Project Pages

Conceptual Framework—Elements of Financial Statements

Primary Objective: The objective of this project was to define key elements of financial statements as well as to describe or define related concepts that primarily will guide the Board in establishing future standards. The project scope included transactions and other events, specific elements (for example, assets and liabilities), and the interrelationship of elements.

Status: Concepts Statement No. 4, Elements of Financial Statements, was issued on June 26, 2007.

Conceptual Framework: Elements of Financial Statement—Project Plan

Project Description: The objective of this project is to define key elements of financial statements as well as to describe or define related concepts that primarily will guide the Board in establishing future standards. The project scope includes transactions and other events, measurement focus, basis of accounting, specific elements (for example, assets, liabilities, revenue), and the interrelation of elements. This project will lead to a Concepts Statement.

Background: This project is needed to provide the GASB with guidelines to help determine if and how events should be recognized as elements in financial statements. Without established definitions of elements and basic concepts, the risk is high that over time standards will include inconsistencies and possibly contradictory solutions to essentially similar accounting issues. Therefore, the project should benefit users by providing them with more consistent reporting, and also should help preparers and attesters when attempting to determine the proper financial reporting for events that are not specifically discussed in the authoritative literature. This project has been an integral part of the overall reexamination of the financial reporting model since that project’s inception in 1984; however, it was not identified as a stand-alone project until January 1993.

Accounting and Reporting Issues:

  1. What are elements of financial statements?
     
  2. What is the entity (or governmental unit) that should serve as the reference point for defining elements?
     
  3. What is a fund?
     
  4. Which elements should be defined? When this project was delayed in 1996, the Board had decided to focus initially on defining primary elements (for example, assets and liabilities). A decision on whether to define secondary or sub-elements (for example, financial assets, receivables, capital assets, infrastructure assets, intangible assets, etc.) was deferred.
     
  5. How should these elements be defined?
     
  6. How do elements change? Assuming elements change as a result of transactions or other events, it is necessary to define these terms. How should transactions and events be defined? What are external and internal events? Should the Concepts Statement distinguish between exchange and nonexchange transactions?
     
  7. What is the relationship between elements and recognition and measurement?
     
  8. To what extent should measurement focus and basis of accounting be discussed (in detail or in general)? 

Project History:

At the August 1995 meeting, the Board approved the project scope and approach. Also in August, the Board arrived at tentative conclusions on the definition of an "entity" for purposes of applying definitions of the financial statement elements. In the remainder of 1995, the Board reached tentative conclusions on the definitions of event, transaction, exchange transaction, asset, and liability. The Board also tentatively adopted a classification scheme for revenue and expense transactions, the primary purposes of which was to group nonexchange transactions into different classes based on their characteristics and to assist with the development of recognition criteria (in the related financial reporting model project) for each class of transaction. The classification scheme for revenues served as the conceptual underpinning for Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. Also in the fourth quarter of 1995, the Board tentatively concluded that the Concepts Statement should include definitions of basis of accounting, cash basis of accounting, accrual basis of accounting, measurement focus, financial resources, and economic resources. Although reference would be made in the Concepts Statement to "modified accrual basis of accounting," the Board tentatively agreed that the term should not be defined in the Concepts Statement because the Board did not believe that "modified accrual" was a unique conceptual notion, but rather combined attributes of both the cash and accrual bases of accounting.

In the first quarter of 1996, the Board tentatively adopted definitions of most of the elements and underlying concepts that it planned to include in the proposed Concepts Statement. Several documents, including FASB Concepts Statement No. 6, Elements of Financial Statements—a replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2) and the International Federation of Accountants‘ Public Sector Committee Study 2, Elements of the Financial Statements of National Governments, as well as publications on financial statement elements by the standards-setting bodies of Canada, Australia, New Zealand, and the United Kingdom, were used as reference sources in the development of these definitions.

At the March 1996 meeting, the Board directed staff to develop a glossary of the financial statement element terms and concepts, as tentatively adopted to date. At that time, the development of a Concepts Statement was placed on hold so that additional Board and staff time could be devoted to the model projects. A glossary containing the definitions of financial statement elements and underlying concepts that the Board had tentatively adopted through the February meeting was distributed to the Board and staff in April 1996. The Board devoted portions of five meetings to the elements project during 1995 and 1996.

A revised version of that paper (revised to include a more thorough discussion of nonexchange transactions) was distributed to the Board and staff in January 1998. (That glossary, titled "Working Definitions of Financial Statement Elements and Related Concepts," is commonly referred to as the "blue paper.") Portions of that glossary were especially important in the development of Statement 34. For example, the discussion of interfund activity, balances, and services provided conceptual support for the Board’s decision on how internal events related to interfund activities should be reported.

