• Discussed at May 2003 IASB Meeting
• Discussed at May 2004 IASB Meeting
• Discussed at September 2004 IASB Meeting
• Discussed at October 2004 IASB Meeting
• Discussed at December 2004 IASB Meeting
• Discussed at May 2005 IASB Meeting
• Exposure Draft of proposed revisions to IAS 37 issued 30 June 2005
  Click to Download the IASB Press Release (PDF 69k).
• Discussed at February 2006 IASB Meeting
• Discussed at March 2006 IASB Meeting
• Discussed at May 2006 IASB Meeting
• Discussed at June 2006 IASB Meeting
• Discussed at July 2006 IASB Meeting
• Discussed at September 2006 IASB Meeting
• Discussed at October 2006 IASB Meeting
• IASB held public round-table discussions in November and December 2006
• Discussed at January 2007 IASB Meeting
• Discussed at March 2007 IASB Meeting
• Discussed at April 2007 IASB Meeting
• Discussed at May 2007 IASB Meeting
• Discussed at July 2007 IASB Meeting
• Discussed at October 2007 IASB Meeting
• Discussed at December 2007 IASB Meeting
• Discussed at February 2008 IASB meeting
• Discussed at April 2008 IASB Meeting – Liabilities (Amendment to IAS 37)
• Discussed at May 2008 IASB Meeting – Liabilities (Amendment to IAS 37)
• Discussed at December 2008 IASB Meeting
• Discussed at April 2009 IASB Meeting
• Discussed at June 2009 IASB Meeting
• Discussed at July 2009 IASB Meeting
• Discussed at October 2009 IASB Meeting
• Discussed at November 2009 IASB Meeting
• Discussed at December 2009 IASB Meeting
• 5 January 2010 – Re-exposure Draft of proposed revisions to IAS 37 issued

Timetable

• Click for IASB Project Timetable

Background

The objective of the overall convergence project is to eliminate a variety of differences between International Financial Reporting Standards and US GAAP. The project, which is being done jointly by FASB and IASB, grew out of an agreement reached by the two boards in September 2002.

Click here for general information about the Convergence Project.

Discussion at the July 2002 IASB Meeting

The Board identified certain differences between FASB Statement 146, Accounting for Costs Associated with Exit or Disposal Activities and IAS 37 and IAS 19. The staff believes, with the exception of employee termination benefits, the application of SFAS 146 will likely result in a later recognition of restructuring liabilities under IAS 37. This is because SFAS 146 specifically states that an entity's commitment to a restructuring does not result in the entity incurring a liability. In contrast, under IAS 37, an entity's commitment to, and announcement of, a restructuring plan means that a constructive obligation has been incurred and a provision shall be recognised.

The Board clarified that the measurement issues are too difficult to resolve in this limited term project and therefore, the focus should be on recognition.

The Board tentatively decided to amend the definition of a constructive obligation. The proposed definition would require that the other party could reasonably rely on the entity discharging its responsibilities. The Board noted that this definition should be similar to the notion of promissory estoppel noted in SFAS 143-and the basis for the definition in SFAS 146. One member noted that the current requirement for a valid expectation does not seem different from the reasonable reliance notion.

The Board further decided to withdrawal the restructuring paragraphs in IAS 37 (paragraphs 70-83). The Board noted that a plan and announcement do not always create an obligation and therefore, the provisions of IAS 37 should apply. The intent of this change is to move the recognition dates under IFRS and US GAAP closer.

The Board decided to add a rule to the final standard that a obligation related to future payments on a contract for a building, for example, should be recorded once the entity actually exits that building.

The Board discussed the current requirements for the recognition of an obligation under an onerous contract. The Board acknowledged that the current wording may be unworkable. However, such improvements should be deferred to a project on the recognition of liabilities and should not be included in this short-term project.

Discussion at the May 2003 IASB Meeting

The Board indicated its intention to remove the notion of probability from the recognition criteria for provisions. They noted that they did not believe this was a change in the standard but merely a cleaning up of redundant wording. The Board agreed to change the definition of contingent assets and liabilities to:

A contingent asset is a present right that arises from past events that may result in a future cash inflow (or other economic benefits) based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. A contingent liability is a present obligation that arises from past events that may require a future cash outflow (or other sacrifice of economic benefits) based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

The Board specified that under these definitions, items would be contingent if the past event had occurred but there was uncertainty as to the outcome of the confirming event. The Board asked the staff to add examples to clarify the consequences of this change. In addition the Board asked the staff to add a flow chart to illustrate the steps for recognising a provision.

