Write a memo to your colleagues -Changes to the definition of a Liability. Essay Example

I confirm that I have read and edited a draft of all work completed by my team members and that this has resulted in changes to the final version submitted for assessment so as to demonstrate that I have engaged with all the objectives of this assignment and should receive marks for them.

I confirm that I contributed at least 40% of the effort for this assignment if it was completed with one other person.

I confirm that I have read and edited a draft of all work completed by my team members and that this has resulted in changes to the final version submitted for assessment so as to demonstrate that I have engaged with all the objectives of this assignment and should receive marks for them.

I confirm that I contributed at least 40% of the effort for this assignment if it was completed with one other person.

If it is found that a student has not complied with the above statements they will only receive marks for the sections of the assignment for which they were primarily responsible. If students have not contributed the minimum percentages listed above they will receive zero for the assignment.

The above statements do not apply to students who did the assignment by themselves.

The existing definition of the word liability is 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

The proposed definition of the liability is that a liability is an obligation as opposed to the outflow of economic benefits that the obligation may generate.

In the current definition, the definition of the word liability required that the liability must be accompanied by an outflow of economic benefits embodying the obligation. However, the proposed definition wants to exclude the outflow of the economic benefits that are generated by the obligation. The liability must have the ability to result in the transfer of economic resources. Whereas the original definition was certain, the proposed definition is not certain and requires that the probability of an obligation resulting in a transfer need not reach any minimum threshold before that obligation meets the definition of liability.

The majority of the respondents who accessed the proposed definitions made objections. The respondents expressed the concerns that the Board needed to make no changes to the liability definition until the project on Financial Instruments with the Characteristics of Equity was first finished or first address the distinction between liabilities and equity in the Conceptual framework projects. The respondents were particular in their concerns in that the guidance on the meaning of “no ability to avoid” on the exposure draft and the discussion of economic compulsion of the Basis for Conclusion. Further they objected that an obligation of an entity to transfer its own equity claims to another party is not a liability. Another body raised concerns that the definition of a liability should include both present obligations and certain other planned future outflows that could arise from past events. These concerns were based on the fact that the definition did not offer clear distinction or the basis to exclude the outflows in the proposed definition of the term liability.

One Comment Letter is the one that was issued by the Australian Accounting Standards Board (AASB). The AASB wanted to provide further opinions on the proposed definition of the liability. The AASB provided rationale why it thought that the definition could be or could not be adopted. In the letter, the AASB stated that it had two significant concerns. The first concern was that the IASB proposal to finalize the definition of liability before concluding its consideration of whether the definition was appropriate in classifying transactions between liabilities and equity. With the proposed definition, the definition could then mean that some of the transactions classified under the liabilities and equity could change. However, the IASB had not finalized on this project implying that it was not clear. Without due diligence, if the new definition was adopted, and it happened to affect the classification of transactions under equity and liabilities, it could have serious concerns over the financial reporting practices. Therefore, the AASB was concerned it could have been better if IASB did not make the changes to the liability definition until all other works were complete.

The other concern that was expressed in the ASSB Concern Letter was that the “no practical ability to avoid” criterion in the present obligation discussion introduced a notion of economic compulsion, and this may inadvertently broaden the scope of items captured as liabilities. In the “no practical ability to avoid” the proposal posited that a liability was only a liability if the entity has no practical ability to avoid or transfer. This implies that in the cases where it had the practical ability to avoid the transfer, then this meant that there was no liability. Further, the inclusion of the Clause “no practical ability to avoid” could further bring on board some other items that were not counted as liabilities and this could potentially reshape the financial reporting and accounting. Some of the items that the proposal could bring on board include the obligation arising from contracts, legislations, and other law operations. Therefore, this proposal introduced a notion of economic compulsion that was not there before that this potentially may broaden the scope of items captured as liabilities. Therefore, before any adoption of new definition could be made, it was important to consider how this new definition could potentially affect the financial reporting and the concept of liabilities. For example, in the preparation of the balance sheet, with the adoption of the new definition of liabilities with the “no practical ability to avoid” clause in it, it could then mean that there is potential to capture new items under liabilities shoes rationale have not been sufficiently provided under the proposed definition of liabilities.

Whereas am opined to think that the proposed definition of the word liability is very good as a school of thought in financial reporting and accounting, it is my opinion that due diligence have not been exhausted before the new definition can be adopted. The IASB need to express how the new definition will affect other items that are described under the assets and liabilities in the financial reporting and accounting. The proposed definition could potentially provide new definition, insights, and treatments of transactions under liabilities and assets. Therefore, the IASF need to finish on the project to find out how this can be addressed to ensure that there is no confusion that could arise thereafter. Therefore, the preliminary works need to be thoroughly done before this definition can be given serious consideration. Also, this applies to the other items that could be affected once the “no practical ability to avoid” could be borrowed. This is because it brings on board an entirely new way of treatment some transactions that affect the obligations an entity. Therefore, the IASF need to conduct the due diligence to ensure

[http://eifrs.ifrs.org/eifrs/comment_letters/50/50_6012_KrisPeachAustralianAccountingStandardsBoard_0_AASB_Comment_Letter_CF_EDs_final.pdf]

Letter to the Clients

In the spirit of the Exposure Draft on Conceptual Framework, Elements of financial statements- Liabilities and equity, the IASB proposed a new definition to the term liability. The current definition provides inclusion of the outflows of the financial resources in the liabilities, however, the new definition has excluded that. The new definition further introduces new grounds on “no practical ability to avoid” concept to define the obligations under the proposed definition. It is important to not that this is only the proposal and it will not have the effect on the financial reporting and accounting. However, when adopted, the new definition will have an impact on transactions under liabilities and equity. It could also broaden the criteria of classifying the liabilities. Nevertheless, the IASB have projects to finish to provide insights on how this could impact the current practice.