IASB June 2008
As part of its joint project with the FASB, the Board considered how to determine when statutes, laws and regulations give rise to a liability and how to deal with uncertainty when ascertaining the existence of a liability.
Statutes, laws and regulations
The Board noted that an entity may be subject to the requirements in statutes, laws and regulations, yet a government or other party cannot enforce those requirements until the entity violates the statute, law or regulation or an event occurs that triggers the requirements. The Board discussed three examples - an environmental obligation, a statutory warranty and a speeding ticket and tentatively decided that an entity:
- does not have a present unconditional obligation to comply with a statute that is not yet effective,
- does not have a present unconditional obligation for expected future actions or intentions,
- does not have a present unconditional obligation to transfer economic resources merely because it has to comply with the law. An obligating event must also have occurred,
- has a present unconditional obligation at the reporting date when an entity violates a requirement or another obligating event has occurred,
- has a present unconditional obligation that has an associated conditional obligation (a stand ready obligation) when a statute requires an entity to provide risk protection. That requirement results in an implicit contractual obligation between the two parties,
- has a present unconditional obligation that has an associated conditional obligation when an 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 deal with uncertainties in the definition, in the guidance accompanying the definition or in the criteria for recognition. To apply the conceptual definition of a liability in a practical manner, the Board tentatively decided to deal with uncertainty in the accompanying guidance. As well, the Board discussed how to apply the definition. The Board tentatively decided that the definition should be applied by judging whether a liability exists on the basis of the facts and circumstances at the end of the reporting period. Once it is judged that a liability exists, uncertainty about the amount of the liability would be taken into account in measurement. The Board also tentatively decided that this judgemental approach can be applied neutrally when ascertaining the existence of any element of the financial reports when there are uncertainties and that additional guidance should be developed on how these judgements can be made in a comparable manner at a standards level.
The Board considered additional situations to evaluate the robustness of the working definition of a liability. With regard to the proposed working definition of a liability, the Board directed the staff to consider revising the definition:
- to include an additional reference that an economic obligation must be unconditional, and
- to replace the description that an economic obligation is something that is capable of resulting in ‘cash outflows or reduced cash inflows, directly or indirectly, alone or together with other economic obligations’ with ‘provision of an economic resource’.
Also, the Board reviewed and agreed with the summary of tentative decisions made and its proposed working definition, including the suggested revisions above, as a basis for staff to begin drafting these aspects of the discussion paper on elements and recognition.
The FASB discussed these issues and proposals concerning the proposed working definition of a liability and reached similar conclusions at its meeting on 25 June 2008.