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1.2 -The definition of liability can help decide the accounting treatment of the situation. Under the
Conceptual Frameworka liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits. In this case, the past event is the fall and injury to the pedestrian.
- Present obligation depends on the probability of payment. The attorney has advised that a $25
000 loss is probable. Therefore appropriate accounting involves recognising a liability for the
probable payment. An expense would also be recognised.
- Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities. In this case, the expense arises at the
time the pedestrian is injured because a liability has also arisen at that time.
1.6
(a)Trinket of sentimental value
- Fails the para 49(a) asset definition as it does not constitute future economic benefits, defined
in para 53 as the potential to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity.
- Recognition criteria are irrelevant, as there is no asset to recognize
