Assets and Liabilities: When Do They Exist?

In this paper, we investigate whether the references to probability in standard setters’ conceptual definitions of assets and liabilities cause individuals to believe that the probability of a future transfer of economic benefits must be above some meaningful threshold (or even, certain) for an asset or a liability to exist — a belief that is contrary to standard setters’ intent. Results of multiple experiments indicate that the majority of individuals do use a high probability threshold to determine asset existence whereas, for liabilities, the majority use a very low threshold. Thus, even under ceteris paribus conditions, liabilities are more frequently identified than assets — a phenomenon consistent with conservatism on the balance sheet. We also provide evidence showing that standard setters’ definitions are not the cause of this behavior, as individuals naturally use probability when making these existence decisions. Our findings also indicate that a simple definitional change, as proposed by the IASB in its recent Exposure Draft (2015a), leads more individuals to identify assets and liabilities in a manner that is more closely (but not perfectly) aligned with standard setters’ goals. Our study provides important insights both for standard setters as they continue work on their mission to update their conceptual frameworks and for researchers regarding the role of conservatism for assets and liabilities.