And now for something completely different – Didrik Thrane-Nielsen, Project Director at European Financial Reporting Advisory Group, recently set out to “trigger some thinking on the basic building blocks in IFRS” by providing new proposed definitions for assets and liabilities, and issuing a challenge: “Please come up with one or more practical example(s) where the definitions and criterions I propose…fail to produce a ‘right’ answer.”

His proposed definition of an asset is: “An asset is a present something that someone other than the entity is willing and able to pay cash to receive.” An asset of an entity is an asset controlled by the entity. He appends a few notes:

• The proposed asset definition is transfer or transaction based (hypothetical transfer or transaction).
• The something includes all future cash inflows and outflows that will be transferred with the transfer of the something.
• The something is not something unless it is possible to be transferred separate from something else.
• The something includes the location of the something.
• To get to a transfer or transaction there is a need for someone to be willing and able to pay.
• For now, cash remains as undefined as in current IFRS.
• A contract is not an asset [or a liability], it is the position (buyer or seller) in a contract that may be an asset [or a liability].

Just as a reminder, this contrasts with the current definition of an asset as “a present economic resource controlled by the entity as a result of past events,” an economic resource being a “right that has the potential to produce economic benefits.”

He proposes defining a liability as follows: “A liability is a present obligation to transfer something that someone is willing and able to pay cash to receive,” in contrast to the current “a liability is a present obligation of the entity to transfer an economic resource as a result of past events.” An obligation, it’s proposed, “is an action that has to be done now or in the future because the implications of not doing it or not doing so is more negative than the implications of doing it or doing so.” A liability of an entity is “a liability that the entity can only be departed from by departing of an asset of an entity.”

In response to a question about the object of the exercise, Thrane-Nielsen said: “I see a benefit in defining an asset and a liability separate from an asset of the entity and a liability of the entity. I further see a benefit in keeping definitions short and the discussion of accounting concepts alive.” Well, without wanting specifically to take up the challenge cited above, I’d agree with the latter objective, not so much for the rest. Among other things, it’s difficult from the outset to be enthusiastic about the pervasive use of “something” and “someone” (especially in such laboured constructions as “the something is not something unless…” – suggesting I guess that on occasion an apparent something actually isn’t, meaning it’s a nothing?). The fact of the proposed definitions of asset and liability both referencing someone “willing and able to pay cash to receive” surely blurs the distinctions more than a little, and in any event seems like a more restrictive notion than the current references to economic resources, the value of which can seemingly be demonstrated in a broader variety of ways than by identifying/positing someone with the requisite willingness and ability. The notion of basing an obligation on an assessment of whether a particular course of action is “more negative” than another seems wildly subjective, given all the potential factors and criteria that might enter into assessing the relative value of competing possibilities. And so on, and so on. If it’s indeed true that the definitions would always generate the “right” answer (meaning the same ones reached under the current definitions? – it’s not clear whether the object is that they’d sometimes differ), it would likely only be with the help of such an expanded volume of supporting material that any theoretical benefit from keeping the core definitions short would be swept away…

Still, whether Thrane-Nielsen’s proposals immediately strike one as perfect isn’t of course the point; all the better, if they don’t seem perfect (and I can’t really imagine that they would to many), to stimulate thought and debate relative to the current definitions (unfortunately, people being who they are, they didn’t stimulate much of either, at least not on LinkedIn where I came across them). The worst one can do, no doubt, is to treat the elements of accounting as fixed points, to be dryly studied as if handed down on stone tablets; to engage with its basic building blocks, whether or not entirely persuasively, can only contribute to one’s suppleness of application and interpretation…

The opinions expressed are solely those of the author.