A4.1. Items that qualify under the definitions of elements of financial statements and that meet criteria for recognition and measurement are accounted for and included in financial statements by using accrual accounting procedures. Accrual accounting and related concepts are therefore significant not only for defining elements of financial statements but also for understanding and considering other aspects of the Conceptual Framework. Paragraphs A4.2—A4.10 define or describe several significant financial accounting and reporting concepts that are used in this chapter and other chapters of the Conceptual Framework.

A4.2. This chapter commonly uses the phrase transactions and other events and circumstances affecting an entity to describe the sources or causes of changes in assets, liabilities, and equity or net assets. An event is a happening of consequence to an entity. It may be an internal event that occurs within an entity, or it may be an external event that involves interaction between an entity and its environment, such as a transaction with another entity. A transaction is a particular kind of external event, namely, an external event involving transfer of something of value (future economic benefit) between two (or more) entities. The transaction may be either an exchange in which each participant both receives and sacrifices value, such as purchases or sales of goods or services, or a nonreciprocal transfer in which an entity incurs a liability or transfers an asset to another entity (or receives an asset or cancellation of a liability) without directly receiving (or giving) value in exchange. Nonreciprocal transfers contrast with exchanges (which are reciprocal transfers) and include, for example, impositions of taxes, gifts, or contributions given or received, and thefts.

A4.3. Circumstances are a condition or a set of conditions that develop from an event or a series of events that may occur almost imperceptibly and may converge in random or unexpected ways to create situations that might otherwise not have occurred and that might not have been anticipated. To see the circumstance may be fairly easy, but to discern specifically when the event or events that caused it occurred may be difficult or impossible. For example, a debtor going bankrupt or a thief stealing gasoline may be an event, but a creditor facing the situation in which its debtor is bankrupt or a warehouse facing the fact that its tank is empty may be a circumstance.

A4.4. Accrual accounting attempts to record the financial effects on an entity of transactions and other events and circumstances in the periods in which those transactions, events, and circumstances occur rather than only in the periods in which cash is received or paid by the entity. Accrual accounting thus provides information about an entity’s assets and liabilities and changes in them that cannot be obtained by accounting for only cash receipts and outlays.

A4.5. Accrual accounting includes using accrual, deferral, and allocation procedures, the goal of which is to relate revenues, expenses, gains, and losses to periods to reflect an entity’s performance during a period instead of merely listing its cash receipts and outlays. Thus, the recognition of revenues, expenses, gains, and losses and the related increments or decrements in assets and liabilities— including the matching of costs and revenues, allocation, and amortization—is the essence of using accrual accounting to measure the performance of entities. The goal of accrual accounting is to account for the effects on an entity of transactions and other events and circumstances in the periods in which they occur, to the extent that those financial effects are recognizable and measurable.

Accrual and Deferral (Including Allocation, Amortization, and Matching) ²⁰

A4.6. Accrual accounting attempts to recognize noncash events and circumstances as they occur and involves not only accruals but also deferrals, including allocations and amortizations. Accrual is concerned with expected future cash receipts and payments; accrual is the accounting process of recognizing assets or liabilities and the related changes in revenues, expenses, gains, or losses for amounts expected to be received or paid, usually in cash, in the future. Deferral is concerned with past cash receipts and payments and with prepayments received or paid; deferral is the accounting process of recognizing a liability resulting from a current cash receipt (or the equivalent) or an asset resulting from a current cash payment (or the equivalent) with deferred recognition of related revenues, expenses, gains, or losses. Recognition of those elements is deferred until the obligation underlying the liability is partly or wholly satisfied or until the future economic benefit underlying the asset is partly or wholly used or lost. Common examples of accruals include purchases and sales of goods or services on account, interest, rent (not yet paid), wages and salaries, taxes, and decreases and increases in marketable securities accounted for at the lower of cost and market. Common examples of deferrals include prepaid insurance and unearned subscriptions.

