Conceptual Framework for Financial Reporting

Definition of a liability
A liability is 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 all be satisfied:
(a)
the entity has an obligation (see paragraphs 4.28–4.35);
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(b)
the obligation is to transfer an economic resource (see
paragraphs 4.36–4.41); and
(c)
the obligation is a present obligation that exists as a result of past
events (see paragraphs 4.42–4.47).
Obligation
The first criterion for a liability is that the entity has an obligation.
An obligation is a duty or responsibility that an entity has no practical ability
to avoid. An obligation is always owed to another party (or parties). The other
party (or parties) could be a person or another entity, a group of people or
other entities, or society at large. It is not necessary to know the identity of
the party (or parties) to whom the obligation is owed.
If one party has an obligation to transfer an economic resource, it follows that
another party (or parties) has a right to receive that economic resource.
However, a requirement for one party to recognise a liability and measure it at
a specified amount does not imply that the other party (or parties) must
recognise an asset or measure it at the same amount. For example, particular
Standards may contain different recognition criteria or measurement
requirements for the liability of one party and the corresponding asset of the
other party (or parties) if those different criteria or requirements are a
consequence of decisions intended to select the most relevant information
that faithfully represents what it purports to represent.
Many obligations are established by contract, legislation or similar means and
are legally enforceable by the party (or parties) to whom they are owed.
Obligations can also arise, however, from an entity’s customary practices,
published policies or specific statements if the entity has no practical ability to
act in a manner inconsistent with those practices, policies or statements. The
obligation that arises in such situations is sometimes referred to as a
‘constructive obligation’.
In some situations, an entity’s duty or responsibility to transfer an economic
resource is conditional on a particular future action that the entity itself may
take. Such actions could include operating a particular business or operating
in a particular market on a specified future date, or exercising particular
options within a contract. In such situations, the entity has an obligation if it
has no practical ability to avoid taking that action.
A conclusion that it is appropriate to prepare an entity’s financial statements
on a going concern basis also implies a conclusion that the entity has no
practical ability to avoid a transfer that could be avoided only by liquidating
the entity or by ceasing to trade.
The factors used to assess whether an entity has the practical ability to avoid
transferring an economic resource may depend on the nature of the entity’s
duty or responsibility. For example, in some cases, an entity may have no
practical ability to avoid a transfer if any action that it could take to avoid the
transfer would have economic consequences significantly more adverse than
the transfer itself. However, neither an intention to make a transfer, nor a
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high likelihood of a transfer, is sufficient reason for concluding that the entity
has no practical ability to avoid a transfer.
In some cases, it is uncertain whether an obligation exists. For example, if
another party is seeking compensation for an entity’s alleged act of
wrongdoing, it might be uncertain whether the act occurred, whether the
entity committed it or how the law applies. Until that existence uncertainty is
resolved—for example, by a court ruling—it is uncertain whether the entity
has an obligation to the party seeking compensation and, consequently,
whether a liability exists. (Paragraph 5.14 discusses recognition of liabilities
whose existence is uncertain.)