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What Is A Constructive Obligation And A Present Obligation?

Constructive obligation

 One of the essential characteristics of a liability is that there must be a present obligation arising from past events. A present obligation exists only where the entity has no realistic alternative but to make the sacrifice of economic benefits to settle the obligation.A present obligation includes a constructive obligation.

A constructive obligation is defined in IAS 37 as “an obligation that derives from an entity’s actions where:

(a)  By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and

(b)  As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.”

A constructive obligation can again be defined as – an obligation that is implied by a set of circumstances in a particular situation, as opposed to a contractually based obligation.

 Present obligation

 The key characteristic of a present obligation is if the entity has no realistic alternative but to make the sacrifice of economic benefits to settle the obligation. This may be the case for example, if an entity makes a public announcement that it will match dollar for dollar the financial assistance provided by other entities to bush-fire victims, and because of custom and moral obligations, there is no realistic alternative but to provide the financial assistance.

In rare cases it may not be clear whether there is a present obligation. In such cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the reporting date (IAS 37, para.15)

 Legal obligations can incur a penalty for non fulfillment, although certain people are obliged or bound to carry out certain actions for other reasons as well, whether as a tradition or for social reasons.

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