Ch 4 (pt.2) Flashcards
For a liability to exist, three criteria must all be satisfied:
(a) the entity has an obligation
(b) the obligation is to transfer an economic resource (see paragraphs 4.36–4.41); and
(c) the obligation is a present obligation that exists as a result of past events (see paragraphs 4.42–4.47).
- The first criterion for a liability is that the entity has an obligation.
- is a duty or responsibility that an entity has no practical ability to avoid. It is always owed to another party (or parties). The other party (or parties) could be a person or another entity, a group of people or other entities, or society at large. It is not necessary to know the identity of the party (or parties) to whom the obligation is owed.
obligation
If one party has an obligation to transfer an economic resource, it follows that another party (or parties) has a___________ that economic resource. However, a requirement for one party to recognise a liability and measure it at a specified amount does not imply that the other party (or parties) must recognise an asset or measure it at the same amount.
For example, particular Standards may contain different recognition criteria or measurement requirements for the liability of one party and the corresponding asset of the other party (or parties) if those different criteria or requirements are a consequence of decisions intended to select the most relevant information that faithfully represents what it purports to represent.
right to receive
Many obligations are established by contract, legislation or similar means and are legally enforceable by the party (or parties) to whom they are owed.
Obligations can also arise, however, from an entity’s ________,_________,________ if the entity has no practical ability to act in a manner inconsistent with those practices, policies or statements.
The obligation that arises in such situations is sometimes referred to as a ‘_______________’.
customary practices,
published policies or
specific statements
constructive obligation
In some situations, an entity’s duty or responsibility to transfer an economic
resource is _____________________.
Such actions could include:
. In such situations, the entity has an obligation if it has no practical ability to avoid taking that action.
conditional on a particular future action that the entity itself may
take
-operating a particular business or -operating in a particular market on a specified future date, or
-exercising particular options within a contract
A conclusion that it is appropriate to prepare an entity’s financial statements
on a going concern basis also implies a conclusion that the entity has ?
no practical ability to avoid a transfer that could be avoided only by liquidating the entity or by ceasing to trade.
The factors used to assess whether an entity has the practical ability to avoid
transferring an economic resource may depend on the nature of the _________? .
For example, in some cases, an entity may have no practical ability to avoid a transfer if any action that it could take to avoid the transfer would have economic consequences significantly more adverse than the transfer itself. However, neither an intention to make a transfer, nor a high likelihood of a transfer, is sufficient reason for concluding that the entity
has no practical ability to avoid a transfer.
entity’s duty or responsibility
In some cases, it is uncertain whether an obligation exists. For example, if
another party is seeking compensation for an entity’s alleged act of
wrongdoing, it might be uncertain whether the act occurred, whether the
entity committed it or how the law applies. Until that existence uncertainty is resolved—for example, by a court ruling—it is uncertain whether the entity has an obligation to the party seeking compensation and, consequently, whether a liability exists. (Paragraph 5.14 discusses recognition of liabilities whose existence is uncertain.)
read lng
The second criterion for a liability is that the obligation is to?
transfer an economic resource.
To satisfy this criterion, the obligation must have the potential to require the
entity to transfer an economic resource to another party (or parties). For that
potential to exist,_______________?
—the transfer may, for
example, be required only if a specified uncertain future event occurs. It is
only necessary that the obligation already exists and that, in at least one
circumstance, it would require the entity to transfer an economic resource.
it does not need to be certain, or even likely, that the entity
will be required to transfer an economic resource
An obligation can meet the definition of a liability even if the probability of a
transfer of an economic resource is_____.
Nevertheless, that ____ probability
might affect decisions about what information to provide about the liability and how to provide that information, including decisions about whether the liability is recognised (see paragraphs 5.15–5.17) and how it is measured.
low
Obligations to transfer an economic resource include, for example:
(a) obligations to pay cash.
(b) obligations to deliver goods or provide services.
(c) obligations to exchange economic resources with another party on
unfavourable terms. Such obligations include, for example, a forward
contract to sell an economic resource on terms that are currently unfavourable or an option that entitles another party to buy an economic resource from the entity.
(d) obligations to transfer an economic resource if a specified uncertain future event occurs.