At the July 2004 meeting, the Board restarted deliberations on the elements projects with a review of the progress of the Board in its prior deliberations, reviewed elements Concepts Statements issued by other standards setters, and discussed the principal differences between governmental and business entities with a view to why an elements’ Concepts Statement might be different.

The Board requested that staff prepare a memorandum for the August 2004 meeting that would explore in greater depth the principal features of governments, including why they were formed, what their objectives are, why financial reporting by governments is needed, the purpose of financial reporting by governments, and the implications for elements of financial statements. This paper has been drafted and is undergoing revisions with the goal being to issue a stand-alone "white paper" that will serve to explain to those not familiar with governmental accounting how governmental accounting is unique and why governmental standard setting should continue.

At the October meeting, the Board tentatively decided that it will pursue defining elements of financial statements using a "flow of resources" approach. In using the term "flow of resources" approach, the Board believes that the statement of activities (or other change statement) should present information that can be used to assess the performance of management of the government, rather than strictly presenting increases and decreases in assets and liabilities from the prior period. This approach recognizes that there are circumstances in which it may be appropriate to defer costs and revenues. The Board also tentatively decided at this meeting that elements that will be defined through this project are the basic building blocks of financial statements, such as assets, liabilities, and revenues, etc. and are not the items, such as receivables, bonds payable, or sale tax revenue, that meet the definitions of particular elements.

At the November 2004 meeting, the Board considered the various possibilities to determining which entity elements of financial statements should refer and tentatively decided that elements will be defined for a governmental unit, a legally separate entity. The Board also acknowledged that when financial statements are prepared for a reporting unit (for example, an activity, fund, or segment), the elements of the reporting unit are the elements of the governmental unit that have been assigned to the reporting unit, delegated to the reporting unit for management purposes, or reported in the reporting unit for the purpose of demonstrating accountability or legal compliance, plus interfund elements (for example: interfund assets and liabilities) that may arise due to the fact that the reporting unit is a subset of a governmental unit.

At the January 2005 meeting, the Board tentatively decided to pursue defining elements of financial statements by their inherent characteristics such that the definitions would be applicable to any measurement focus, basis of accounting, and measurement attribute employed in a particular financial statement. The Board began discussing the inherent characteristics of assets.

At the February and April 2005 meetings, the Board continued its discussion of the definition of assets and began discussing the inherent characteristics of liabilities, tentatively agreed on a definition for assets,

Assets are resources that are presently controlled by the entity.

For an item to be an asset of an entity, it is required to possess both of the following inherent characteristics:

  • The resource is capable of providing a future benefit.
     
  • Access to or use of the future benefit is presently controlled by the entity.

For this resource to also be reported as an asset of an entity, it should also meet applicable recognition and measurement criteria.

At the May 2005 meeting and prior to completing discussions of the inherent characteristics of liabilities, the Board considered issues of how all elements integrate tentatively concluding that assets, liabilities, inflows and outflows of resources presented in change statements should be defined according to their inherent characteristics and that deferred items should be defined in such a way as to integrate the elements defined according to their inherent characteristics—the hybrid approach.

At the June 2005 and August 2005 meetings, the Board further discussed the hybrid approach, tentatively concluding that all elements should be defined at a high level, such that they can be applied to all measurement focuses and bases of accounting. The Board also tentatively concluded that inflows of resources and outflows of resources presented in change statements are the only elements of change statements and that timing is an essential characteristic of these elements.

At the September 2005 meeting, the Board tentatively decided that the inherent characteristics of outflows and inflows of resources are (1) consumption and acquisition of net resources and (2) applicability to the period. For financial statements prepared under the economic resources measurement focus, applicability to the period refers to consistency with interperiod equity. The Board also tentatively decided that separate elements for transactions with owners are not needed. The inherent characteristics of deferred outflows and inflows of resources are (1) consumption and acquisition of net resources and (2) applicability to a future reporting period.

At the November 2005 meeting, the Board tentatively concluded that only a brief discussion of application of the definition of elements of financial statements in different measurement focuses is needed. The notion of current financial resources should be described as resources that are financial in nature and are available for spending. Under the current financial resource flows measurement focus, assets and liabilities are current financial resources and claims against current financial resources, both being short-term in nature. The Board also tentatively decided that the various terms for outflows and inflows of resources, such as revenues, other financing sources, receipts, expenses, expenditures, other financial sources, and disbursements, would be mentioned in order to clarify how the high-level definitions are applied in different measurement focuses, but that it was not desirable to match to terms up with a specific measurement focus. The Board tentatively agreed that basis of accounting needed be mentioned only in the general approach section. The Board also agreed with the staff recommendation to place the definition and discussion of resources before all definitions of elements of financial statements and to augment the discussion to recognize that human resources are a type of resource.