A4.7. Allocation is the accounting process of assigning or distributing an amount according to a plan or a formula. It is broader than and includes amortization, which is the accounting process of reducing an amount by periodic payments or writedowns. Specifically, amortization is the process of reducing a liability recorded as a result of a cash receipt by recognizing revenues or reducing an asset recorded as a result of a cash payment by recognizing expenses or costs of production. That is, amortization is an allocation process for accounting for prepayments and deferrals. Common examples of allocations include (a) assigning manufacturing costs to production departments or cost centers and to units of product to determine “product cost,” (b) apportioning the cost of a “basket purchase” to the individual assets acquired on the basis of their relative market values, and (c) spreading the cost of an insurance policy or a building to two or more accounting periods. Other costs also are recognized as expenses in the period in which they are incurred because the period to which they otherwise relate is indeterminable or not worth the effort to determine.

A4.8. A major difference between accrual accounting and accounting based on cash receipts and outlays is the timing of recognition of revenues, expenses, gains, and losses. Investments by an entity in goods and services for its operations or other activities commonly do not all occur in the same period as revenues or other proceeds from selling the resulting products or providing the resulting services. Several periods may elapse between the time that cash is invested in raw materials or plant, for example, and the time that cash is returned by collecting the sales price of products from customers. A report showing cash receipts and cash outlays of an enterprise for a short period (such as a statement of cash flows) cannot indicate how much of the cash received is return of investment and how much is return on investment and, thus, cannot indicate whether or to what extent an enterprise is successful or unsuccessful. Similarly, goods or services that a notfor-profit organization provides gratis to beneficiaries commonly result from using goods or services acquired with cash received and spent in earlier periods. A report showing cash receipts and outlays of the organization for a short period cannot tell much about the relationship between the goods or services provided and the resources used to provide them and, thus, cannot indicate to what extent an organization is successful or unsuccessful in carrying out its service objectives. Cash receipts in a particular period largely may reflect the effects of the activities of a business entity or a not-for-profit entity in earlier periods, while many of the cash outlays may relate to the entity’s activities and efforts expected in future periods.

A4.9. In most entities, transactions or events occur that result in simultaneous recognition of revenue and one or more expenses that result directly and jointly from the same transactions or other events. For example, a sale of a product or merchandise involves revenues from the receipt of cash or a receivable and expense for the sacrifice of product or merchandise sold to the customer. If all assets and liabilities are recorded from the transaction, a matching of revenue and expenses in the same period is achieved by proper application of the asset and liability definitions.

A4.10. Many expenses, however, are not related directly to particular revenues but can be related to a period on the basis of transactions or events occurring in that period or by allocation. Some costs that cannot be related directly to particular revenues are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. However, many assets yield their benefits to an entity over several periods, for example, prepaid insurance, buildings, and equipment. Expenses resulting from the use of assets are normally allocated to the periods of their estimated useful lives (the periods over which they are expected to provide benefits) by a “systematic and rational” allocation procedure. Usually no detectable relationship exists, and expenses are recognized by allocating costs to periods in which assets are expected to be used and are related only indirectly to the revenues that are recognized in the same period.

BC4.1. The following summarizes the Board’s considerations in reaching the conclusions in this chapter. It includes reasons for accepting some alternatives and rejecting others. Individual Board members gave greater weight to some factors than to others.

BC4.2. Concepts Statement 6 defines the following 10 elements:

BC4.3. The Board concluded that the discussion of elements in Concepts Statement 6 could be further developed and improved with the objective of providing a foundation for future standards. Many of the decisions reflect changes in practices and standards since Concepts Statement 6 was issued and are based on the Board’s experience in using those concepts in setting standards. The decisions discussed in this chapter are principally to clarify the elements definitions in Concepts Statement 6 by:

BC4.4. Beyond the decisions described in paragraph BC4.3, parts of this chapter have been carried forward from Concepts Statement 6. Accordingly, because there was no basis for conclusions in Concepts Statement 6, this chapter provides no basis for those paragraphs that were brought forward. However, in developing this chapter, the Board decided to revise the language from Concepts Statement 6 as follows:

BC4.5. The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. This chapter provides the means for carrying out that objective; it defines elements of financial statements to be applied to both business entities and not-for-profit organizations. Those elements provide a foundation for information that is relevant to the objective of financial reporting.

