The FASB on June 2, 2021, reaffirmed much of a proposal on the conceptual definition of a liability, eliminating words that could confuse a chapter for elements of financial statements.
The board in 2020 issued Proposed FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting —Chapter 4, Elements of Financial Statements, to include defining a liability as “a present obligation of an entity to transfer an economic benefit,” characterized as “a present obligation” which “requires an entity to transfer or otherwise provide economic benefits to others.”
Board members affirmed that as proposed the words “probable,” “future,” and the term “past transactions or events” should not be included in the definition of a liability, maintaining consistency with the proposed definition of an asset.
“We had this discussion a couple of weeks ago when we talked about assets basically we’re creating a mirror image, not necessarily symmetrical accounting but a mirror image,” FASB member Harold Schroeder said. “And I think it would be very difficult to make this operational if we were not to eliminate these terms here when we did in the previous discussion,” he said.
The board also reaffirmed that “an obligation that requires an entity to transfer or otherwise provide economic benefits to others should meet the definition of a liability,” and not to add illustrative examples related to “distinguishing between liabilities and equity,” among other items.
Much of the discussion surrounded wording, with a goal of ensuring that the new concepts chapter 4 is clearly written, does not included redundancies and would be useful to this and future boards.
A reoccurring theme is that companies might have misunderstood the proposal and therefore suggested changes that were not appropriate for an internal guide. Many comment letters, for example, suggested changes that were relevant to actual accounting standards, the discussions indicated.
The conceptual framework is an internal guide the board uses to develop and amend U.S. GAAP. It is not GAAP.
Discussions also continued about the conceptual definition of an asset, to determine whether to remove the term “control” from the asset definition. The board voted 5 to 2 to remove the word “control” from the asset definition, believing the term would be redundant and could potentially be misapplied.
FASB Vice Chair James Kroeker and board member Christine Botosan were the two dissents.
Botosan said the term “control” is important enough that it should be included in the definition of an asset, stating “the feedback that we heard overwhelmingly also supported included that term in the definition.” Kroeker said “control is an important element of having an asset” and removing the word could pose issues for the guide later on.
The board will continue discussions mid-July, including on other miscellaneous issues.
This article originally appeared in the June 3, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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