At the December 2005 meeting, the Board tentatively agreed that liabilities will be defined as present obligations of an entity. In this definition, obligations are future sacrifices of resources that the entity has little or no discretion to avoid. Also, an obligation is a present obligation when the sacrifice of resources is not contingent of future events. The Board also tentatively agreed that (1) obligations can be constructive in nature when an entity has little or no discretion to avoid the future sacrifice due to social, moral, or economic consequences and (2) constructive obligations rarely if ever arise from nonexchange transactions.

At the January 2006 meeting, the Board tentatively decided that net assets will be defined as a residual of all other statements of position elements and that deferred outflows of resources and deferred inflows of resources are individual elements of financial statements.

At the March 2006 meeting, the Board tentatively agreed that the issue of whether a government’s power to tax is an asset of the government should be discussed in the proposed Concepts Statement on elements of financial statements. The power to tax does not become an asset of an entity until the transaction levying the tax or the underlying taxed transaction, as applicable, occurs. The Board also tentatively agreed to use the term resource flows statements to generically refer to a statement of activity; a statement of revenues, expenditures, and changes in fund balance; a statement of revenues, expenses, and changes in net assets; or a cash flows statement.

At the April meeting the Board considered comments on the draft definitions of elements from the members of the task force and tentatively agreed to various clarifying revisions.

At the May/June 2006 meeting, the Board refined the wording of the definitions of assets and liabilities. Assets are resources that the entity presently controls. Liabilities are an entity’s present obligations to sacrifice resources or future resources that it has little or no discretion to avoid. This definition uses the term obligation in a general, rather than specific, sense, and this change will be reflected in the balance of the draft exposure draft. Additionally, the Board reconsidered the nature of constructive liabilities, tentatively agreeing that they generally arise only from exchange transactions. The Board, however, did not want to preclude the possibility that a constructive liability might arise from a nonexchange transaction.

At the July 2006 meeting and August 2006 teleconference, the Board continued to refine and edit the specific language of the draft exposure draft. At the August teleconference, the Board voted to issue the exposure draft.

During the period from December 2006 through March 2007, the Board has evaluated comments received on Issue 1, the overall approach to defining elements of financial statements; Issue 2, using resources as a feature common to definitions of all elements; Issue 3, the definitions of assets, liabilities, outflows of resources, and inflows of resources; and Issue 6, constructive liabilities, as well as other general comments. The Board has tentatively agreed to a number of editorial changes that improve the understandability of the Concepts Statement and has tentatively confirmed its proposals make in the Exposure Draft with the following exceptions. The element previously referred to as net assets will now be referred to as net position to better reflect the range of measurement focuses under which financial statements may be prepared. The way the term resource is defined and used in the Concepts Statement has been changed. The term resource is now used in a broader, dictionary-based definition of the word, rather than the technical meaning used in the Exposure Draft. As such, the discussion contrasting present and future resources that was included in the Exposure Draft, that many respondents indicates was confusing, is no longer needed. A paragraph will be added explaining the term little or no discretion as used in the definition of a liability.

Elements of Financial Statements—Minutes for Deliberations

Minutes of Meeting, June 19-21, 2007

After agreeing upon a few final editorial changes in the introductory section, the Board voted unanimously to issue Concepts Statement No. 4, Elements of Financial Statements.

Minutes of Meeting, May 29, 30, and June 2, 2007 Teleconferences

The Board reviewed a ballot draft of Concepts Statement No. 4, Elements of Financial Statements, tentatively agreeing upon a limited number of editorial changes and also requested additional edits in the introductory section.

Minutes of Meeting, May 1-3, 2007

The Board reviewed a preballot draft of Concepts Statement No. 4, Elements of Financial Statements, and tentatively agreed upon a number of editorial changes. Additionally, the Board tentatively agreed to add an example to illustrate the concept of constructive obligations and to remove certain examples of uncertainties that were not sufficiently representative. The Board also tentatively agreed to expand and clarify the discussion of how this Concepts Statement improves financial reporting.

Minutes of Meeting, April 3-5, 2007

As a result of its evaluation of comments received on Issue 4 (interperiod equity) and Issue 5 (the definitions of deferred outflows and inflows of resources) in the Exposure Draft, Elements of Financial Statements, the Board tentatively agreed to the following changes: 

  • The Basis for Conclusions will include a paragraph that distinguishes the concept of interperiod equity from the concept of matching, as well as explains that the concept of interperiod equity used in this Concepts Statement focuses on the accounting and financial reporting aspects of the concept versus that used in Concepts Statement No. 1, Objectives of Financial Reporting, which focused solely on its use in a budgetary context.
     
  • An increase in the level of borrowing will be used as an example of how the burden of paying for the cost of services can be shifted to future-year taxpayers or revenue providers.
     