BC4.6. Assets and liabilities have conceptual and definitional primacy. The conceptual primacy of assets and liabilities is axiomatic such that the other elements are dependent on those two elements or changes in those elements. Given the conceptual primacy of assets and liabilities, this chapter defines those elements to support recognition in financial statements. Thus, to be recognized in financial statements an item must meet the definition of an asset or a liability. By only recognizing assets and liabilities and changes in those elements, recognition of items that are not grounded in concept is prevented and, thus, the integrity of financial reporting is maintained.

BC4.7. Assets, liabilities, equity, investment by owners, distributions to owners, and comprehensive income constitute the complete set of fundamental elements of financial statements of business entities. In contrast, the definitions of revenue, expenses, gains, and losses serve a different purpose than the definitions of the other six elements because they are not needed to determine comprehensive income but, instead, serve as presentation elements for comprehensive income.

BC4.8. When applied as intended, the definitions of assets and liabilities in Concepts Statement 6 were not fundamentally problematic. However, those definitions were often misunderstood. As a result, the Board concluded that improving the definitions in Concepts Statement 6 by making them clearer and more precise would enhance consistent application of the definitions in developing standards.

BC4.9. Accordingly, this chapter reflects changes decided upon by the Board, many of which are common to the definitions of both assets and liabilities. Those common changes primarily address the specific terms used in the definitions of assets and liabilities that have historically been misunderstood.

BC4.10. Both the definition of an asset and a liability in Concepts Statement 6 include the terms probable, future economic benefit, and past transactions or events. The term probable in the definitions in Concepts Statement 6 has been misunderstood as implying that a future economic benefit or a future sacrifice of economic benefit must be probable to a certain threshold before the definition of an asset or liability is met. In other words, if the probability of future economic benefit is low, the asset definition is not met under this interpretation. A similar interpretation could be made for liabilities. The footnotes to the Concepts Statement 6 definition of assets and liabilities also were not helpful in clarifying the application of the term probable as used in the definitions of assets and liabilities. Accordingly, the Board decided to eliminate that term from the proposed definitions of both assets and liabilities.

BC4.11. The term future in the definitions in Concepts Statement 6 focused on identifying a future flow of economic benefits to demonstrate that an asset exists or identifying a future transfer of economic benefits to demonstrate that a liability exists. The definitions in Concepts Statement 6 were often misunderstood as meaning that the asset (liability) is the ultimate future inflow (outflow). For example, in the instance of trade receivables, the definition in Concepts Statement 6 could be misunderstood to indicate that the asset is the successful collection of the receivable in the future. When applied appropriately, however, the definition would conclude that the asset is the present right to collection. Similar misunderstandings occurred in applying the liability definition. As a result, the Board concluded that a focus on the term present would appropriately shift the focus from identifying a future occurrence. Therefore, the Board decided to include the term present right to demonstrate that an asset exists and emphasize the term present obligation to demonstrate that a liability exists.

BC4.12. The definitions of assets and liabilities in Concepts Statement 6 both include the phrase past transactions or events. The Board concluded that if an entity has a present right or a present obligation, one can reasonably assume that it was obtained from some past transaction or event. Therefore, that phrase is considered redundant and has been eliminated from the proposed definitions.

BC4.13. In addition to addressing those specific terms used in the definitions in Concepts Statement 6, this chapter addresses other considerations for the definitions of both assets and liabilities. For assets, the considerations in this chapter do not alter the population of items that were included under the previous definition of an asset in Concepts Statement 6. For liabilities, however, this chapter fundamentally expands the population of liabilities that were included under the previous definition of a liability in Concepts Statement 6 to include certain obligations to issue or potentially issue an entity’s own shares.

BC4.14. The definition of an asset in this chapter (a) eliminates terms from the previous definition that were misunderstood, as described in paragraphs BC4.10– BC4.12, and (b) removes the term control while maintaining the notion of control.

