The transfer of an economic resource embodies economic benefits that will be required to settle the obligation, resulting in an outflow (in general of cash) from the reporting entity to a third party.
A definition of resource:
|An economic or productive factor required to accomplish an activity, or as means to undertake an enterprise and achieve desired outcome. Three most basic resources are land, labor, and capital; other resources include energy, entrepreneurship, information, expertise, management, and time.|
The settlement of a present obligation usually involves the entity transferring resources embodying economic benefits in order to satisfy the claim of the other party. Settlement of a present obligation may occur in a number of ways, for example, by:
- payment of cash;
- transfer of other assets;
- provision of services;
- replacement of that obligation with another obligation; or
- conversion of the obligation to equity.
An obligation may also be extinguished by other means, such as a creditor waiving or forfeiting its rights.
The Conceptual Framework explains ‘transfer of an economic resource‘ along some essential features captured in the following subjects:
1. Transfer an economic resource resulting in an expected outflow of resources
To satisfy the obligation to ‘transfer an economic resource’, the obligation must have the potential to require the entity to transfer an economic resource to another party (or parties). For that potential to exist, it does not need to be certain, or even likely, that the entity will be required to transfer an economic resource—the transfer may, for example, be required only if a specified uncertain future event occurs. It is only necessary that the obligation already exists and that, in at least one circumstance, it would require the entity to transfer an economic resource.
The most common feature of a financial liability is the contractual obligation to deliver cash or another financial asset (which is the transfer of an economic resource). The transfer maybe conditional upon the occurrence of an event in the future. It is only necessary that the transfer of an economic transfer is expected and that there is at least one circumstance in which it would result in a transfer of economic benefits.
2. Probability of a transfer of economic benefit is low Transfer of an economic resource
An obligation can meet the definition of a liability even if the probability of a transfer of an economic resource is low. Nevertheless, that low probability might affect decisions about what information to provide about the liability and how to provide that information, including decisions about whether the liability is recognised and how it is measured.
In some cases, that uncertainty, possibly combined with a low probability of outflows of economic benefits and an exceptionally wide range of possible outcomes, may mean that the recognition of a liability, necessarily measured at a single amount, would not provide relevant information. Whether or not the liability is recognised, explanatory information about the uncertainties associated with it may need to be provided in the financial statements.
A low probability of economic benefits might affect recognition decisions and the measurement of the liability.
3. Examples of a transfer of economic resources Transfer of an economic resource
Obligations to transfer an economic resource include, for example:
- obligations to pay cash. Transfer of an economic resource
- obligations to deliver goods or provide services. Transfer of an economic resource
- obligations to exchange economic resources with another party on unfavorable terms. Such obligations include, for example, a forward contract to sell an economic resource on terms that are currently unfavorable or an option that entitles another party to buy an economic resource from the entity.
- obligations to transfer an economic resource if a specified uncertain future event occurs.
- obligations to issue a financial instrument if that financial instrument will oblige the entity to transfer an economic resource.
A transfer comprises a change in ownership of an asset, or a movement of funds and/or assets from one account to another. A transfer may involve an exchange of funds when it involves a change in ownership, such as when an investor sells a real estate holding. In this case, there is a transfer of title from the seller to the buyer and a simultaneous transfer of funds, equal to the negotiated price, from the buyer to the seller.
4. Alternative transfers of ‘resources’
Instead of fulfilling an obligation to transfer an economic resource to the party that has a right to receive that resource, entities sometimes decide to, for example:
- settle the obligation by negotiating a release from the obligation;
- transfer the obligation to a third party; or
- replace that obligation to transfer an economic resource with another obligation by entering into a new transaction (see example below).
In the situations described above, an entity has the obligation to transfer an economic resource until it has settled, transferred or replaced that obligation.
It is relative unusual for entities to obtain a (partial) release from an obligation instead of fulfilling the obligation, however it is possible for example obtaining a discount or even complete waiver of the obligation due to the delivery of goods with a bad quality.
An example of (c) would be: Transfer of an economic resource
An entity may renegotiate the terms of an obligation with a creditor of the entity with the
result that the entity extinguishes the obligation fully or partially by issuing equity instruments to the creditor. Issuing equity instruments constitutes consideration paid. An entity shall measure the equity instruments issued at their fair value.
However, if the fair value of the equity instruments issued cannot be measured reliably without undue cost or effort, the equity instruments shall be measured at the fair value of the obligation extinguished. An entity shall derecognise the obligation, or part of the obligation.