ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework
Zenith plc has publicly announced it will close a factory next year, but has not yet communicated any plan to those affected, has no detailed formal plan and has no legal duty to pay compensation. Under the Conceptual Framework definition of a liability, which statement is most appropriate at the reporting date?
No liability exists. A liability requires a present obligation, legal or constructive, that the entity has no practical ability to avoid. A board decision or an expected future outflow, without communication or a binding commitment, does not create such an obligation at the reporting date.
- ANo liability exists because Zenith has no present obligation with no practical ability to avoid transferring an economic resourceCorrect
- BA liability exists because a future outflow of resources is probable
- CA liability exists because the board has made the decision to close
- DA liability exists because the decision is a past event and the amount can be estimated
Explanation
A liability needs a present obligation to transfer an economic resource arising from past events. A management intention alone, with no legal or constructive obligation and with the ability to avoid the outflow, does not create one. Probability of outflow and a board decision are not sufficient on their own.
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