BC4.15. The definition of an asset in Concepts Statement 6 associated assets with a particular entity by inclusion of the term control. Control often refers to the ability to direct, manage, or have power over something to obtain or access benefits or to increase, maintain, or protect those benefits. Control goes beyond legal rights and includes the ability to obtain and control the benefit in other ways, including restricting, or otherwise prohibiting, the access of others to the economic benefit of the asset.

BC4.16. In applying the definition of an asset in Concepts Statement 6, however, many constituents misunderstood the notion of control. Some improperly viewed control of a probable future economic benefit in the same manner as described in business combinations or consolidation accounting. Additionally, in applying the term control, some often failed to properly identify that which was controlled under the asset definition. For example, in the instance of trade receivables, the definition could be misunderstood to indicate that what is controlled is the successful collection of the receivable in the future. When applied appropriately, however, the definition in Concepts Statement 6 would conclude that the present right to collection is what is controlled. Similarly, if an entity has an option to acquire an asset, the present right of that entity is to the option itself, not the underlying asset that the option provides the right to acquire. Thus, control references the existing right that has the ability to generate economic benefits, or potential economic benefits, and to restrict others access to those benefits.

BC4.17. While the Board concluded that the notion of control was an important aspect of the asset definition, it was not clear to the Board whether the explicit term control added anything significant to the definition of an asset. Those considerations are addressed by inclusion of the term present right in the definition in this chapter. If an entity has a present right to an economic benefit, that would seem to be sufficient to establish the fact that the asset is an asset of that entity. Indeed, if an entity has exclusive rights, it presumably can deny or regulate access to that benefit by others, thereby implying control.

BC4.18. An asset must give an entity rights to an economic benefit. The Board concluded that it is not the economic benefit that represents an asset. Rather, it is the existing rights that have the ability to generate economic benefits. Accordingly, the Board concluded that what is controlled is the existing right that gives rise to the economic benefits, or potential economic benefits, rather than the economic benefits themselves.

BC4.19. The Board considered whether to use the term economic resource or economic benefit in the definition of an asset. Although either term may have been appropriate if properly applied, the Board discussed that some view economic benefit more broadly than economic resource because the latter seems to some to be limited to physical resources. Because of those views, the Board determined that the term economic benefit should be used in the definition to yield a more consistent application.

BC4.20. In addition to considering which term to use, the Board also addressed whether all economic benefits are accounting assets. The 1976 FASB Discussion Memorandum, Elements of Financial Statements and Their Measurement, takes a very broad view of benefits. However, Concepts Statement 6 more narrowly discusses common characteristics of benefits such that benefits are scarce and useful for carrying out economic activities such as consumption, production, and exchange. Application of those characteristics excludes benefits that are not scarce, such as air or water, as well as benefits that are not useful to an entity’s activities, such as a memento or a keepsake of purely sentimental value. Thus, accounting assets are defined in a manner that restricts them to those for which the benefits meet the characteristics described in this paragraph.

BC4.21. The definition of a liability in this chapter has been changed to (a) eliminate terms from the previous definition that were misunderstood, as described in paragraphs BC4.10–BC4.12, (b) clarify when an entity becomes presently obligated, and (c) fundamentally expand the population of liabilities to include present obligations settled with an entity’s own shares rather than exclusively with assets.

BC4.22. The term present obligation is included in the definition of a liability, both in this chapter and in Concepts Statement 6. Because the application of the liability definition under Concepts Statement 6 frequently did not give sufficient emphasis to the term present obligation, the definition in this chapter more appropriately emphasizes that term. Assessing whether a present obligation exists is the primary criterion in the definition of a liability in this chapter. The primacy of the term present obligation is made more evident through the removal of many of the problematic terms in the definition of a liability in Concepts Statement 6, as discussed in paragraphs BC4.10–BC4.12.

BC4.23. Almost always, the existence of a present obligation will be apparent. Most present obligations are legally enforceable, including obligations arising from binding contracts, agreements, statutes, or other legal or contractual means. However, situations lacking legal or contractual evidence of a present obligation pose particular challenges that may make it difficult to discern whether a present obligation exists.