The Board discussed whether the recognition criteria for contingent assets (virtually certain) should be changed to be symmetrical with contingent liabilities. Currently, losses and related insurance gains are recorded in different periods. The Board recognised that a problem exists but expressed concern about addressing it in a short-term project without thinking through the implications.

Restructuring provisions

The Board agreed to change the treatment of onerous contracts, as follows:

• If a contract is onerous as a result of a decision to stop using the underlying item and the contract can be terminated, a provision is recognised at the date of notice of termination.
• If the contract cannot be terminated, a provision will be recognised when the underlying item is no longer used.
• If the contract is onerous as a result of price changes the provision will be recognised at the time of the price change.

The Board also concluded that an onerous contract provision should include recoveries (for instance, sub-leases) based on prices that could be obtained in the market.

Constructive obligations

At its May 2003 meeting, the Board agreed to include some clarifications to the wording in the standard.

Measurement

At its May 2003 meeting, the Board agreed that a provision should be measured at the amount that would be rationally paid to settle the obligation at the balance sheet date. References to the 'most likely outcome' would be removed as this would be inconsistent with this principle.

The Board agreed to clarify that provisions should be remeasured at each reporting date using a current discount rate.

Discussion at the September 2003 IASB Meeting

Recognition

At the Board's September 2003 meeting, the staff asked the Board to consider if there is a present obligation in the two following examples:

Example 1

An entity contaminates a river adjacent to its land in a country where there is no legislation requiring it to clean up (and the entity has not created a constructive obligation to clean up). There is, however, a possibility that a new law will enacted in due course that will require the entity to clean up its past contamination. The likelihood of the new law being passed is assessed to be approximately 75%.

Example 2

An entity is defending itself in a lawsuit. The entity is alleged to have sold a faulty item of equipment, which is subject to warranty, but the entity believes the case to be spurious. To the surprise of the entity and its legal advisors, the entity loses the case.

After a long debate, the Board tentatively agreed that in example 1 there is no present obligation until the law has been passed. In the second example there is a present obligation.

As a result of the ensuing discussion and the staff's proposal the Board decided to amend the definition of a contingent liability in IAS 37 and Phase II to: 'a contingent liability is a conditional obligation that arises from events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity' They agreed that the wording in Phase I would need to be clarified to be consistent with this principle.

Discussion at the May 2004 IASB Meeting

The staff asked the Board to confirm the previous decisions made as set out in the following decision summary:

Definitions of Contingent Assets and Contingent Liabilities

The Board decided to amend the definition of a contingent asset to:

• A conditional right that arises from past events from which future economic benefits may flow based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

The Board decided to amend the definition of a contingent liability to:

• A conditional obligation that arises from past events that may require an outflow of resources embodying economic benefits based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Recognition and Measurement of Contingent Assets and Contingent Liabilities

The Board observed that contingent assets (or liabilities) are sometimes accompanied by associated unconditional rights (or obligations) that satisfy the definition of an asset (or liability).

The Board observed that, for a contingent asset that is within the scope of IAS 37, any accompanying unconditional right would be a non-monetary asset without physical substance and, if it satisfied the 'identifiability' criterion in IAS 38 Intangible Assets, it would meet the definition of an intangible asset. The Board therefore decided that an unconditional right that accompanies a contingent asset (that is within the scope of IAS 37) should be accounted for in accordance with IAS 38.

The Board also observed that, for a contingent liability that is within the scope of IAS 37, any accompanying unconditional obligation would meet the definition of a provision (liability). The Board therefore decided that an unconditional obligation that accompanies a contingent liability (that is within the scope of IAS 37) should be accounted for under IAS 37.

The Board also decided that, in the absence of accompanying unconditional rights (or obligations), contingent assets (or liabilities) are themselves not assets (or liabilities) and are not considered for recognition separately as assets (or liabilities) in or outside of a business combination.

Constructive Obligation

The Board decided to amend the definition of a constructive obligation as follows:

• A constructive obligation is 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 particular responsibilities; and
  • (b) as a result, the entity has created a valid expectation in those parties that they can reasonably rely on it to discharge those responsibilities.

The Board decided to include additional explanatory material to assist entities in determining whether they have met the definition of a constructive obligation.

Recognition

The Board decided to add to the existing recognition guidance in IAS 37 to explain that the outflow of economic resources required to settle an obligation can be the provision of services. For example, an entity that has issued a product warranty has an unconditional obligation to provide a service for the duration of the warranty. The entity has therefore satisfied the probable outflow criterion (ie IAS 37.14(b)) regardless of the likelihood of the product developing a fault.