(e) obligations to issue a financial instrument if that financial instrument
will oblige the entity to transfer an economic resource.
Instead of fulfilling an obligation to transfer an economic resource to the
party that has a right to receive that resource, entities sometimes decide to,
for example:
(a) settle the obligation by negotiating a release from the obligation;
(b) transfer the obligation to a third party; or
(c) replace that obligation to transfer an economic resource with another
obligation by entering into a new transaction.
In this situations described, an entity has the obligation to transfer an economic resource until it has settled, transferred or replaced that obligation.
The third criterion for a liability is that the obligation is a ?
present obligation that exists as a result of past events.
A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits or taken an action;
and
(b) as a consequence, the entity will or may have to transfer an economic
resource that it would not otherwise have had to transfer.
The economic benefits obtained could include, for example, goods or services.
The action taken could include, for example, operating a particular business or operating in a particular market. If economic benefits are obtained, or an action is taken, over time, the resulting ______________ over that time.
present obligation may accumulate
If new legislation is enacted, a present obligation arises only when, as a
consequence of obtaining economic benefits or taking an action to which that legislation applies, an entity will or may have to transfer an economic
resource that it would not otherwise have had to transfer.
The enactment of legislation is not in itself sufficient to give an entity a present obligation. Similarly, an entity’s customary practice, published policy or specific statement of the type mentioned in paragraph 4.31 gives rise to a present obligation only when, as a consequence of obtaining economic benefits, or taking an action, to which that practice, policy or statement applies, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.
read and understand
A present obligation can exist even if a transfer of economic resources cannot
be enforced until some point in the future. For example, a contractual liability to pay cash may exist now even if the contract does not require a payment until a future date. Similarly, a contractual obligation for an entity to perform work at a future date may exist now even if the counterparty cannot require the entity to perform the work until that future date.
true or false
true
An entity does not yet have a present obligation to transfer an economic
resource if ______________?
For example, if an entity has entered into a contract to pay an employee a salary in exchange for receiving the employee’s services, the entity does not have a present obligation to pay the salary until it has received the employee’s services. Before then the contract is executory— the entity has a combined right and obligation to exchange future salary for future employee services
it has not yet satisfied the criteria in paragraph 4.43, that is, if it
has not yet obtained economic benefits, or taken an action, that would or
could require the entity to transfer an economic resource that it would not
otherwise have had to transfer.
The _____________ is the right or the group of rights, the obligation or the
group of obligations, or the group of rights and obligations, to which recognition criteria and measurement concepts are applied.
unit of account
A unit of account is selected for an asset or liability when considering how
________________________?
recognition criteria and measurement concepts will apply to that asset or
liability and to the related income and expenses
In some circumstances, it
may be appropriate to select _________ for recognition and a ____________ for measurement. For example, contracts may sometimes be recognised individually but measured as part of a portfolio of contracts. For presentation and disclosure, assets, liabilities, income and expenses may need to be aggregated or separated into components.
one unit of account
different unit of account
If an entity transfers part of an asset or part of a liability, the unit of account
may change at that time, so that the transferred component and the retained component become ____________?
separate units of account
A unit of account is selected to provide useful information, which implies
that:
(a) the information provided about the asset or liability and about any related income and expenses must be relevant. Treating a group of rights and obligations as a single unit of account may provide more relevant information than treating each right or obligation as a separate unit of account if, for example, those rights and obligations:
(i) cannot be or are unlikely to be the subject of separate transactions;
(ii) cannot or are unlikely to expire in different patterns;
(iii) have similar economic characteristics and risks and hence are
likely to have similar implications for the prospects for future net cash inflows to the entity or net cash outflows from the entity; or
(iv) are used together in the business activities conducted by an entity to produce cash flows and are measured by reference to estimates of their interdependent future cash flows.
(b.) the information provided about the asset or liability and about any related income and expenses must faithfully represent the substance of the transaction or other event from which they have arisen.
Therefore, it may be necessary to treat rights or obligations arising from different sources as a single unit of account, or to separate the rights or obligations arising from a single source (see paragraph 4.62). Equally, to provide a faithful representation of unrelated rights and obligations, it may be necessary to recognise and measure them separately.
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