Conceptual framework

• A liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events.
• For a liability to exist, three criteria must be satisfied: the entity has an obligation, the obligation is to transfer an economic resource, and the obligation is a present obligation that exists as a result of past events.
• An obligation is defined as a duty or responsibility that an entity cannot practically avoid, owed to another party, which could be an individual, entity, group or society at large.
• Aggregation (7.20) discusses the practice of combining or aggregating similar items for reporting purposes, emphasizing when and how aggregation can provide a clearer understanding of financial information while ensuring relevance and reliability.
• Profit or Loss and Other Comprehensive Income (7.15) differentiates between profit or loss and other comprehensive income, discussing items included in each category.
• Obligations can be established by contract, legislation, or similar means, enforceable legally, or can also arise from an entity's practices, policies, or specific statements if the entity has no practical ability to act contrary to them, termed as 'constructive obligations'.
• Obligations encompass various scenarios, such as paying cash, delivering goods or services, unfavorable exchange of economic resources, commitments based on uncertain future events, or issuing financial instruments that commit the entity to transfer an economic resource.
• Until an obligation to transfer an economic resource is settled, transferred, or replaced, the entity remains under the obligation.
• Conditional Obligations: Sometimes, an entity's duty to transfer an economic resource is contingent upon a specific future action the entity may take, such as operating in a particular market.
• If the entity has no practical ability to avoid taking that action, it incurs an obligation.
• Going Concern Implication: Preparing financial statements on a going concern basis implies that the entity has no practical ability to avoid a transfer that could only be avoided by liquidation or cessation of trading.
• Assessing Practical Ability to Avoid Transfer: Factors used to assess an entity's ability to avoid transferring an economic resource depend on the nature of the duty or responsibility.
• An entity might lack practical ability to avoid a transfer if any action to avoid it would have significantly worse economic consequences than the transfer itself.
• Uncertainty of Obligations: In uncertain situations, such as when compensation is sought for alleged wrongdoing, it's uncertain if an obligation exists until the uncertainty is resolved, for example, by a court ruling.
• If one party has an obligation to transfer an economic resource, it implies that another party (or parties) has a corresponding right to receive that resource.
• Recognition and measurement of the liability by one party don't mandate the same treatment for the corresponding asset by the other party, especially if different criteria exist to represent the most relevant information.
• The second criterion for a liability is an obligation to transfer an economic resource.
• The obligation doesn't need to be certain or highly likely; it can be contingent upon an uncertain future event.
• Even if the likelihood of transferring an economic resource is low, the obligation can still qualify as a liability.
• Derecognition is the removal of all or part of a recognized asset or liability when it no longer meets the definition.
• Recognition is based on whether it provides relevant and faithfully represented information about the asset, liability, income, expenses, or equity.
• The value at which an asset, liability, or equity is recognized in the financial statement is termed its 'carrying amount.'
• For assets, derecognition occurs when the entity loses control.
• Expenses are the decreases in equity resulting from decreases in assets or increases in liabilities, excluding distributions to equity holders.
• Derecognition may not accurately reflect a transaction’s impact, especially when the entity retains rights or obligations associated with the transferred asset/liability.
• For liabilities, derecognition occurs when the entity no longer has a present obligation.
• High uncertainty in estimates might affect the faithful representation of an asset/liability.
• Information about the potential magnitude, timing, and influencing factors of uncertain assets/liabilities might be relevant for users, even with a low probability.
• Descriptions and explanations of highly uncertain estimates may be necessary even if the measure is less relevant.
• The derecognition Process involves derecognizing expired, consumed, fulfilled, or transferred assets/liabilities.
• Income is the increase in equity resulting from increases in assets or decreases in liabilities, excluding contributions from equity holders.
• Uncertain Assets or Liabilities: Explanatory information about uncertainties associated with assets or liabilities not recognized might be needed in the financial statements.
• The retained portion is separated and continued to be recognized separately.
• Cost-Benefit Analysis: Recognition decisions consider costs versus benefits.
• Income and expenses are vital components representing an entity's financial performance in the financial statements.
• Accounting aims to faithfully represent retained assets/liabilities and changes due to the derecognition event.
• Equity is the increase in an entity's net worth resulting from its operations and is represented in the statement of financial position as total assets minus total liabilities.
• Total assets minus total liabilities equals total equity in the statement of financial position.
• Recognition involves including an item that meets the criteria of financial statement elements (asset, liability, equity, income or expenses) in the financial statements.
• Some transactions result in simultaneous recognition of income and related expenses (e.g., sale of goods for cash).