Measurement

The Board decided to make the following limited amendments to the existing measurement requirements of IAS 37 for clarification and to remove inconsistencies:

• (a) Provisions should be measured at the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time.
• (b) Using an expected value estimation technique would generally be consistent with the above principle, whilst measuring a provisions at a single point estimate of the most likely outcome would not.
• (c) Provisions should be remeasured at each reporting date using a current discount rate.

Application Guidance for Provisions for Restructuring Costs

The Board decided to withdraw the existing guidance on provisions for restructuring costs in IAS 37 (paragraphs 70-83) and to specify that the existence and announcement of a restructuring plan does not by itself create an obligation. The Board decided that IAS 37 should explain that a cost associated with a restructuring is recognised as a provision on the same basis as if that cost arose independently of a restructuring. The Board also decided that it would specify the treatment of costs that are often incurred in a restructuring as follows:

• (a) The cost of employee termination benefits should be recognised in accordance with IAS 19 (see below).
• (b) The cost of terminating a contract before the end of its term should be recognised in accordance with the requirements for onerous contracts (see below).
• (c) The liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity should be recognised in accordance with the requirements for onerous contracts (see below).

Application Guidance for Provisions for Onerous Contracts

The Board decided to specify that if a contract becomes onerous as a result of the entity's own actions, the resulting provision for that contract should not be recognised until that action has occurred. For example, in the case of an operating lease on a property that will become vacant as a result of a restructuring, the provision for the unavoidable lease commitment should be recognised when the entity vacates the property.

The Board decided to specify that if the onerous contract is an operating lease, the provision for the unavoidable lease commitment should be reduced by the sublease rentals that could reasonable be obtained for the property.

Termination Benefits

The Board decided that the principles underlying SFAS 146 should apply to all involuntary termination benefits, not just those that are within the scope of SFAS 146 (ie 'one-time' termination benefits). The Board therefore decided that:

• (a) The recognition of termination benefits depends on whether those benefits relate to employees' past service or are paid in exchange for employees' future services (ie are a 'stay bonus').
• (b) Termination benefits are regarded as paid in exchange for employees' future services if they:
  • i. are not provided under the terms of an established benefit arrangement (ie employment contract, legislation, union agreement, prior business practice);
  • ii. do not vest until the employment is terminated; and
  • iii. are provided to employees who will be retained beyond the minimum retention period.

• (c) No liability for termination benefits is recognised until the entity has communicated its plan of termination to the affected employees.

More specifically:

• Termination benefits that relate to employees' past services are recognised when the entity has a present obligation to provide termination benefits. In the case of involuntary termination benefits, this is when the entity has a formal plan of termination that it has communicated to the affected employees. In the case of voluntary termination benefits, this is when the employees accept the entity's offer of voluntary redundancy.
• Termination benefits that are payable in exchange for employees' future services are recognised over that period of future service.

The Board confirmed the decisions subject to wording to clarify that if a provision is measured using an expected value estimation technique, it should be measured, and subsequently remeasured, taking into the risk adjusted measures a third party who assumed the obligation would take into account.

Discussion at the September 2004 IASB Meeting – Proposed Amendments to IAS 37

Title of IAS 37

The Board decided to retain the existing title.

Definition of a provision

IAS 37 defines a provision as "a liability of uncertain timing or amount". Paragraph 11 of the current Standard then attempts to explain that it is this uncertainty that distinguishes provisions from other liabilities, for example trade payables and accruals.

The Board decided that the wording should be changed and that Staff would look into this. Some wording suggested during discussion was along the lines of defining a provision as "a liability for which the outflow of economic resources is of an uncertain timing or amount".

Probability recognition criterion

At the March Board meeting, the Board decided that the present application in IAS 37 of the probability recognition criterion to product warranties and guarantees is flawed, because the criterion is applied to the conditional obligation (contingent liability to repair the product/make a payment under the guarantee) rather than the unconditional obligation (present obligation) to provide a service for the duration of a contract that accompanies the conditional obligation. The Board noted that it would be inconsistent for an entity to consider recognition of a liability (unconditional obligation) by assessing whether the contingent liability (conditional obligation) would result in an outflow of resources. For consistency, the Board decided that the probability recognition criterion should be applied to the liability (unconditional obligation).

