The Revised Conceptual Framework- Part II

We have been able to rub minds on the basics of the conceptual framework while trying to do justice to its key highlights. Shall we shoot on other parts of the framework? Please enjoy the meal!!!

Quick recall; we stopped at the revised position of the framework on the definition of Assets.

Liabilities

The previous version of the conceptual framework defined liability as a present obligation of the entity arising from past event, settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Brethren, this looks like a master piece, right? Anyway, this definition is now stale, follow through please!

The revised conceptual framework defines a liability as a present obligation of the entity to transfer an economic resource as a result of past events. Precise but all encompassing! The framework defines obligation in this context to mean an endeavor an entity has no practical ability to avoid. Exactly, the way single guys include budget for calling girl friends on their monthly excel budget because heavens can fall, if they do not fulfil this key performance obligation, I hope I haven’t tagged your girlfriend a liability? LOL!

 One can also infer that a liability has to be a present obligation, though could result into cash flows payable at a later date. This then justifies why we discount future cash flows to recognize liabilities, because we want to estimate in today’s terms what the value of the liability is.  Liabilities of course must have arisen from past events (legally or constructively). What this revised framework also takes care of is over-emphasis of the old definition on outflow of resources by espousing that it is only an obligation to transfer resources.

Esteemed readers, when you are confused about liabilities, please ask yourself whether you have the practical ability to avoid a cause of action? If Yes, no liability please, else, recognize liability.

Income and Expenses

The old version of the framework defines income as increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity. The revised framework, however, defines income as an increase in assets, or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims and expenses as decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claim.

Forget it English, anything that increases asset or reduces liability is an income, anyway it is not contribution from owners of the business. So, you wouldn’t call issue of share for example, an income. In the same vein, anything that reduces assets or increases liability is an expenses, again, it has to be other than distribution to owners. Brethren, Dividend is never an expenses. You want to start thinking right? Please no thinking is required here. Dividend payment is though reducing an asset (cash) but represents distributions to equity holders.

Getting bored? Please let me wrap up with other key issues addressed in the revision.

The framework also explicitly address stewardship. Just like the old version, it perceives general purpose financial reporting as presentation of financials to different users without having to re-design or re-create financial statements that address the needs of individual users. The revised framework now upholds that users assess stewardship by the management by issuing financials.

The framework now better restores our lovely concept, Prudence. Why most persons call accountants, stingy! The IASB explained that in making judgment, prudence has to be factored in. overcast and under-cast of elements of financial statement is totally disallowed.   

Ladies and gentlemen, the framework espouses that measurement uncertainty does not mean information is not useful. There are of course material information that are more useful to users of financial statement and have measurement uncertainty, you might want to take unquoted equities that has no observable input or our popular depreciation that is estimated as perfect examples.

Permit me to fall the curtains here, till we meet in my subsequent write up.

I hope justice was done to this topic? Comments would be appreciated as usual. 

Your IFRS Pal,

Sobur ‘Lekan Bello.