  • The Basis for Conclusions discussion of deferred outflows and inflows of resources will include the example of the deferral of sales of future revenues. Also included will be a discussion that the Board is currently considering standards for accounting and financial reporting for derivatives and might conclude that changes in the fair market value of hedging derivatives meet the definition of deferred outflows and inflows of resources.

The Concepts Statement will include the statement that standards will establish which items meet the definitions of deferred outflows and inflows of resources and that it is inappropriate for practitioners to analogize that any other item or items should be reported as deferred outflows or inflows of resources due to the judgment needed to assess applicability to the period.

Minutes of Meeting, March 12, 2007 Teleconference

The Board discussed a number of revisions to the draft Concepts Statement, primarily in the paragraphs discussing the definition of a liability. The Board tentatively agreed to include the paragraph explaining the meaning of the phrase little or no discretion as used in the definition of a liability. The remaining revisions were editorial in nature.

Minutes of Meeting, February 20–22, 2007

The Board continued its discussion of comments on the Exposure Draft, Elements of Financial Statements. In concluding the deliberations on the comments related to the definition and discussion of resources and assets, the Board tentatively concluded that:

  • A resource will be defined as a supply or other means that can be drawn on when needed.
     
  • A resource applied to a governmental context is an item that can be drawn on to provide services to the citizenry.
     
  • To be consistent with the source for the general definition of a resource, the definition of an obligation will be drawn from this same source.
     
  • It is not appropriate to discuss construction in progress in the explanation of present service capacity.
     
  • To avoid potential confusion, both terms service capacity and present service capacity should not be used; present service capacity will be used exclusively.
     
  • The language describing control of a resource as, in part, the ability of the entity to “access the resource’s service capacity” should be replaced with “utilize the resource’s present service capacity.”
     
  • The phrase transactions and other events will be replaced with the broader term events. Examples used to illustrate concepts need not provide an example of both a transaction and other event but rather may be a single example for events overall.

As a result of the discussion of the comments received on the definition of liabilities and specifically Question 6 on constructive liabilities, the Board tentatively agreed that:

  • An expanded discussion of the term little or no discretion should be included.
     
  • The example of a liability for which the specific party to whom the liability is owed is not known will be changed to refunds owed for overpayment of income taxes prior to the filing of tax returns and refunds owed for anticipated adjustment due to property tax assessment appeals.
     
  • The heading present responsibility should be changed to present obligation.
     
  • Certain clarifications to the paragraph describing present obligation will be made.
     
  • The paragraph discussing commitments will be moved from the obligation section to the present obligation section.
     
  • The discussion of constructive liabilities will explain that they are associated with a government’s actions, conduct, or promises.
     
  • Some of the explanation of constructive obligations in the Basis for Conclusions will be moved the concepts section of the document.
     
  • The general principles related to eligibility requirements will be explained in the Basis for Conclusions.

As a result of the discussion of the comments received on the definitions of outflows of resources and inflows of resources, the Board tentatively agreed that:

  • In many places in the discussion of outflows of resources and inflows of resources, the references to net resources should be to net assets instead.

An example of a loss would be added to the discussion of outflows of resources.

Minutes of Meeting, January 29, 2007 Teleconference

The Board discussed proposed revisions to the way the term resource is defined and used in the Concepts Statement, tentatively agreeing that use of a broader dictionary definition for resource is better and clearer than the discussion of present and future resources that was included in the Exposure Draft, Elements of Financial Statements. The Board, however, did not believe that the specific definition of a resource included in the proposed revisions was the most appropriate one for the governmental environment and requested that the staff review alternative dictionary definitions. The Board also did not support the proposed inherent characteristic for an asset of having an identity separate from the entity. The Board requested that the staff revise the document to remove this language and to explain that powers inherent in a government, such as the power to tax, are not assets because they do possess present service capacity until exercised.

Minutes of Meeting, January 9–11, 2007

The Board continued its evaluation of comments from respondents to the Exposure Draft of the proposed Concepts Statement, Elements of Financial Statements, focusing on the comments in response to Issues 1 and 2. Based on this discussion, the Board tentatively agreed to the following:

  • Paragraph 31 of Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements, will be modified as a conforming change to describe the amounts recognized in financial statements as assets, liabilities, deferred outflows of resources, deferred inflows of resources and residual balances, as well as inflows of resources and outflows of resources.
     
  • The element previously referred to as net assets will now be referred to as net position to better reflect the range of measurement focuses under which financial statements may be prepared.
     
  • Due to the relatively short length of the statement, the extensive use of headings and subheadings, and the potential to misinterpret definitions without context, a glossary will not be added to the Statement.
     
  • The Basis for Conclusions will be modified to explain why the services of an individual are included as an example of resources and why the Board believes that human resources generally would not meet the definition of an asset.