The staff recommended omitting the probability recognition criterion (paragraph 14(b)) from the amended IAS 37.

The Board agreed with the Staff proposal and indicated that wording should be tightened in other areas to ensure that there is no misunderstanding of the intentions of the deletion. The main concern in this regard was the non-existence of a 'bright line' in certain scenarios, for example:

An unfavourable court judgement could give rise to an unconditional liability. Prior to that judgement, a conditional (contingent) liability exists. However, if the same issue were to be resolved by the passing of a law that has the same unfavourable effects, current interpretation of IAS 37 would result in an unconditional liability being recognised on passing of the law, with no disclosure of a conditional liability prior to that (in certain cases). The Board's general view was that in the scenario of the court judgement, that was enforcement of an already existing legal framework that constituted the past event whereas, in the scenario of new legislation, no prior law existed, hence the difference.

In the recently published ED of Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts Financial Guarantee contracts and Credit Insurance (the Guarantee ED), the Board proposed that financial guarantee contracts should be recognised initially at fair value and subsequently measured "at the higher of:

• 1. the amount determined in accordance with IAS 37; and
• 2. the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue."

The Board developed the Guarantee ED because of its concerns about the application of the probability recognition criterion in IAS 37 to guarantees-specifically, because Example 9 of IAS 37 explains that no liability is recognised for a single guarantee if it is not probable that a payment will be required under the guarantee. The Guarantee ED therefore clarifies that all entities that issue financial guarantee contracts should recognise a liability at inception (at fair value) regardless of the probability of payments being required under the guarantee.

The Board agreed the in amending IAS 37 in as far as the 'probability recognition criterion' is concerned (see above), the issue as regards guarantees would be resolved.

IFRS or IAS

The Board discussed whether the amendments to IAS 37 warrant the revised pronouncement being issued as an IFRS due to the extent of amendments. The Board agreed to list all the issues that required revision and then to determine whether given the current agenda, it would be worthwhile dealing with all those issues and as a result, issue an IFRS and not a revised IAS.

Discussion at the October 2004 IASB Meeting

The Board considered a discussion paper relating to issues that arose at the last meeting when a pre-ballot draft of an exposure draft was considered. The Board discussed at length the definition of constructive obligations, and when, if at all, such obligations should be recognised. The Board agreed that provisions arise from a greater group of items than just contractual obligations, but that the dividing line between what should be recognised and what should not is not clear. The Board agreed that staff should consider this issue further, particularly with reference to the existing examples in IAS 37, and for consistency with decisions made to date in the revenue recognition project. It was agreed that a key characteristic of an item that should be recognised is that an entity have little or no discretion in the outflow of future economic benefits.

The Board discussed the issue of whether a difference in accounting should arise when a liability arises from a lawsuit as opposed to a possible change in the law. It was agreed that until the law is enacted, no resulting liability should be recognised. It was agreed that this point would be clarified in the basis for conclusions.

The Board agreed not to incorporate the requirements of IFRIC 1 into the revised IAS 37, as the requirements of IFRIC 1 are more relevant to IAS 16 and should be incorporated into that standard when it is next updated. The Board agreed to propose withdraw paragraphs 48 and 49 (considering the impact of future events on the measurement of a provision) from existing IAS 37 in the exposure draft.

The Board considered whether to ask a question of constituents to highlight that there is a requirement to remeasure a provision at the current discount rate. It was agreed that this is unnecessary as this requirement is made clear by IFRIC 1. The Board discussed the requirements of IAS 37 in relation to offsetting reimbursements, and agreed some editorial amendments to clarify that this is not allowed. The Board agreed to break the existing paragraph 53 into two paragraphs, one dealing with the recognition of reimbursement assets and the other dealing with their display.

The Board will consider the issues in relation to the reimbursement ceiling at its November meeting, as well as certain issues relating to IAS 19, with a view to issuing an exposure draft in the near future.

Discussion at the December 2004 IASB Meeting

Proposed Amendments to IAS 37 - Measuring Termination Benefits

At its September meeting, the Board had considered a first draft of the exposure draft of amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The exposure draft included complementary amendments to the requirements for termination benefits in IAS 19 Employee Benefits.

At the September meeting, the staff had proposed that termination benefits should be measured at fair value. However, some Board members raised concerns about this proposal and asked the staff to reconsider the issue. The staff therefore presented their new proposals to the Board.

