Yesterday’s roundtable recapping the FASB’s 2010 Financial Reporting Issues Conference got me thinking more about defining elements of financial statements, particularly a liability. I’m interested to know whether you can answer the following questions in a way that is consistent with your conception (or the FASB’s conception) of a liability.

In any case, this (or something like it) might be a good exercise for students in our accounting theory courses (yes, I think the curriculum should include a course in accounting theory).

OK, here are the questions. If you’re game for this exercise, in each case, decide whether you have a liability and, if so, when you would recognize the associated revenue/gain or expense/loss, if any. 

(1) Based on the current forward price, you receive cash (from customers) for the entire crop of corn you intend to grow during the coming season. Part of the season falls in the current fiscal year and the other part of the season falls in the next fiscal year.

(2) The government pays you the same amount as you would receive in (1) in exchange for your commitment not to grow corn during the coming season. If you grow any corn, you have to return all the money that the government gave you.  Again, part of the season falls in the current fiscal year and the other part of the season falls in the next fiscal year.

(3) Same as (2) except that you get to keep the money the government gave you. However, if you grow corn, you pay a tax on the amount you grow.

(4) Same as (3) except that the tax only applies to corn that you grow in excess of some prespecified amount.

(5) Same as (4) except that instead of cash you receive allowances to grow corn and each allowance corresponds to a certain amount of corn. You can either sell these allowances at any time during the coming season, or you can use them to pay any tax you owe at the end of the season. Account for the allowances AND any obligation (associated or not).

(6) Same as (5) except replace corn with pollution emissions.

I’d be interested to know whether we can answer the above questions in a way that would form the basis for a consistent, coherent and comprehensive concept describing the accounting for an agreement NOT to do something. How would you write that concept?

If you think the above questions need tweaking (or dramatic revision), let me know, because I’d like to use something like this the next time I teach accounting theory. Also, if you have your own set of questions whose answers might help develop a conceptual framework (or understand/revise the one we have), please let me know, because our accounting theory students need all the help they can get!