Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework

Definitions of Assets and Liabilities and Measurement Bases in SBR

Updated 11 October 2026 · Fact-checked

Under the 2018 Conceptual Framework, an asset is a present economic resource controlled by the entity as a result of past events. A liability is a present obligation to transfer an economic resource as a result of past events. Measurement bases are historical cost and current value (fair value, value in use, fulfilment value, current cost).

Understand Definitions of Assets and Liabilities and Measurement Bases

The Conceptual Framework (revised in 2018) is the base for all IFRS Accounting Standards. SBR questions often give you an unusual transaction that no standard covers. You then use the definitions to decide whether something belongs in the statement of financial position.

An economic resource is a right that has the potential to produce economic benefits. Notice the focus: the right itself, not the benefits being certain or probable. An asset is a present economic resource controlled by the entity as a result of past events. A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The old words 'expected inflow' and 'probable outflow' were removed from the definitions.

Income is an increase in assets, or a decrease in liabilities, that results in an increase in equity, other than contributions from holders of equity claims. Expenses are decreases in assets, or increases in liabilities, that result in a decrease in equity, other than distributions to holders of equity claims. So the statement of financial position definitions drive the profit or loss ones.

A definition is not enough. An item is recognised only if recognition gives useful information: relevant information and a faithful representation. Uncertainty over existence, or a low probability of inflow or outflow, or measurement uncertainty, can make recognition inappropriate.

Measurement has two families. Historical cost uses the price when the item was acquired or incurred, updated for things like depreciation, impairment and amortised cost. Current value reflects conditions at the measurement date. It includes fair value (an exit price between market participants), value in use for assets and fulfilment value for liabilities (entity-specific present values of cash flows), and current cost (an entry price now). The Framework gives factors to consider when choosing a basis, mainly relevance and faithful representation, and the cost of the information. It does not demand one basis for everything.

Key rules to remember

Asset: Asset = present economic resource controlled by the entity as a result of past events; Check all three parts: a right with potential to produce benefits, control, and a past event.
Economic resource: Economic resource = a right that has the potential to produce economic benefits; The potential need not be certain or even likely. Low probability affects recognition and measurement, not the definition.
Liability: Liability = present obligation to transfer an economic resource as a result of past events; Needs three tests: an obligation, a transfer of a resource, and it is present because of a past event. The entity must have no practical ability to avoid the transfer.
Income and expenses: Income = increases in assets or decreases in liabilities that increase equity (excluding contributions from equity holders). Expenses = the reverse (excluding distributions to equity holders).; Derived from the asset and liability definitions.
Fair value: Fair value = price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; An exit price, from the market participant's view. Defined in IFRS 13.
Value in use: Value in use = present value of cash flows the entity expects to derive from the use of an asset and its ultimate disposal; Entity-specific. Used in IAS 36. Fulfilment value is the matching idea for liabilities.
Recognition criteria: Recognise if the item meets the definition AND recognition gives relevant information and a faithful representation; Cost constraint also applies.

How to solve Definitions of Assets and Liabilities and Measurement Bases questions

Use this order for any scenario asking whether to recognise an item or which measurement basis to choose.

1Identify the item and what the question asks: definition, recognition, or measurement.
2Test the definition. For an asset: is there a right with potential to produce benefits, does the entity control it, and is there a past event? For a liability: is there an obligation, a transfer of a resource, and a past event?
3Apply each test to the facts given. Quote the fact, for example 'the contract was signed before the year end'.
4Decide on recognition. Consider whether the information would be relevant and faithfully represented, including existence uncertainty and measurement uncertainty.
5If measurement is asked, name candidate bases and say what each shows. Contrast historical cost with current value, and fair value (exit, market) with value in use (entity-specific).
6Choose one basis and link it to relevance and faithful representation, for example how the item produces cash flows.
7Conclude clearly: recognise or not, and at what basis. Add the effect on income, expenses or equity if useful.

Quickest way: Three-test shortcut

When to use it: When you have little time and the question is 'is this an asset or liability?'.

Write 'Right/obligation?', 'Control/no practical ability to avoid?', 'Past event?' as a short list.
Tick or cross each with a fact from the scenario.
If all three are ticked, it meets the definition. Add one line on recognition and measurement.
For measurement, write one line each: cost = past price, fair value = exit market price, value in use = entity cash flows.