The staff now recommends retaining the existing requirement in paragraph 139 of IAS 19 (i.e. where termination benefits fall due more than 12 months after the balance sheet date, they shall be discounted using the discount rate [used to discount post-employment benefit obligations]', i.e. a discount rate 'determined by reference to market yields on high quality corporate bonds') for measuring termination benefits, but:

(a) specifying that when termination benefits fall due more than 12 months after the balance sheet date, an entity should subsequently follow the recognition and measurement requirements for post-employment benefits; and

(b) clarifying that when termination benefits are provided through a post-employment benefit plan, the liability and expense recognised initially includes only the value of the additional benefits that arises from the providing those termination benefits.

It was noted by the staff that this recommendation will result in some termination benefits being accounted for similarly under US GAAP and IFRS. Nonetheless, reconciling items will still arise for some termination benefits (particularly those provided for involuntary termination) because of difference in either recognition or measurement.

The Board commented that the staff had done very well in a difficult area and that it was impressed by, and supported, the proposals.

Discussion at the May 2005 IASB Meeting

The Board was asked to consider seven distinct issues related to a proposed exposure draft. Those issues emanated from the comments of certain Board members as well as suggestions by staff.

Issue 1: Measurement guidance

A Board member questioned whether there was sufficient guidance about how to measure a stand ready obligation. To assist constituents in measuring liabilities with contingencies, the measurement requirements in the pre-ballot drafts included a new paragraph. This explained that the uncertainty of the amount and timing of the cash flows resulting from the conditional obligation is reflected in the measurement of the unconditional stand ready obligation. However, in response to the Board member's concern, the staff recommended expanding the illustrative example of a lawsuit and a warranty obligation to provide more guidance on measurement.

The Board agreed with the staff recommendation. In addition, the staff were asked to clarify certain aspects that distinguished the examples as well as to clarify the recognition criteria for a stand ready obligation.

Issue 2: Definition of a provision

IAS 37 presently defines a provision as 'a liability of uncertain timing or amount'. Provisions are therefore specified as being a subset of liabilities. However, the Standard does not provide sufficient explanation of how liabilities within this subset should be identified. The distinction between a provision and a liability that is not a provision is vague. Also vague is the distinction between a provision and the new analysis of contingent liabilities. For example, a liability for a product warranty that IAS 37 states is a provision also has attributes of a contingent liability – the uncertainty about timing or amount is relating to the cash flows associated with the conditional obligation.

The staff recommended the elimination of the term 'provision'. The staff thinks that it should be replaced with the phrase 'non-financial liability' as it is important to make a clear distinction between liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement and IAS 37.

Some Board members who supported eliminating the term 'provision' at this time noted that there is a risk that the term will become more entrenched and be very difficult for the Board or its successors to remove. Elimination of the term would allow the Board to revert to the terminology in the Framework. The conflicting use of the term, which may cause confusion, was also noted as the term 'provision' is now more readily understood in the context of adjustments to the carrying amount of assets (for instance, receivables, inventory, PP&E) rather than a liability.

Other Board members disagreed on the basis that the term 'provision' has already become entrenched in legislation and other guidance with the same meaning as that in IAS 37; therefore, superseding it would cause upheaval. The issue of the translation problem in non-English speaking countries was also raised as the term 'non-financial liability' would have different meanings in different jurisdictions.

The Board agreed to eliminate the term 'provision' on the basis that, whilst having sympathy for non-English speaking constituencies, the IASB had to develop the best conceptual Standards and that the issue of translation should not be a consideration for the IASB. In addition, it was noted that the IASB's Standards are issued in English. It was noted that the elimination of the term 'provision' from IFRSs (in the context of liabilities) would not necessarily preclude preparers from using the term in financial statements.

The staff recommended and the Board agreed in principle, that:

• for all classes of provisions, an entity should disclose the carrying amount of the provision at the period end together with a brief description of the obligation;
• for any class of provision with significant estimation uncertainty, an entity should also present the other disclosures currently specified by the existing version of IAS 37.

Concern was expressed about the term 'significant' in the second bullet point. Some Board members believe this is a lower threshold when compared to 'material' whereas others believe it is the converse. The staff were asked to reconsider the wording.

Issue 3: Contingent assets and contingent liabilities

The Board was asked to confirm its agreement to eliminating the requirement to disclose contingent assets and contingent liabilities from IFRSs as well as to remove those terms from the title of IAS 37.

The Board agreed. A definition of a 'contingency' would replace the terms 'contingent liability' and 'contingent assets' and this would clarify that it is a conditional obligation or right.

