Liabilities defined

IASB Framework definition of liabilities:A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Present obligation

Expected to give rise to an outflow of economics benefits

• The actual sacrifices are yet to be made

• Obligation is already present

• Planned obligation included if to an external party

• Legal enforceability

• Settlement of liability in various ways

• Equitable and constructive obligations

Past transactionA past transaction (or event)

ensures that only present liabilities are recorded and not future ones

What kind of past transaction or event is acceptable?◦wholly executory contracts

Liability recognitionRecognition criteria: Reliance on the law

◦ legal enforceability

Determination of the economic substance of the event◦ ‘real’ obligation

Ability to measure the value of the liability◦ normally the nominal amount

◦ if period longer than 12-months, based on the present value of expected future cash flows

Use of the conservatism principle◦ at what point is the entity too conservative

IASB FrameworkA liability should be recognised if

◦it is probable that any future economic benefit associated with the items will flow to or from the entity; and

◦the item has a cost or value that can be measured with reliability

Liability measurementThe Framework provides little guidance

about how to measure liabilitiesA number of different measurement bases

may be usedUnder IFRS, historical cost is the most

commonFair value measurement is more commonly

being used ◦ leases◦ financial instruments◦ share based payments◦ business combinations

Employee benefits – pension (superannuation) plansUnfunded commitments

◦equitable obligations

Provisions and contingenciesProvisions and contingencies occur

where there is a blurring between present and future obligations

Liabilities and provisions are recognised only when there is a present obligation, it is probable and it can be reliably measured

Contingent liabilities do not meet these criteria◦notes