Question

The definition of a liability under the conceptual framework incorporates three essential characteristics. identify and briefly explain these three characteristics.

Answer 1

A liability has three essential characteristics:

(a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand

In legal terms this would be an obligation to pay a specific party or parties. By strict definition, accrual-in-advance may not meet this definition. When considering the financial substance of the transaction and its effect on current financial position, the liability created under the accrue-in-advance method may be a far more accurate measurement. Accrue-in-advance allows for true matching of expenses (and liabilities) to the periods in which they occurred

(b) the duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice

From a practical standpoint, major overhaul costs cannot be avoided, and in some cases they are strictly regulated. Weather accrue-in-advance meets this portion of the definition would depend on the intent of the applying party.

(c) the transaction or other event obligating the entity has already happened.

The accrue-in-advance method provides a measurable result in the period in which it occurs, and the resulting expense and liability are matched to that period