Issue 4: Disclosure of comparative information

IAS 37 specifies that for each provision (or class of provision) the entity present a reconciliation of the carrying amount at the beginning and end of the period. However, no reconciliation is required for the comparative information. Some Board members suggested that the exemption be withdrawn.

The staff therefore recommended that disclosure of comparative information should be required. The Board agreed.

Issue 5: Transition requirements

The Board discussed this issue at length, particularly the problems that would be faced by preparers if transition was to be as required by IAS 8 as the measurement of liabilities would require the use of hindsight. The problem is exacerbated by the need for comparability that would be sacrificed if prospective application were to be required. In addition, the issue of first-time adopters transitioning to IFRS via IFRS 1 would present a an additional issue as they are subject to a different set of rules. The Board decided that a principle should be documented and perhaps inserted into IAS 8 regarding transition in general and that IFRS 1 should be revisited in the future to remove any inconsistencies with that principle. Regarding the exposure draft, the Board agreed to require transition to be effected using IAS 8 but to specify that it would be impracticable for entities to meet the measurement requirements, thereby indirectly pointing preparers to the guidance in IAS 8 that requires the entity to restate opening balances for the earliest period for which retrospective restatement is practicable (which may be the current period).

Issue 6: Onerous contracts

A Board member has asked that the Board consider some of the issues that arise from the existing definition of an executory contract in IAS 37 and the existing definition of an onerous contract. That Board member notes that the definition of an executory contract is broad, because any inequality as to performance makes the contract non-executory. For example, if an entity receives a deposit to sell goods, the contract is no longer executory which could lead to a provision being recognised if the value of the goods changes. That Board member also notes that IAS 37 specifies that if an entity has an onerous contract, it 'recognises the present obligation under the contract as a provision'.

At the November meeting, the Board considered whether to address further issues in this project. The Board concluded that the scope of the project be limited to those amendments necessary to implement the revised thinking about contingent liabilities and converging with SFAS 146.

Although acknowledging the point raised and the status of the project, the staff did not recommend reconsidering more generally the requirements relating to onerous contracts.

The Board agreed.

Issue 7: Format of the exposure draft

The Board agreed to issue the exposure draft as a clean copy but to make the marked up copy of the existing IAS 37 available through its website. In addition, a table of concordance would be inserted into the exposure draft for constituents to understand better, the proposed changes.

June 2005: IASB proposes amendments to provisions standard

On 30 June 2005 the IASB published and invited comment on proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets (to be retitled Non-financial Liabilities) and complementary limited amendments to IAS 19 Employee Benefits. The amendments to IAS 37 would change the conceptual approach to recognising non-financial liabilities. Entities would be required to recognise in their financial statements all obligations that satisfy the definition of a liability in the IASB's Framework, unless they cannot be measured reliably. Uncertainty about the amount or timing of the economic benefits that will be required to settle a liability would be reflected in the measurement of that liability instead of (as is currently required) affecting whether it is recognised. This change would enhance financial reporting because some liabilities previously only disclosed in the notes to the financial statements will now be included in the balance sheet. Moreover, it would make the IASB approach consistent with the approach under US GAAP.

Comments are due by 28 October 2005.

Click to Download the IASB Press Release (PDF 69k).

Main proposals in the exposure draft:

Discussed at the February 2006 IASB Meeting

The Board issued its Exposure Draft Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits (ED) on 30 June 2005. The comment period ended on 28 October 2005 and the Board received 123 comment letters.

During this session, the Board considered the main points raised in the comment letters and as a result, were asked to:

• (a) affirm the project objectives;
• (b) approve the initial staff assessment of matters for which the staff:
  • (i) will undertake additional research and ask the Boards to reconsider, or
  • (ii) expect to present to the Board for reaffirmation without additional research; and
• (c) approve the staff's provisional project plan for the redeliberations.

The discussion began with an overarching discussion about general comments received in a number of the comment letters. The point was made that it appeared that the objectives and direction of the IAS 37 project had been misunderstood.

The Board reiterated its view that the amendments to IAS 37 did not amend the requirements of the current Standard or the current version of the Framework. Instead, the amendments were clarifications and a logical extension of the current IAS 37 Standard. The Board went on to point out that the comments received reflected an incorrect interpretation and application of IAS 37 as it currently stands. Board members acknowledged that the current Standard was a compromise pronouncement that did not properly articulate certain principles therefore it does not always read as it was intended. The Board views the amendments to IAS 37 as clarification of those ambiguities.

