Conceptual Framework for Financial Reporting

Potential to produce economic benefits
An economic resource is a right that has the potential to produce economic
benefits. For that potential to exist, it does not need to be certain, or even
likely, that the right will produce economic benefits. It is only necessary that
the right already exists and that, in at least one circumstance, it would
produce for the entity economic benefits beyond those available to all other
parties.
A right can meet the definition of an economic resource, and hence can be an
asset, even if the probability that it will produce economic benefits is low.
Nevertheless, that low probability might affect decisions about what
information to provide about the asset and how to provide that information,
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Conceptual Framework
A40
© IFRS Foundation

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including decisions about whether the asset is recognised (see
paragraphs 5.15–5.17) and how it is measured.
An economic resource could produce economic benefits for an entity by
entitling or enabling it to do, for example, one or more of the following:
(a)
receive contractual cash flows or another economic resource;
(b)
exchange economic resources with another party on favourable terms;
(c)
produce cash inflows or avoid cash outflows by, for example:
(i)
using the economic resource either individually or in
combination with other economic resources to produce goods
or provide services;
(ii)
using the economic resource to enhance the value of other
economic resources; or
(iii)
leasing the economic resource to another party;
(d)
receive cash or other economic resources by selling the economic
resource; or
(e)
extinguish liabilities by transferring the economic resource.
Although an economic resource derives its value from its present potential to
produce future economic benefits, the economic resource is the present right
that contains that potential, not the future economic benefits that the right
may produce. For example, a purchased option derives its value from its
potential to produce economic benefits through exercise of the option at a
future date. However, the economic resource is the present right—the right to
exercise the option at a future date. The economic resource is not the future
economic benefits that the holder will receive if the option is exercised.
There is a close association between incurring expenditure and acquiring
assets, but the two do not necessarily coincide. Hence, when an entity incurs
expenditure, this may provide evidence that the entity has sought future
economic benefits, but does not provide conclusive proof that the entity has
obtained an asset. Similarly, the absence of related expenditure does not
preclude an item from meeting the definition of an asset. Assets can include,
for example, rights that a government has granted to the entity free of charge
or that another party has donated to the entity.
Control
Control links an economic resource to an entity. Assessing whether control
exists helps to identify the economic resource for which the entity accounts.
For example, an entity may control a proportionate share in a property
without controlling the rights arising from ownership of the entire property.
In such cases, the entity’s asset is the share in the property, which it controls,
not the rights arising from ownership of the entire property, which it does not
control.
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Conceptual Framework
© IFRS Foundation
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An entity controls an economic resource if it has the present ability to direct
the use of the economic resource and obtain the economic benefits that may
flow from it. Control includes the present ability to prevent other parties from
directing the use of the economic resource and from obtaining the economic
benefits that may flow from it. It follows that, if one party controls an
economic resource, no other party controls that resource.
An entity has the present ability to direct the use of an economic resource if it
has the right to deploy that economic resource in its activities, or to allow
another party to deploy the economic resource in that other party’s activities.
Control of an economic resource usually arises from an ability to enforce legal
rights. However, control can also arise if an entity has other means of
ensuring that it, and no other party, has the present ability to direct the use of
the economic resource and obtain the benefits that may flow from it. For
example, an entity could control a right to use know-how that is not in the
public domain if the entity has access to the know-how and the present ability
to keep the know-how secret, even if that know-how is not protected by a
registered patent.
For an entity to control an economic resource, the future economic benefits
from that resource must flow to the entity either directly or indirectly rather
than to another party. This aspect of control does not imply that the entity
can ensure that the resource will produce economic benefits in all
circumstances. Instead, it means that if the resource produces economic
benefits, the entity is the party that will obtain them either directly or
indirectly.
Having exposure to significant variations in the amount of the economic
benefits produced by an economic resource may indicate that the entity
controls the resource. However, it is only one factor to consider in the overall
assessment of whether control exists.
Sometimes one party (a principal) engages another party (an agent) to act on
behalf of, and for the benefit of, the principal. For example, a principal may
engage an agent to arrange sales of goods controlled by the principal. If an
agent has custody of an economic resource controlled by the principal, that
economic resource is not an asset of the agent. Furthermore, if the agent has
an obligation to transfer to a third party an economic resource controlled by
the principal, that obligation is not a liability of the agent, because the
economic resource that would be transferred is the principal’s economic
resource, not the agent’s.