Common mistakes in Definitions of Assets and Liabilities and Measurement Bases

Saying an asset needs a probable or expected inflow of benefits.
This was in the pre-2018 definition and many study notes still use it.
Fix: State that the 2018 definition only needs potential to produce benefits. Probability is a recognition issue.
Treating a future intention or board plan as a liability.
Students focus on the expected cost, not on whether a present obligation exists.
Fix: Ask if there is a past event and no practical ability to avoid the transfer. A plan alone is not enough.
Confusing ownership with control.
Legal title feels like the natural test.
Fix: Use control: the ability to direct use and obtain the benefits. Leases and licences can give control without ownership.
Treating fair value and value in use as the same thing.
Both are present values of cash flows or 'current values'.
Fix: Fair value is an exit price using market participant assumptions. Value in use uses the entity's own expected cash flows from using the asset.
Stopping at the definition and ignoring recognition.
Meeting the definition feels like the final answer.
Fix: Add a recognition test: relevance, faithful representation, and whether uncertainty makes the information unhelpful.
Claiming the Framework overrides an IFRS Standard.
The Framework is used heavily in the exam so it feels authoritative.
Fix: State that where a standard exists it prevails. The Framework helps where no standard applies and guides standard setting.

Worked examples

Example 1

Zeta Co signed a contract on 20 March to buy specialised equipment for $2 million, delivery 15 May after the year end of 31 March. Zeta can cancel without penalty before delivery. A director says Zeta should record an asset and a liability of $2 million at 31 March. Discuss using the Conceptual Framework.

Show the solution

Asset test: Zeta has a contract, but has no right yet to use the equipment. Control passes on delivery, and the past event (taking delivery) has not happened.
Liability test: Zeta can cancel without penalty, so it has the practical ability to avoid the transfer of cash. There is no present obligation.
The contract is an executory contract, a combined right and obligation that is equal and interdependent. Until performance begins, the net position is nil.
Recognition would not give useful information because no asset or liability exists at the year end.

Answer: Do not recognise the equipment or the $2 million liability at 31 March. Neither definition is met. The commitment may be disclosed if material.

Example 2

Delta Co owns a machine with a carrying amount of $800,000. Similar machines trade in an active market at $720,000 less $20,000 costs of disposal. Delta expects the machine to generate cash flows with a present value of $760,000 if used. Explain which current value bases apply and calculate the recoverable amount under IAS 36.

Show the solution

Fair value is the exit price in an orderly market transaction: $720,000. Costs of disposal are not part of fair value.
Fair value less costs of disposal = $720,000 − $20,000 = $700,000.
Value in use is entity-specific: $760,000.
Recoverable amount is the higher of fair value less costs of disposal ($700,000) and value in use ($760,000) = $760,000.
Compare with the carrying amount: $800,000 − $760,000 = $40,000.

Answer: Fair value is $720,000 and value in use is $760,000. Recoverable amount is $760,000, so the machine is impaired by $40,000. The difference arises because fair value reflects market participants and value in use reflects Delta's own expected cash flows.

Exam tips

Always use the three-part definitions in your wording. Markers look for control, past event and present obligation by name.
Apply, do not recite. Quote a fact from the scenario against each part of the definition to earn the professional skills and application marks.
When asked to compare measurement bases, give one advantage and one disadvantage each, such as the reliability of historical cost against the relevance of current value.
Mention that recognition is a separate step from definition. This is a common marker point.
Link to a standard when the question does: IFRS 13 for fair value, IAS 36 for value in use.

Practice questions from The applications, strengths and weaknesses of the accounting framework

Definitions of Assets and Liabilities and Measurement Bases in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Definitions of Assets and Liabilities and Measurement Bases: frequently asked questions

What is the 2018 definition of an asset?

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. The potential does not have to be certain or likely.

What is the difference between fair value and value in use?

Fair value is an exit price, what market participants would pay in an orderly transaction at the measurement date. Value in use is the present value of cash flows the entity itself expects from using the asset and disposing of it. Value in use is entity-specific, so it can differ from fair value.

What is the difference between historical cost and current value?

Historical cost reflects the transaction price when the item was acquired or incurred, adjusted for things like depreciation and impairment. Current value reflects conditions at the measurement date and includes fair value, value in use, fulfilment value and current cost. Current values are usually more relevant but can be harder to measure.

Can an item meet the definition of an asset and still not be recognised?

Yes. Recognition also requires relevant information and a faithful representation. If existence is highly uncertain or measurement is too uncertain, recognition may not give useful information.