The Board pointed out that the amendments project should not be viewed as a convergence project between IAS 37 and FAS 5, because these two pronouncements are fundamentally different. Consequently, the Board decided that this project should be viewed on a standalone basis due to the high profile that it has taken on amongst constituents.

The Board affirmed its intention to continue with the project because it was clear that its reasoning in that project was starting to reap benefits in other projects as well - it has helped Board members to think about and understand other difficult issues. Consequently, the Board believes its decisions in this project reflect superior and principled thinking that is applicable to other projects. The Board suggested a communication strategy to help constituents understand this project (for instance, an article with the content presented to the World Standard Setters group).

The Board discussed briefly, how it intends to approach the roundtable discussions by making sure that there is wide geographical coverage.

With minor clarification, the Board approved the staff plan of issues to be reconsidered and those that do not require reconsideration (re-affirmation instead).

It was pointed out that the current project timetable runs until May 2007 and may change depending on progress.

Discussion at the March 2006 IASB Meeting

The Board continued its redeliberations of proposed amendments to IAS 37.

Scope

The Board agreed that:

• (a) IAS 37 applies to all liabilities not within the scope of another Standard.
• (b) The wording in paragraph 7 of the ED be improved specifically to clarify that items presented as credits on the balance sheet that arise from the operation of IAS 18 Revenue are outside the scope of IAS 37.
• Board members noted that the dividing line between 'deferred revenue' and other non-financial liabilities was not well defined in IFRS, but is important because of the fundamentally different accounting that results from following IAS 37 as opposed to IAS 18. The staff acknowledged this tension and promised to revisit it.
• (c) The Basis for Conclusions should be expanded to explain the analysis undertaken that leads the Board to believe that the requirements of IAS 37 are appropriate for all liabilities.
• (d) The term 'provision' should not be a defined term in IAS 37 [the Board wants to avoid using it altogether].
• (e) The term 'liability' should be used to describe liabilities within the scope of IAS 37 [that is, the ED term 'non-financial liability' will not be carried forward to the final standard].
• (f) The scope section include positive examples of liabilities within the scope of the Standard.

Possible additional topics

The Board considered whether five topics raised by constituents during the comment letter process should be added to the project. The Board decided not to add the following items:

• Recognition and measurement guidance in IAS 38 Intangible Assets
• Onerous contracts There was a brief discussion on this topic. It was noted that there is often difficult to distinguish an out-of-the-money forward from an onerous contract. They distinguishing feature was whether the forward would settle in cash. If it would settle in cash, it would be within the scope of IAS 39; if not cash settled, it would be an onerous contract within the scope of IAS 37.
• Application guidance for specific staff benefit plans
• Measurement guidance for non-financial liabilities

However, the Board agreed to provide measurement guidance on reimbursement rights in the final standard.

Discussion at the May 2006 IASB Meeting

Approach to re-deliberating the issues associated with the recognition principle proposed in the ED (agenda paper 10A))

In the February 2006 Board meeting it was agreed that an entity shall recognise a liability when:

• the definition of a liability has been satisfied; and
• the liability can be measured reliably.

Many respondents used litigation as an example to highlight their concerns with the ED. Staff believe that litigation is a problematic area because it often involves multiple points of uncertainty, and so may combine several recognition and measurement issues. As a result, litigation will be discussed as a standalone topic in the June meeting. The following topics will also be discussed in June:

• the Framework's recognition criteria;
• clarity of explanation within the ED;
• elimination of the term 'contingent liability'; and
• the interaction between the recognition principle in the ED and the recognition of liabilities following the guidance in other standards (e.g. business combinations).

From the comment letters on the proposed amendments to IAS 37, staff identified two main sources of uncertainty:

• 1. uncertainty about the outflow of resources embodying economic benefits associated with a present obligation; and
• 2. uncertainty about the existence of a present obligation.

1. Uncertainty about the outflow of resources embodying economic benefits associated with a present obligation

Respondents argued that the ED's proposals are not consistent with the Framework, because the Framework definition of a liability includes the words 'the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits'. Staff believe that the phrase 'expected to' has more than one definition, and has addressed this issue in paper 10B (see below).

Respondents were also concerned that the probability was only being considered when measuring a liability, whereas the Framework requires a probability assessment to determine whether a liability should be recognised. Staff believed that the only justification for not recognising a liability when there is little or no uncertainty that a present obligation exists is that it is not possible to identify a range of possible outcomes with sufficient reliability. Consequently staff propose to examine whether further guidance is needed in this area.

