ACCA SBR ^INT Syllabus B. The Financial Reporting Framework - Chapter 4—The Elements Of Financial Statements - Assets & Liabilities - Notes ^{9 / 18}

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

This section discusses three aspects of those definitions:

1. Rights

   These come from obligation of others (eg they owe you cash/goods/services) 
   These also come when there's no obligation of others (eg Use of Property)
   These come from contract (eg Leasing an object)

   Conceptually, the economic resource is the set of rights, not the physical object. 

   There may be a dispute over a right. Until that uncertainty is resolved—for example, by a court ruling—it is uncertain whether an asset exists

2. Potential to produce economic benefits

   No need to be certain, or even likely, just that in one circumstance, it would produce economic benefits
    
   However, low probability might affect decisions about whether the asset is recognised and how it is measured.

   The economic resource is the present right that contains that potential, not the future economic benefits 

   Paying for an object isn't conclusive proof it's an asset and vice-versa. Eg Government granted rights

3. Control

   Control links an economic resource to an entity. 

   It helps to identify the economic resource. Eg You control a share of a property so the asset is that share not the entire property

   Control means the present ability to direct the use of the economic resource including preventing others from doing so.  

   It usually comes from legal rights but not always. Eg A right to use (not patented) know-how if it can keep it secret

   Control is also indicated by exposure to significant variations in benefits, but it is only one factor

For a liability to exist, three criteria must all be satisfied:

1. Obligation

   Something you have no practical ability to avoid. 

   You can owe it even to society - you don't need to know their identity 

   Just because you have a liability of 100 doesn't mean the other party has an asset of 100 Eg. some IFRS contain different recognition criteria for liabilities and assets

   They're normally from contracts but can just be from customary practices, published policies or specific statements. This is called a ‘constructive obligation’.

   The obligation may be conditional (eg options in a contract) - here a liability exists only if there's no practical ability to avoid it

   You can't argue that liquidation is a practical way to avoid something - as you are deemed to be a going concern

   No practical ability to avoid means when avoiding it you'd be significantly worse off than not avoiding it

2. Transfer of an economic resource

   This, again, does not have to be probable, only that, in at least one circumstance, it would require the entity to transfer an economic resource.

   Instead of paying sometimes the following happen:
   (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.

   Here, an entity has the obligation to transfer an economic resource until it has settled, transferred or replaced that obligation.

3. Present obligation as a result of past events

   This means:
   (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 

   The enactment of legislation is not in itself sufficient to give an entity a present obligation. 

   Similarly, an entity’s customary practice becomes an obligation only when it has obtainined economic benefits (or took an action) and so now has to transfer an economic resource that it would not otherwise have had to 

   A present obligation can exist even if a transfer is only enforceable in the future. Eg. a contractual liability to pay cash may exist now even if the contract does not require a payment until a future date. 

   If an entity has entered into a contract with an employee,  there's no present obligation to pay the salary until it has received the employee’s services. (Before then the contract is executory)

Definition of Equity

Equity is the residual interest in the assets of the entity after deducting all its liabilities