The Board reviewed proposed changes to the sections discussing resources and assets to consider whether those changes were sufficiently responsive to respondents’ concerns regarding clarity of the terms resources and future resources, but it did not reach a tentative agreement on revised language for those sections. The Board agreed to review alternative revised language at the teleconference meeting on January 29th.

Minutes of Meeting, December 18, 2006 Teleconference

The Board reviewed comments on a variety of issues and tentatively agreed that:

  • The Basis for Conclusions will include a brief reference to the unique characteristics of governments and explain that these definitions of elements reflect these unique characteristics.
     
  • Paragraph 2 will include a discussion explaining that the names of the elements of financial statement were selected to be neutral with respect to the measurement focus employed in a financial statements and do not reflect specific titles that are expected to be used in financial statements.
     
  • The Board confirmed that the scope of this concepts statement does not include the format of financial statements.
     
  • The Board confirmed that net resources, defined as assets minus liabilities, is not an element of financial statements.
     
  • The Board confirmed that the discussion of uncertainty in the proposed concepts statement remains appropriate.
     
  • The discussion of resources will be augmented to emphasize the unique nature of certain government resources, such as certain types of infrastructure.
     
  • The Board confirmed that the definitions of elements will apply to a legally separate governmental unit.
     
  • The Board confirmed that the application of the elements to a particular accounting transaction is beyond the scope of this concepts statement.
     
  • The more commonly used phrase, transactions and other events, will be used to clarify paragraph 2.
     
  • The discussion of the entity to which the definitions apply will be modified to use the terms reporting entity, governmental unit, and reporting unit in a more generic manner.
     
  • The Board confirmed that the purpose this concepts statement is the further the development of a conceptual framework that will guide future Board to develop standards that are consistent and further the objective of financial reporting.
     
  • The Board confirmed that revisiting existing standards for consistency with the final definitions of elements is outside the scope of this project.

Minutes of Meeting, July 31, 2006 Teleconference

The Board (Board member Williams did not participate due to technical difficulties) reviewed and discussed the ballot draft of the proposed Concepts Statement, Elements of Financial Statements. The Board agreed to include in the proposed Concepts Statement the four discussion issues presented in the staff paper as well as two additional issues. The additional issues are (a) whether the respondents agree with the proposed definitions of assets, liabilities, outflows of resources, and inflows of resources and (b) whether respondents agree that resources as defined in the proposed Concepts Statement is a common feature of all elements of financial statements. The Board also agreed to various editorial changes to the document. The document was subsequently balloted and unanimously approved for issuance as an exposure draft.

Minutes of Meeting, July 11-13, 2006

The Board reviewed a preballot draft of a Concepts Statement on Elements of Financial Statements and directed the staff to make a number of primarily editorial revisions, including clarifying that liabilities associated with nonexchange transactions generally would not arise as the result of constructive obligations. Additionally, the Board considered the best way to explain how construction-in-progress meets the definition of an asset, agreeing on language that explains that construction-in-progress provides an indirect service benefit because it can be combined with other resources to produce a resource that directly provides a service benefit. The board extensively discussed the issue of the way the current financial resource flows measurement focus would be discussed in the document. After considering several alternatives presented in the staff paper, the Board tentatively concluded that the Concepts Statement should refer to current financial resource flows as a measurement focus to which these definitions of elements could be applied, without defining current financial resources or providing specificity as to when outflows or inflows of resources are applicable to a period under the current financial resource flows measurement focus. These issues would be addressed as part of the conceptual framework project on recognition and measurement.

Minutes of Meeting, May 31–June 2, 2006

After reviewing a number of options for defining assets and liabilities, the Board tentatively agreed that:

  • The definition of assets will be "resources that the entity presently controls." The explanations of the two inherent characteristics—resource and present control—will be included as the first sentence of each applicable section, rather than as bulleted item associated with the definition paragraph.
     
  • The definition for liabilities will be "an entity’s present obligations to sacrifice resources or future resources that it has little or no discretion to avoid." This definition changes the way the term obligation is used throughout the proposed Concepts Statement. Instead of the narrow meaning ascribed to the term obligation in paragraph 18, the term will now have a more general meaning. As such, there may be obligations that do not require an entity to sacrifice resources or future resources, such as an obligation to refrain from certain actions. Due to this change in the usage of the term obligation, additional changes throughout the document, primarily the section on obligations, are needed.

The Board then discussed the issue of whether liabilities arising from nonexchange transactions may be constructive in nature—that is, whether social, moral, or economic consequences, rather than legal requirements, can result in such a liability. The Board tentatively agreed to modify the language that stated absolutely that liabilities that are constructive in nature arise only from exchange transactions. The Board also tentatively agreed to add language explaining that liabilities resulting from exchange transactions generally arise when consideration has been exchanged, and liabilities resulting from nonexchange transactions arise when commitments to sacrifice resources reach a similar stage of maturity as exchange transactions.

