Framework Problem #2
Following is the definition of a liability from threesources:
1. IASB Framework, paragraph 49(b) – “A liability isa present obligation of the entity arising from past events, thesettlement of which is expected to result in an outflow from theentity of resources embodying economic benefits.”
2. FASB’s Concept Statement No. 6, paragraph 35 –“Liabilities are probable future sacrifices of economic benefitsarising from present obligations of a particular entity to transferassets or provide services to other entities in the future as aresult of past transactions or events.”
3. The Working Group’s working definition as ofOctober 2008 – “A liability of an entity is a present economicobligation for which the entity is the obligor.” Accompanying text will amplify the liabilitydefinition by describing present, economic obligation, andobligor.· Present means that on the date of the financialstatements both the economic obligation exists and the entity isthe obligor.· An economic obligation is an unconditional promise orother requirement to provide or forgo economic resources, includingrisk protection, that is enforceable by legal or equivalentmeans.· An entity is the obligor if the entity is required tobear the economic obligation and its requirement to bear theeconomic obligation is enforceable by legal or equivalentmeans.
Required: Read each definition and compare andcontrast the FASB and IASB versions and then compare to the WorkingGroup’s definition. Review the following items and evaluate if each meetsthe Working Group’s definition of liability. Focus on “… presenteconomic obligation” and “… entity is obligor” in youranalysis:
· Accounts payable· Bank loan payable· Future inventory purchases· Discretionary employee bonuses· Existing property lease· Product warranty obligation· Possible lawsuit alleging patent infringement· Preferred stock redeemable at option ofstockholder· Futures contract to purchase raw materials in twoyears at today’s price
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