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ACCA Applied Knowledge · Financial Accounting · The main elements of financial statements

Which of the following items would NOT meet the Conceptual Framework definition of a liability at the reporting date?

The uncommunicated board decision to buy machinery next year is not a liability. There is no present obligation arising from a past event, only an intention. Legal and constructive obligations from past events, such as supplier debts, refunds or fines, are liabilities.

  1. AA legal obligation to pay a supplier for goods already received
  2. BA constructive obligation to refund customers, created by the entity's published refund policy and past practice
  3. CA decision by the board, not yet communicated to anyone, to buy new machinery next yearCorrect
  4. DA court-ordered fine payable by the entity for a breach that occurred during the year

Explanation

A liability needs a present obligation arising from a past event. An uncommunicated board intention to buy machinery creates no present obligation. The other options are legal or constructive obligations arising from past events.

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