The Board also reviewed a draft Concepts Statement that for the first time included a Notice to Recipients, Summary, Background Information, Basis for Conclusions, and Codification Instructions. A number of editorial changes were suggested and tentatively agreed upon.

Minutes of Meeting, April 18-20, 2006

The Board reviewed the comments from task force members on the draft sections of a Concepts Statement on Elements of Financial Statements. Based upon these comments, the Board tentatively agreed to a number of revisions that clarified the information that the Board has previously tentatively agreed to convey in the draft Concepts Statement. These revisions include rewriting negatively phrased sentences, eliminating unnecessarily detailed examples, exploring possibilities for rewriting the definitions of assets and liabilities into a narrative form, and clarifying the discussion of the relationship between consumption and acquisition of resources and changes in deferred items.

Minutes of Meeting, March 7-9, 2006

The Board tentatively agreed that the issue of whether a government’s power to tax is an asset of the government that should be discussed in the proposed Concepts Statement on elements of financial statements. Staff was directed to prepare a discussion to explain that the power to tax does not become an asset of an entity until the transaction levying the tax or the underlying taxed transaction, as applicable, occurs. This discussion may include components such as (1) a comparison of assets from a general economic perspective with assets from an accounting perspective; (2) the identification that the power to tax does not become a resource, one of the inherent characteristics of an asset, until the levy or underlying taxed transaction occurs; and (3) a statement recognizing the similarities between general rights and responsibilities accorded to a government upon its creation, such as the power to tax and the duty to provide services to citizens, and how neither is an asset nor a liability for accounting purposes until certain transactions or other events occur.

The Board requested minor revisions to the language in the scope section of the proposed Concepts Statement to expand the explanation of a legally separate entity.

The Board tentatively agreed that the definitions of the elements of financial statements should be included in the summary of the proposed Concepts Statement and that a subheading for resources was needed in the section discussing the general approach to defining elements of financial statements.

The Board tentatively agreed with the ways that measurement focus was discussed in the draft proposed Concepts Statement, suggesting some minor edits.

The Board tentatively agreed to use the term resource flows statements to generically refer to a statement of activity; a statement of revenues, expenditures, and changes in fund balance; a statement of revenues, expenses, and changes in net assets; or a cash flows statement.

The Board tentatively agreed with the order of presentation of the elements in the draft proposed Concepts Statement recommended by staff.

The Board tentatively agreed to specific edits to the explanation of interperiod equity in the discussion of applicability to the period.

Finally, the Board tentatively agreed with the proposed language for explaining that consumption and acquisition of resources can occur through changes in balances of deferred outflows and inflows of resources, as applicable.

Minutes of Meeting, January 24-26, 2006

The Board tentatively decided that net assets will be defined as a residual of all other statement of position elements and that the associated discussion of the element will explain that this amount is also the accumulation of all inflows and outflows reported on change statements.

After considering the inherent characteristics of deferred items and of other tentatively defined elements, the Board tentatively concluded that deferred outflows of resources and deferred inflows of resources are individual elements of financial statements—not subsets of other elements. Consequently, net assets can be defined as assets minus liabilities and plus or minus deferred items.

Minutes of Meeting, December 13-15, 2005

The Board resumed its discussion of the definition and inherent characteristics of liabilities. The Board tentatively decided (1) that liabilities are present obligations of an entity and, as used in this definition, that obligations are future sacrifices of resources that the entity has little or no discretion to avoid and (2) that an obligation is a present obligation when the sacrifice of resources is not contingent on future events. The Board also tentatively agreed that the format of the definition of assets would be modified in a similar manner as the tentative definition in that the one-sentence definition would be followed by brief statements defining each of the two inherent characteristics. The Board discussed the proposed language for the detailed discussion of the inherent characteristics of a liability, suggested some edits, and tentatively agreed (1) that obligations can be constructive in nature when an entity has little or no discretion to avoid the future sacrifice due to social, moral, or economic consequences and (2) that constructive obligations rarely if ever arise from nonexchange transactions.

Minutes of Meeting, November 1-3, 2005

After evaluation of the extent to which measurement focus should be included in a concepts Statement on elements of financial statements, the Board tentatively concluded that a brief discussion of the application of the definition of elements of financial statements in different measurement focuses, such as that on page 7 of Paper 1, is needed. The Board provided suggestions to improvement the clarity of the examples in that paragraph and concluded that the notion of current financial resources should be described as resources that are financial in nature and are available for spending. Under the current financial resource flows measurement focus, assets and liabilities are current financial resources and claims against current financial resources, both being short term in nature. The Board also tentatively decided that the various terms for outflows and inflows of resources, such as revenues, other financing sources, receipts, expenses, expenditures, other financial sources, and disbursements, would be mentioned in order to clarify how the high-level definitions are applied in different measurement focuses.