BC4.24. Determining when a present obligation exists has caused confusion with the existence of business risks. Business risks result from the nature of the business and where, when, and how an entity conducts its business. While certain businesses pose risks of future events occurring that will cause a transfer of economic benefits, the Board decided that the risks themselves are not present obligations because exposure to a potential negative consequence does not constitute a present obligation. Rather than viewing all business risks as liabilities, the Board decided that an entity has a present obligation only after an event occurs that demonstrates that the inherent business risk has created a present obligation. Thus, distinguishing when a business risk makes an entity presently obligated requires analysis of the facts and circumstances at the standards level.

BC4.25. Determining the existence of a present obligation is particularly challenging in evaluating constructive obligations. Those obligations lack legal sanctions that characterize most liabilities. Instead, constructive obligations are binding because of equitable, social, or moral customs. The Board decided that language that existed in paragraph 40 of Concepts Statement 6 would be appropriate to include in this chapter to guide standard setting. Specifically, the following excerpt is helpful:

BC4.26. Given that constructive obligations are created by circumstance rather than explicit agreement, it can be unclear whether a present obligation exists. While present obligation is the primary distinguishing characteristic of a liability, a liability is often accompanied by the notion of having “little or no discretion to avoid the future sacrifice,” as described in paragraph 36 of Concepts Statement 6. This criterion of “little or no discretion to avoid the future sacrifice” is not alone sufficient to create an obligation, but it can be a helpful notion to consider in evaluating whether a constructive obligation exists. In the absence of an explicit agreement, sufficient information to distinguish a present obligation is likely only available at the specific standards level. Thus, the Board decided that specific facts or circumstances at the standards level must be assessed to determine whether an entity has created a constructive obligation.

BC4.27. When an entity determines that a present obligation exists, constructive obligations have uncertain outcomes, especially related to their amount and timing. Those types of obligations were commonly referred to as stand-ready obligations. Assessing the amount and timing of stand-ready obligations is a question of measurement and, thus, is not considered in this chapter. However, the term stand-ready obligation warrants discussion because it has previously created challenges in the application of the definition of a liability. The Board decided that determining when and why a present obligation exists is critical to identifying a liability. However, if an entity is presently obligated, it may be an obligation with an uncertain outcome.

BC4.28. A liability in Concepts Statement 6 is a present obligation that requires the transfer of assets of an entity or the provision of services to other entities. Under that definition, obligations that require future transfers of equity instruments of the entity are not liabilities. Current GAAP and practices are inconsistent with that definition. The inconsistency in the application of the Conceptual Framework definition has led to ad hoc standard-setting decisions, which in turn has resulted in a complex accounting model for financial instruments that have characteristics of both liabilities and equity. The Board recognizes that resolving the distinction between liabilities and equity at the standards level begins with a conceptually sound definition of a liability in the Conceptual Framework that the Board can apply in standard setting.

BC4.29. Distinguishing a liability from equity has been a difficult issue that the Board has considered several times in the past, both at a conceptual level and at the standards level. For many, distinguishing between liabilities and equity is more about the effect on net income than it is about the balance sheet classification. That is because of very different views about how particular financial instruments should be subsequently measured and how changes in values are reflected in the statement of comprehensive income. However, this discussion is a question of measurement and presentation, rather than one of elements and their definitions. A particular financial instrument meeting the definition of a liability does not imply that it must be subsequently measured using a particular measurement method. Similarly, when an instrument does not meet the definition of a liability (that is, it is an equity instrument), that does not imply that the instrument should not be remeasured or that a gain or a loss should not be recognized upon settlement of the arrangement.

BC4.30. Common and preferred shares represent the equity interest in an entity. Those outstanding instruments do not create an obligation to transfer or provide economic benefits. The debate has focused on the classification of obligations that require or may require the issuance of the entity’s own shares.

