IASB December 2007
The Board resumed its consideration of the interaction between Chapters 1 and 2 of the new framework and the existing Framework until the entire new framework is completed. The Board focused on issues arising from the proposal to replace the term ‘reliability’ with ‘faithful representation’. The Board noted potential implications of withdrawing guidance on how to apply ‘reliability’. Therefore, the Board decided that a rubric to the new framework should inform readers about the publication of Chapters 1 and 2 and the paragraphs that were superseded. In addition, a footnote will be added to carry forward the definition of the term ‘reliability’ when it first appears in the new framework.
Elements: definition of a liability
The Board considered whether to modify its approach to developing a definition of a liability to align it more closely with alternatives being considered in the Board’s research project on liabilities and equity. That research project is expected to result in the publication of an IASB discussion paper accompanying the FASB’s recently released Preliminary Views on Financial Instruments with Characteristics of Equity. The Board considered an approach that would initially focus on defining the broader class of items that would be candidates for inclusion in a statement of financial position as either liabilities or equity, and subsequently subdivide that broader class into those items that constitute liabilities and those that constitute equity. The Board confirmed its intention to continue with an approach that converges and improves the definition of a liability, on the basis of its previous decisions to converge on and improve the definition of an asset.
The Board tentatively decided that the IASB and FASB definitions of a liability should converge by focusing on defining a liability as an economic obligation, rather than as probable future sacrifices; and should be improved by:
Also, the Board tentatively decided that essential attributes of an enforceable obligation include the involvement of a separate party and the existence of a mechanism that is capable of forcing an entity to take a specified course of action.
The Board suggested additional examples against which to test the working definition of a liability, for consideration at a future meeting. Future discussions also will consider how to deal with uncertainty about whether a liability exists, whether it is the entity’s liability, and the interaction of a working definition of a liability with potential definitions of equity.