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

Zeta Co has a policy of refunding customers' payments for faulty goods and has a history of doing so. At the reporting date it plans to launch a new product line next year, and its board has approved a budget of $2m for marketing in that year, with no contracts signed. Applying the Conceptual Framework definition of a liability, how should the $2m marketing budget be treated at the reporting date?

The $2m marketing budget is not a liability at the reporting date. A liability needs a present obligation arising from a past event, and a board-approved budget without any contract can be avoided by the entity's own future actions, so no obligation exists.

  1. ANot a liability, because there is no present obligation arising from a past eventCorrect
  2. BA liability, because the board has approved the expenditure
  3. CA liability, because the expenditure is probable and can be measured reliably
  4. DA liability measured at present value, because it will be paid next year

Explanation

A liability requires a present obligation to transfer an economic resource as a result of past events. A budget approved by the board and not committed by contract creates no present obligation, as Zeta could avoid the spending through its own future actions. Board approval alone (option two) is therefore insufficient.

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