BC4.31. Some argue that all obligations should meet the definition of a liability regardless of whether the obligation is settled with assets or an entity’s own shares. The Board concluded that an obligation to transfer either assets or a variable number of shares of the entity’s own shares meets the definition of a liability. Under the Board’s proposed definition, there are instruments that create obligations and that are considered equity interests of the entity. Those are instruments in which the value of the instrument varies with the value of the outstanding stock (indexed to the entity’s shares) and that are settled with the entity’s fixed number of shares. The Board notes that the holder of that instrument, although not currently a shareholder of the entity, is on the path to potentially becoming a shareholder of the entity. Holders of that type of instrument participate in the risks and rewards of the issuer’s operations, just not the same way in which a counterparty of an outstanding share does. For example, a holder of a written call option participates in the upside potential in the same way a common shareholder does. That holder also participates in a downside risk, that is, the loss of the premium paid for the instrument. The Board notes that an obligation that requires the issuance of a sufficient number of shares to equal a specific value when issued is a liability. The value to the recipient is fixed; as such, the obligation conveys nothing like the returns and rewards of an equity shareholder.

BC4.32. Net assets of not-for-profit organizations is divided into two mutually exclusive classes dependent upon the existence or absence of donor-imposed restrictions. That requirement modifies Concepts Statement 6, which divided net assets into three classes:

BC4.33. The Board concluded that the two-class distinction was preferable because the prior distinction between permanently restricted classes and temporarily restricted classes had been blurred because of changes in laws. Additionally, the term unrestricted implies to some that the unrestricted portion of net assets is without contractual, legal, or other restriction. For those reasons, the Board decided to combine temporarily and permanently restricted net assets into net assets with donor restrictions and to rename unrestricted net assets to net assets without donor restrictions, thereby dividing net assets for not-for-profits into two classes rather than three.

BC4.34. The fundamental criticism of the existing definitions of investments by and distributions to owners in Concepts Statement 6 is that the elements use the term owners, which was not defined. This chapter clarifies those elements by defining the term owners. The definition of owners is derived from the Board’s decisions made to distinguish between liabilities and equity in this chapter. That is, obligations to issue a fixed number of shares (common or preferred) would be classified as equity. Holders of those instruments and holders of outstanding common and preferred shares are considered owners.

BC4.35. The Board decided to retain the definition of comprehensive income in Concepts Statement 6. The Board notes that the term comprehensive income should continue to be a function of the accounting equation represented by the changes in the recorded assets and liabilities other than from investments by and distributions to owners. As a result, the Board has concluded that all revenues, expenses, gains, and losses should be included in comprehensive income. The Board also notes that describing what is meant by the term owner, and consequently transactions with owners, helps to clarify the definition of comprehensive income.

BC4.36. In discussing revenues, expenses, gains, and losses, some Board members questioned whether defining those elements was necessary given that they are often perceived to be matters of presentation. However, the Board decided to retain all four elements of comprehensive income—revenues, expenses, gains, and losses. The Board also concluded that retaining the elements gains and losses as distinct from the elements revenues and expenses was informative in understanding the composition of comprehensive income.

BC4.37. Concepts Statement 6 uses the terms other activities and ongoing major or central operations to distinguish revenues from gains and expenses from losses. It is not clear whether the term ongoing major or central operations is intended to refer to all revenues and expenses or only those that relate to revenues and expenses from other activities. As a result, the Board decided to remove the term ongoing major or central operations from the proposed definitions of revenue and expense in this chapter. The Board concluded that delivering or producing goods and rendering services are primary factors in distinguishing revenue from gains and expenses from losses, regardless of whether they are considered major or central to an entity. There are certain circumstances in which distinguishing between revenues and gains and expenses and losses can be difficult. In those circumstances, the Board decided that presentation concepts are helpful when distinguishing between those elements to meet the objective of financial reporting.

BC4.38. The Board decided to retain the term other activities in the definitions in this chapter. The inclusion of this term allows sources such as investment income to be considered revenue and charitable contributions made to be considered an expense. It is not the Board’s intent to suggest that the term other activities is an all-encompassing notion that captures every inflow and outflow. The Board’s description of the term other activities is derived from a description of revenues and general activities in APB Statement No. 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises. In APB Statement 4, the term general activities is described as those activities that permit others to use economic resources, which result in interest, rent, royalties, fees, and the like.

