The underlying concepts of the definition of a liability in financial reporting: A doctrinal research perspective

Abstract

Accounting literature has identified fundamental conceptual issues and uncertainties regarding the financial reporting treatment of liabilities. This paper assesses whether the underlying concepts for the definition of a liability are robust and sufficiently developed in the 2018 Conceptual Framework of the International Accounting Standards Board (IASB) to create a conceptual foundation to identify, recognise, measure and derecognise liabilities. Doctrinal research is applied to evaluate the proposed concepts by using authoritative interpretation. The outcome of the authoritative interpretation is the contribution to the accounting literature. The paper finds that the 2018 Conceptual Framework significantly improves the conceptual foundation of the identification, recognition, measurement and derecognition of liabilities. The 2018 Conceptual Framework clarifies the obligation and past event criteria of the definition of a liability and, as a result, has paved the way for removing the reference to future outflow or sacrifices in both the definition and the recognition criteria of a liability. The 2018 Conceptual Framework also implies that when meeting the definition of a liability, in principle, it appropriately triggers recognition. It also clearly defines the different measurement bases and clarifies the measurement decision process regarding liabilities, which are sufficiently based on the nature and benefits of different measurement bases and the factors of useful information. The uncertainty about the existence of a liability for incorporation in financial statements is, however, still problematic and could create uncertainty in developing related International Financial Reporting Standards (IFRSs) and in practical applications.

Keywords:

• conceptual framework
• executory contracts
• fair value
• fulfilment value
• historical cost
• liabilities
• measurement
• past event
• present obligation
• recognition

Notes

1 Current cost was only included in the final deliberations of the Conceptual Framework by the IASB and will only be applied to liabilities in exceptional cases when the other three measurement bases are not relevant.