling the economic resource; or
• extinguish liabilities by transferring the economic resource. [CF 4.16].
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Although an economic resource derives its value from its present potential to produce
future economic benefits, the economic resource is the present right that contains that
potential, not the future economic benefits that the right may produce. For example, a
purchased option derives its value from its potential to produce economic benefits
through exercise of the option at a future date. However, the economic resource is the
present right, that is the right to exercise the option at a future date. The economic
resource is not the future economic benefits that the holder will receive if the option is
exercised. [CF 4.17].
There is a close association between incurring expenditure and acquiring assets, but the
two do not necessarily coincide. Hence, when an entity incurs expenditure, this may
provide evidence that the entity has sought future economic benefits, but does not
provide conclusive proof that the entity has obtained an asset. Similarly, the absence of
related expenditure does not preclude an item from meeting the definition of an asset.
Assets can include, for example, rights that a government has granted to the entity free
of charge or that another party has donated to the entity. [CF 4.18].
7.2.3 Control
Control links an economic resource to an entity. Assessing whether control exists helps
to identify the economic resource for which the entity accounts. For example, an entity
may control a proportionate share in a property without controlling the rights arising
from ownership of the entire property. In such cases, the entity’s asset is the share in
the property, which it controls, not the rights arising from ownership of the entire
property, which it does not control. [CF 4.19].
An entity controls an economic resource if it has the present ability to direct the use of
the economic resource and obtain the economic benefits that may flow from it. Control
includes the present ability to prevent other parties from directing the use of the
economic resource and from obtaining the economic benefits that may flow from it. It
follows that, if one party controls an economic resource, no other party controls that
resource. [CF 4.20].
An entity has the present ability to direct the use of an economic resource if it has the
right to deploy that economic resource in its activities, or to allow another party to
deploy the economic resource in that other party’s activities. [CF 4.21].
Control of an economic resource usually arises from an ability to enforce legal rights.
However, control can also arise if an entity has other means of ensuring that it, and no
other party, has the present ability to direct the use of the economic resource and obtain
the benefits that may flow from it. For example, an entity could control a right to use
know-how that is not in the public domain if the entity has access to the know-how and
the present ability to keep the know-how secret, even if that know-how is not protected
by a registered patent. [CF 4.22].
For an entity to control an economic resource, the future economic benefits from that
resource must flow to the entity either directly or indirectly rather than to another party.
This aspect of control does not imply that the entity can ensure that the resource will
produce economic benefits in all circumstances. Instead, it means that if the resource
produces economic benefits, the entity is the party that will obtain them either directly
or indirectly. [CF 4.23].
The IASB’s Conceptual Framework
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Having exposure to significant variations in the amount of the economic benefits
produced by an economic resource may indicate that the entity controls the resource.
However, it is only one factor to consider in the overall assessment of whether control
exists. [CF 4.24].
Sometimes one party (a principal) engages another party (an agent) to act on behalf of,
and for the benefit of, the principal. For example, a principal may engage an agent to
arrange sales of goods controlled by the principal. If an agent has custody of an
economic resource controlled by the principal, that economic resource is not an asset
of the agent. Furthermore, if the agent has an obligation to transfer to a third party an
economic resource controlled by the principal, that obligation is not a liability of the
agent, because the economic resource that would be transferred is the principal’s
economic resource, not the agent’s. [CF 4.25].
7.3 Definition
of
liabilities
As noted at 7 above, the Framework defines a liability as a present obligation of the
entity to transfer an economic resource as a result of past events. [CF 4.2, 4.26].
For a liability to exist, three criteria must all be satisfied:
• the entity has an obligation;
• the oblig
ation is to transfer an economic resource; and
• the obligation is a present obligation that exists as a result of past events. [CF 4.27].
These criteria are discussed in turn below.
7.3.1 Obligation
The first criterion for a liability is that the entity has an obligation. An obligation is a
duty or responsibility that an entity has no practical ability to avoid. An obligation is
always owed to another party (or parties). The other party (or parties) could be a person
or another entity, a group of people or other entities, or society at large. It is not
necessary to know the identity of the party (or parties) to whom the obligation is owed.
[CF 4.28, 29].
If one party has an obligation to transfer an economic resource, it follows that another
party (or parties) has a right to receive that economic resource. However, a requirement
for one party to recognise a liability and measure it at a specified amount does not imply
that the other party (or parties) must recognise an asset or measure it at the same
amount. For example, particular standards may contain different recognition criteria or
measurement requirements for the liability of one party and the corresponding asset of
the other party (or parties) if those different criteria or requirements are a consequence
of decisions intended to select the most relevant information that faithfully represents
what it purports to represent. [CF 4.30].
Many obligations are established by contract, legislation or similar means and are legally
enforceable by the party (or parties) to whom they are owed. Obligations can also arise,
however, from an entity’s customary practices, published policies or specific statements
if the entity has no practical ability to act in a manner inconsistent with those practices,
policies or statements. The obligation that arises in such situations is sometimes referred
to as a ‘constructive obligation’. [CF 4.31].
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In some situations, an entity’s duty or responsibility to transfer an economic resource is
conditional on a particular future action that the entity itself may take. Such actions
could include operating a particular business or operating in a particular market on a
specified future date, or exercising particular options within a contract. In such
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