The Board tentatively agreed that basis of accounting need be mentioned only in the general approach section and provided edits to the language proposed in Paper 1.

The Board also agreed with the staff recommendation to place the definition and discussion of resources before all definitions of elements of financial statements and to augment the discussion to recognize that human resources (for example, as embodied in payroll costs) are a type of resource that is used by a government.

Minutes of Meeting, September 20-22, 2005

The Board’s discussion focused on the elements of financial statements that describe outflows and inflows of resources that are reported in change statements. The Board tentatively concluded that these elements will be named "outflows and inflows of resources," and that the inherent characteristics of these elements are (1) consumption and acquisition of net resources and (2) applicability to the current reporting period. As used in these definitions of elements of financial statements, the term resources refers to those resources that are reported under the measurement focus of the pertinent financial statement. The discussion of the definitions of these elements will note that consumption and acquisition of net resources result in relative net increases or decreases, as appropriate, of resources controlled by the entity and present obligations of the entity. The Board tentatively decided that applicability to the period in financial statements prepared under the economic resources measurement focus refers to consistency with the measurement of interperiod equity and that this second inherent characteristic under the cash measurement focus refers to when cash is paid or received. The Board did not reach a conclusion on how the inherent characteristic of applicability to the current reporting period applies to the current financial resources measurement focus, but rather directed staff to develop a paper to be presented at a future Board meeting that addresses the conceptual underpinnings of that measurement focus. The Board also tentatively concluded that separate elements from transactions with owners are not needed.

The Board also considered proposed definitions for deferred items and tentatively decided that their inherent characteristics include (1) consumption and acquisition of net resources that (2) are applicable to a future reporting period. However, the Board did not address whether these definitions will be combined with the asset and liability definitions or be proposed as separate elements.

Minutes of Meeting, August 9-11, 2005

The Board considered whether inflows and outflows of resources reported in change statements each consists of more than one element and tentatively concluded that the staff should continue to explore definitions of inflows and outflows that do not consist of more than one element, consistent with the Board’s intention to define element of financial statements at a high level. The Board also recognized that the previously used terms net inflows and net outflows could be interpreted to mean that related inflows and outflows should be netted on the change statements, and requested staff to develop new terms for these elements.

Through their evaluation of the models of integrating financial statements presented in issues paper 2, the Board tentatively concluded that timing is an inherent characteristic of the element of inflows of resources that are presented in a change statement, thereby eliminating models 5–7 in issues paper 2. The Board did not reach a conclusion among the remaining models on which best describes the relationship among elements of financial statements.

Minutes of Meeting, June 21–23, 2005

The Board discussed the hybrid approach and the preliminary definitions of elements of financial statements included in the staff paper. The Board agreed to continue pursuing the hybrid approach in which assets, liabilities, net inflows of resources, and net outflows of resources are defined based upon their inherent characteristics, with deferred items serving to articulate the statement of net assets and change statement. The Board tentatively agreed that the definition of revenues (net inflows of resources) and, by extension, the definition of expenses and losses (net outflows of resources) should not refer to the period of time to which the flow is applicable, but rather should be at a higher level that is applicable to all measurement focuses and bases of accounting. The Board tentatively agreed that the period in which the flow should be reported (recognition) should be discussed in future Concepts Statements, but not as an inherent characteristic of a net flow of resources. Further, the Board considered whether net flows of resources should be separated conceptually into those associated with or available to support provision of services and those not available to support or to provide services (gains and losses) and tentatively agreed that they should be defined separately.

Minutes of Meeting, May 17–19, 2005

The Board discussed the five approaches to defining elements of financial statements described in the staff paper as well as an additional approach suggested during the meeting. The additional approach would be to define assets, liabilities, net inflows of resources, and net outflows of resources according to their inherent characteristics, and to use defined deferred items (if such an element category is ultimately used) in such a way as to articulate elements of the statement of net assets or balance sheet with elements in a change statement. The Board agreed with staff’s recommendation to continue to pursue defining flows of resources according to their inherent characteristics, recognizing that this may require expanding the scope of the project to include certain issues associated with recognition and measurement focus/basis of accounting.

The Board also briefly discussed the revised draft language for the definition of an asset, but decided to defer finalizing the language until definitions of additional elements have been further explored.

Minutes of Meeting, April 5–7, 2005

In reviewing the language of the assets section of a Concepts Statement on elements of financial statements, the Board reached several tentative conclusions that modified earlier conclusions. The first inherent characteristic of an asset is that it is a resource capable of providing a future benefit. The section describing this inherent characteristic will be titled "Resources" and will present a definition of resource as well as a discussion of what is meant by the term future benefit, which is a key feature of a resource. Future benefit tentatively will be described as "a capacity to provide, directly or indirectly, service." It will no longer be necessary to refer to future benefit as being of either a service or an economic nature because the notion of providing service either directly or indirectly, captures both concepts and more closely aligns with the purpose for which governments have been created.