BC4.39. The Conceptual Framework is designed to be a robust judgment and decision-making framework that supports the setting of high-quality accounting and financial reporting standards. For reasons discussed below, Ms. Botosan believes that certain aspects of this proposed chapter would fail to enhance, and could potentially reduce, the usefulness of the Conceptual Framework.

BC4.40. Specifically, Ms. Botosan disagrees with the following aspects of this proposed chapter in the Conceptual Framework:

BC4.41. Paragraph 25 of Concepts Statement 6 defines assets as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events” (emphasis added; footnote reference omitted). Concepts Statement 6 describes an entity’s ability to obtain an economic benefit and control others’ access to it as an essential characteristic of an asset. ²¹ In addition, Concepts Statement 6 notes that including the term control in the definition serves to exclude economic resources such as public highways, air, or water from the set of economic resources that might otherwise meet the definition of an asset. ²²

BC4.42. This proposed chapter acknowledges the existence of uncontrolled rights that do not give rise to an asset in the explanatory paragraphs following the definition of an asset. Specifically, paragraph E20 states that “access to a public road outside an entity’s property might provide a right to an economic benefit, but if the entity cannot restrict access to that road, the road is not an asset of the entity” (emphasis added). Ms. Botosan agrees with this statement but believes that control is sufficiently important that it should be elevated from the explanatory paragraphs to the definition itself. She believes that explicit inclusion of control in the definition helps establish the link between an economic resource and a particular entity, which is necessary for an item to be considered an asset of the entity. Ms. Botosan believes that including control in the definition would mitigate potential misapplication of the definition to economic resources to which an entity has a right but no ability to control.

BC4.43. The International Accounting Standards Board’s (IASB) definition of an asset is “a present economic resource controlled by the entity as a result of past events” (emphasis added). ²³ The IASB concluded that including control in the definition is important to link an economic resource to a specific entity. ²⁴ The IASB considered, but rejected, a proposal to remove control from the definition of an asset. The IASB acknowledged that control may be implied by having a right to an economic resource but concluded that control is sufficiently important to warrant explicit inclusion in the definition.

BC4.44. Ms. Botosan believes that differences between U.S. GAAP and IFRS Standards should be limited to situations in which significant cost and/or benefit differences arise because of different legal, regulatory, or social norms. Given the foundational role that the Conceptual Framework plays in standard setting, Ms. Botosan believes that it is particularly important to limit differences in the conceptual frameworks to situations for which there is a compelling justification. Ms. Botosan believes that both the IASB and the FASB intend to restrict assets to rights controlled by the entity. Ms. Botosan is concerned, however, that the Boards’ different decisions about the need to explicitly reference control in the definition raise the risk of different application outcomes. Ms. Botosan also believes that the definition of an asset in this proposed chapter would be more robust and would more closely converge with the IASB definition of an asset if control were included.

BC4.45. Control also plays an essential role in principles guiding the derecognition of an asset. For example, paragraph 5.26 of the IASB’s Conceptual Framework for Financial Reporting states that:

BC4.46. This proposed chapter does not address principles of derecognition; however, the Conceptual Framework is intended to be a coherent system of interrelated objectives and fundamental concepts. Ms. Botosan is concerned that the proposed decision to remove the term control from the definition of an asset risks complicating subsequent development of principles guiding the derecognition of an asset.

BC4.47. The definition of equity in this proposed chapter is unchanged from the definition in Concepts Statement 6. Equity is defined as “the residual interest in the assets of an entity that remains after deducting its liabilities.” Ms. Botosan believes that “assets minus liabilities,” a mathematical statement derived from the basic accounting equation, falls far short of a conceptual definition of equity. She notes that the definitions of assets and liabilities draw on the underlying economic concepts of economic resources and economic obligations, respectively. Ms. Botosan believes that a definition of equity that similarly draws on the underlying economic concept of a residual claim would offer a more powerful tool in standard setting. Ms. Botosan finds the existing definition of equity to be of little use in standard setting because equity, by definition, is simply a mechanical outcome of the recognition and measurement decisions afforded to assets and liabilities.

