Week 9 Liabilities

Q4:

If an aspect of our firm meets the ‘time-based’ trifecta of being a liability, does this mean we will include this aspect of a liability in our firm’s accounts and financial statements? Why or why not?

A:

No it does not. 

Once we identify we have a liability in our business (based on our understanding that a liability is ‘a present obligation of the entity to transfer an economic resource as a result of past events’) we do not automatically recognise it, that is include it in our firm’s financial statements.

Winning the trifecta of ‘past‘/’present‘/’future‘ means that aspect of our business meets the definition of a liability.  But there is another step. We need to recognise, or include, that liability in our firm’s accounts.

Not including a liability in our accounts might exclude useful information:

“Not recognising an item that meets the definition of one of the elements makes the statement of financial position and the statement(s) of financial performance less complete and can exclude useful information from financial statements…”

(AASB CF Framework para 5.7)

However, sometimes including a liability in our firm’s accounts may not provide useful information. To recognise or include a liability in our firm’s accounts we need to consider that it provides useful information to users of financial statements, that is relevant information and a faithful representation of the liability (AASB CF Framework para 5.7); and at a cost that does not outweigh its benefits (AASB CF Framework para 5.8).

A liability may not provide relevant information if it is uncertain whether a liability exists (AASB CF Framework para 5.14); or if it exists, the probability of an outflow of economic benefits is low (AASB CF Framework paras 5.15-5.17). And it may not provide a faithful representation of that liability if there is a high level of measurement uncertainty (AASB CF Framework para 5.18). So, the two key aspects in relation to recognising or including liabilities in our accounts are that the outflow of economic benefits is probable and can be measured reliably.

And remember, the AASB CF Framework is not an accounting standard. Where there is an accounting standard it takes precedence over AASB CF Framework, which provides guidance where there is no specific accounting standard. For example, AASB 137 Provisions, Contingent Liabilities and Contingent Assets provides specific guidance on the definition and recognition (and measurement) of Provisions and Contingent liabilities.