The second and third inherent characteristics tentatively will be combined by describing the characteristic as "present control by the entity of access to or use of the future benefit." The section describing this inherent characteristic will explain that for an entity to presently control the future benefit embodied in a resource, a transaction or other event giving rise to that control is required to have occurred in the past.

The Board directed staff to make other changes, which are editorial in nature, to the draft Concepts Statement language.

In its deliberations on issues related to the definition of a liability, the Board tentatively agreed that obligations arising out of exchange transactions that are legally enforceable are liabilities. Further, the Board tentatively concluded that obligations arising out of nonexchange transactions are liabilities when all eligibility requirements have been met, which is a surrogate for legal enforceability. The Board then began discussion of whether constructive obligations should be considered liabilities and tentatively concluded that some, but not all, constructive obligations arising from exchange transactions are liabilities. The Board discussed but did not reach a conclusion regarding whether constructive obligations arising from nonexchange transactions are liabilities or whether equitable obligations give rise to liabilities.

Minutes of Meeting, February 22–24, 2005

The Board evaluated the definition of assets and the paragraphs explaining the inherent characteristics of that definition proposed by staff and tentatively agreed that:

  • Assets are certain types of resources that contain a future benefit, rather than being the future benefit directly.
     
  • The description of the future benefit embodied in resources should specifically state that the future benefit may be in the form of either services or economic benefit.
     
  • The discussion of how uncertainty relates to the definition of assets should be included in a more general discussion of how uncertainty relates to the definitions of all elements of financial statements.
     
  • The proposed description of the control characteristic of an asset is acceptable as drafted.
     
  • Although no examples of assets arising from other events need be provided, the discussion of the inherent characteristic that assets have arisen as a result of past transactions or other events should continue to include the reference to other events.

The Board also directed staff to make additional editorial and clarifying changes to the proposed language.

The Board then discussed whether deferred charges, such as bond discounts, would meet the definition of assets and tentatively concluded at this time that it would not. The Board is not, however, excluding the possibility of defining an element or elements of financial statements that would include deferred charges and credits.

The Board then began discussing some of the issues related to defining a liability. The Board considered the question of whether an obligation should be considered only as a legal obligation, or whether it also includes constructive or equitable obligations. The Board tentatively agreed not to limit what is considered an obligation to only legal obligations. As part of the discussion of obligations, the Board also considered whether the nature of an obligation was different depending upon whether the related transaction is an exchange transaction or a nonexchange transaction. No general agreement developed as to whether the distinction between exchange or nonexchange transactions affects the nature of an obligation.

Next, the Board considered whether time restrictions, such as those related to property taxes that have been levied for the subsequent year, create an obligation. The Board did not reach any conclusions on this issue.

Finally, the Board discussed whether or not, for an obligation to exist, there must be an external party or possibly a specifically identified external party to whom the obligation is owed. The Board tentatively agreed that a specific external party need not be identified for an obligation to exist.

Minutes of Meeting, January 11–13, 2005

The Board considered whether elements of financial statements should be defined solely by their inherent characteristics or whether elements should be defined for a particular measurement focus, basis of accounting, and measurement attribute. After considering the theoretical ranges of measurement focuses, bases of accounting, measurement attributes, and the various combinations thereof, the Board tentatively decided to pursue defining elements of financial statements by their inherent characteristics such that the definitions would be applicable to any measurement focus, basis of accounting, and measurement attribute employed in a particular financial statement.

The Board then began evaluating potential inherent characteristics of assets. The Board tentatively decided that one inherent characteristic of assets is that they embody a future benefit, which will be described more precisely at future meetings, but generally will include the notion that the future benefit may take the form of either singly or with other assets providing service to citizens or the public or may take the form of an economic benefit that may be used, for example, to satisfy liabilities. The benefit may flow directly to citizens or the public or it may flow to the entity (legally separate government). The Board also tentatively decided that an additional inherent characteristic of assets is that their future benefit is controlled, through legal or other means, by the entity. The Board also tentatively decided that the definition of assets should include as the third inherent characteristic that the asset has arisen as a result of past transactions.

The Board then discussed the basics of the notion of deferred charges and credits, without reaching a decision as to whether deferred charges and credits should be considered a separate element (or elements) of financial statements or what their inherent characteristics might be. However, they did not rule out the possibilities that it might be appropriate to define deferred items as a separate element (or elements) as the project progresses.

Elements of Financial Statements—Major Tentative Decisions

Concepts Statement No. 4, Elements of Financial Statements, was approved in June 2007.

Elements of Financial Statement—Relevant Links