BC4.48. The definition of comprehensive income in this proposed chapter is unchanged from the definition in Concepts Statement 6. Comprehensive income is defined in terms of the change in equity from nonowner sources; a mathematical statement derived from the basic accounting equation. Ms. Botosan believes that this definition falls far short of a conceptual definition of comprehensive income. Ms. Botosan believes that a definition of comprehensive income that draws on the underlying economic concept of economic income would offer a more powerful tool in standard setting.

BC4.49. Specifically, Ms. Botosan believes that the existing prescriptive definition of comprehensive income fails to provide an adequate framework for the Board to debate whether certain changes in net assets appropriately belong in comprehensive income because under the existing definition, comprehensive income is simply a mechanical outcome of the recognition and measurement decisions afforded to assets and liabilities. Consequently, the existing definition provides no comprehensive income “off-ramp” for changes in net assets that resource providers do not view as informative of income accruing to equity holders.

BC4.50. For example, in paragraph BC62 of Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the FASB acknowledges that:

The amendments in Update 2016-01 addressed this issue by requiring that those changes in fair value be reported in other comprehensive income. However, in paragraph 4.53 of the 2016 Invitation to Comment, Agenda Consultation, the Board acknowledged that there is no conceptual basis for classifying items in other comprehensive income. Ms. Botosan believes that having to resort to a mechanism for which there is no conceptual basis is the direct result of the prescriptive definition of comprehensive income.

BC4.51. The elements definitions in the Conceptual Framework are intended to help the FASB objectively and consistently identify and classify items included in financial reports. For example, the definition of an asset has proven useful in standard setting because it provides a framework for considering what items should be reported in financial statements as assets. Ms. Botosan believes that the existing prescriptive definitions of equity and comprehensive income have not served the Board well in past standard-setting efforts. She believes that the proposal to retain those definitions, which emphasize the practical balancing function of the equity section in a statement of financial position to the detriment of conceptual definitions of equity and comprehensive income represents a missed opportunity to improve the available tools to support the setting of high-quality accounting and financial reporting standards.

BC4.52. The definitions in Concepts Statement 6 and in this proposed chapter link revenue to the provision of goods or services or conduct of other activities and gain to activities that are not revenue producing. To further distinguish revenue from gain, however, the Concepts Statement 6 definition of revenue includes a reference to an entity’s ongoing major or central operations, and the existing definition of gain includes a reference to peripheral or incidental activities. The proposed definitions eliminate this language. Ms. Botosan acknowledges that the Concepts Statement 6 definitions of revenue and gain are not perfect, but she believes that the proposed removal of that language will make the definitions less helpful when deciding between revenue or gain classification in standard setting.

BC4.53. Ms. Botosan questions the benefit of separately defining revenue and gain if those definitions offer limited help in distinguishing between them. Ms. Botosan believes that the distinction between revenue and gain is more appropriately addressed as a gross versus net presentation issue. Specifically, revenue (that is, gross) presentation is preferred when margin information is relevant, whereas gain (that is, net) presentation is preferred when margin information is not relevant. Ms. Botosan notes that addressing the distinction between revenue and gain as a presentation issue instead of as a definitional issue would be more consistent with the IASB’s Conceptual Framework. In Ms. Botosan’s opinion, there is no compelling advantage to the proposed separate definitions of revenue and gain, and she believes that differences between the FASB’s and the IASB’s conceptual frameworks should be limited to situations with a compelling justification.

BC4.54. Finally, Ms. Botosan notes that the definition of revenue in Topic 606, Revenue from Contracts with Customers, is consistent with the definition in Concepts Statement 6. Ms. Botosan acknowledges that amendments to the Conceptual Framework do not affect existing authoritative guidance. Nevertheless, she believes that having a different definition of revenue in Topic 606 versus the Conceptual Framework is less than ideal. She finds this difference difficult to justify given her belief that the proposed definitions do not enhance the usefulness of the Conceptual Framework.

BC4.55. Ms. Botosan has similar concerns with the proposed definitions of expense and loss. For brevity, those concerns are not reiterated in that context.