Conceptual Framework to Include Updated Definitions of Assets, Liabilities

The IASB agreed to develop new definitions of assets and liabilities for its upcoming revision to its Conceptual Framework. The board considers the document to be the backbone of its standard-setting process.

The IASB on July 18, 2016, determined some important elements of its upcoming revision to the Conceptual Framework for IFRS.

The international board considers the document to be the backbone of its standard-setting process.

After hours of discussion, the board agreed to revise the definitions of assets and liabilities, some terms to support those definitions, and debated the wording that will help the board decide how to measure different types of assets and liabilities.

The decisions, which need to be finalized, largely confirmed proposals outlined in the May 2015 Exposure Draft (ED) No. 2015-3, Conceptual Framework for Financial Reporting .

The IASB decided that an asset has the “potential to produce” economic benefits, and a liability is an obligation that has the “potential to require” the entity to transfer an economic resource. The board agreed to confirm that an economic resource is a right that has the potential to produce economic benefits.

The new definitions remove from the current Conceptual Framework the definitions of assets and liabilities that say they produce “expected” inflows or outflows of economic benefits.

In addition, the IASB agreed that assets and liabilities should be recognized if they provide readers of financial statements with relevant information and a faithful representation of the transaction. The board agreed to scrap a provision in ED No. 2015-3 that said an item should be recognized if the benefits of providing the information exceeded the costs. IASB members agreed to remove the description from the 2015 exposure draft because businesses could come up with plenty of reasons for not measuring a particular item.

“Going back to a former life, I think preparers [could say], ‘I don’t see any use to our shareholders for this information. No one’s asked a question on it. Why do I spend a penny?'” said Kabureck, a former chief accounting officer at Xerox Inc. “They should rely on relevance. They should not rely on cost concern.”

The IASB had a more difficult time coming up with wording for the measurement of different types of assets and liabilities.

The board wants to be consistent in determining when certain items should be measured at fair value versus historical cost, but this is a tough — and often controversial — task.

“It must be possible to do something here,” IASB Chairman Hans Hoogervorst said. “Or do we not say anything and just admit we are totally inconsistent, we never have any principles, we just do what we want?”

IASB member Mary Tokar suggested that the board try to outline characteristics or principles as opposed to hard-and-fast rules.

“What maybe we’re trying to do here is identify features that we think are relevant to consider so that… when we make a decision on the standards level, we explain in the standard how we considered each of those factors in reaching our measurement conclusion,” she said.

Rachel Knubley, a technical principal with the IASB’s research staff, said the measurement chapter in the Conceptual Framework would always require judgment.

“This measurement chapter is never going to give us a decision tree that says, ‘Ooh, we’ve got this type of asset, this is going to give us this type of measurement,'” she said. “It’s not going to work like that. It is going to be a judgment call on these things.”

She said the research staff would try to capture the importance of judgment in a future draft and come back to the board.

“I think we’re saying, don’t expect miracles next time, but we’ll certainly give it a go,” she said.

The draft conceptual framework attempts to refine the definitions of what the IASB calls the “building blocks” of financial statements: assets, liabilities, equity, income, and expenses. It also aims to describe the differences between historical cost and current value. The idea is for the framework to help the IASB set consistent accounting standards.

The framework is regarded by many financial professionals as one of the IASB’s most important efforts as it develops new priorities for its standard-setting and moves away from its international accounting convergence efforts with the FASB. Many financial executives and auditors have told the IASB that it needs to complete the framework to ensure that its standards fit a common, unifying set of underlying principles.

The IASB says it will finalize the framework in 2017.

The Conceptual Framework originally was a joint project with the FASB, but the boards suspended work on it in 2010 to focus on more pressing needs in the wake of the 2008 financial crisis.

The IASB revived the project in 2012, independent of the FASB, which is working on its Framework.

In September the IASB plans to discuss other aspects it wants to include in the Framework, including the definition of equity, the process from removing an asset or liability from the balance sheet, the guidelines for presenting and disclosing information, capital maintenance, materiality, business activities and long-term management, and the reporting entity, according to the international board’s research staff.