Conceptual Framework for Financial Reporting

Executory contracts
An executory contract is a contract, or a portion of a contract, that is equally
unperformed—neither party has fulfilled any of its obligations, or both parties
have partially fulfilled their obligations to an equal extent.
An executory contract establishes a combined right and obligation to
exchange economic resources. The right and obligation are interdependent
and cannot be separated. Hence, the combined right and obligation constitute
a single asset or liability. The entity has an asset if the terms of the exchange
are currently favourable; it has a liability if the terms of the exchange are
currently unfavourable. Whether such an asset or liability is included in the
financial statements depends on both the recognition criteria (see Chapter 5)
and the measurement basis (see Chapter 6) selected for the asset or liability,
including, if applicable, any test for whether the contract is onerous.
To the extent that either party fulfils its obligations under the contract, the
contract is no longer executory. If the reporting entity performs first under
the contract, that performance is the event that changes the reporting entity’s
right and obligation to exchange economic resources into a right to receive an
economic resource. That right is an asset. If the other party performs first,
that performance is the event that changes the reporting entity’s right and
obligation to exchange economic resources into an obligation to transfer an
economic resource. That obligation is a liability.
Substance of contractual rights and contractual
obligations
The terms of a contract create rights and obligations for an entity that is a
party to that contract. To represent those rights and obligations faithfully,
financial statements report their substance (see paragraph 2.12). In some
cases, the substance of the rights and obligations is clear from the legal form
of the contract. In other cases, the terms of the contract or a group or series of
contracts require analysis to identify the substance of the rights and
obligations.
All terms in a contract—whether explicit or implicit—are considered unless
they have no substance. Implicit terms could include, for example, obligations
imposed by statute, such as statutory warranty obligations imposed on entities
that enter into contracts to sell goods to customers.
Terms that have no substance are disregarded. A term has no substance if it
has no discernible effect on the economics of the contract. Terms that have no
substance could include, for example:
(a)
terms that bind neither party; or
(b)
rights, including options, that the holder will not have the practical
ability to exercise in any circumstances.
4.56
4.57
4.58
4.59
4.60
4.61
Conceptual Framework
A48
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A group or series of contracts may achieve or be designed to achieve an overall
commercial effect. To report the substance of such contracts, it may be
necessary to treat rights and obligations arising from that group or series of
contracts as a single unit of account. For example, if the rights or obligations
in one contract merely nullify all the rights or obligations in another contract
entered into at the same time with the same counterparty, the combined
effect is that the two contracts create no rights or obligations. Conversely, if a
single contract creates two or more sets of rights or obligations that could
have been created through two or more separate contracts, an entity may
need to account for each set as if it arose from separate contracts in order to
faithfully represent the rights and obligations (see paragraphs 4.48–4.55).