2. Uncertainty about the existence of a present obligation

Several respondents indicated that there are many situations in which it is not certain that a present obligation exists. This has been referred to by staff as 'element uncertainty'. Whilst this is not a new issue, the ED has highlighted it because it clarifies that an entity must first determine whether a present obligation exists. This issue is addressed in paper 10C (see below).

The meaning of the phrase 'expected to' in the definition of a liability (agenda paper 10B)

Comment letters on the ED indicated that different views exist on the meaning of 'expected to'. In particular, many are interpreting the phrase as meaning 'probable'. The issue arises as 'expected to' is often used in common English to mean more likely than not, or probable. If an outcome is less certain, the word 'possible' is often used. However, staff believe that the phrase 'expected to' in the Framework is not intended to imply a particular degree of certainty. Instead, they believe it is being used to indicate some potential outflow is necessary in order to meet the definition of a liability. The Board acknowledged that there is widespread confusion about the term, and there was comment that the phrase was being used here in more of a statistical context (where the probability of an out come is assessed by adding together all possible outcomes multiplied by their associated probabilities of occurring). It was also mentioned that the history of the phrase being used by the FASB was to avoid the assumption that there must be virtual certainty before a liability exists. The Board generally agreed with the staff conclusion that:

• 'expected to' is not intended to imply that there must be a particular degree of certainty that an outflow of benefits will occur before an item meets the Framework definition of a liability; and
• the Board's interpretation of 'expected to' in the IASB's definition of a liability does not increase divergence with US GAAP.

However, the Board felt this was important enough that this confusion should not simply be addressed in the Basis for Conclusions - it should also be included in the body of the standard.

Determining whether an entity has a liability when the existence of a present obligation is uncertain (agenda paper 10C)

Staff noted that element uncertainty is not a new issue. IAS 37 currently contains limited guidance and states that when uncertainty exists an entity must assess all available evidence to determine whether it is more likely than not that a present obligation exists. If so, a present obligation is deemed to exist, and if not, a contingent liability exists. However, IAS 37 also states that it is only in rare cases that it will not be clear whether a present obligation exists. The ED does not include any reference to 'more likely than not'.

Many respondents disagree with omitting this probability guidance in the ED, and support the Alternative View given. They argue that by omitting this guidance, there is insufficient guidance on what to do in situations where it is unclear whether a present obligation exists.

Staff agreed with respondents that more guidance in this area is necessary. Further, staff believe that element uncertainty arises with sufficient frequency across all industries to justify including additional guidance. Staff proposed five different options which may form the basis of additional guidance on element uncertainty:

• 1. reflect element uncertainty in measurement;
• 2. reinstate the 'more likely than not' guidance in paragraphs 15 and 16 of the current IAS 37;
• 3. reinstate the current probability recognition criterion;
• 4. provide a list of indicators to act as guidance in determining whether a present obligation exists; or
• 5. identify an alternate obligating event.

Staff recommended that option 4 be pursued. The Board agreed that further guidance was needed and justified. There were a variety of views about which of the above options was the best route to follow. There was general agreement that providing a list of indicators as to whether a present obligation exists (that is, option 4) would be useful. Some Board members felt that in addition, the 'more likely than not' guidance should be reinstated. Several Board members stated that it was difficult to judge without seeing the list of indicators. There was some discussion about whether entities would use the 'more likely than not' guidance in practice, even if the words were not reinstated. There was also discussion about whether it is appropriate to use probability to determine whether an event has occurred, as either the event has occurred, or it hasn't. Some Board members stated it might be helpful to also give some examples of situations in which there is no element uncertainty.

Stand ready obligations (agenda paper 10D)

The ED proposes introducing the concept of a stand ready obligation. Many respondents stated that the explanation of what a stand ready obligation is too broad and will result in recognising far more liabilities. Based on an analysis of the comment letters staff believe that there are two potential improvements that could be made:

• improve the explanation of the notion of a stand ready obligation; and
• provide additional examples to illustrate the distinction between scenarios in which there is a stand ready obligation and in where there is just business risk.

The Board agreed with the staff plans for improvement. Staff then asked the Board to consider four examples and to give an indication on whether there is a liability, and if so what is the obligating event. The examples given are duplicated from the observer notes.

There was general agreement that a liability does exist in example 1, and the obligating event is selling the warranty (rather than selling the CD player and warranty, as proposed by staff). There was some discussion about whether this was consistent with the impairment model in IAS 39 for receivables, where an incurred (rather than expected) model is used. There was also discussion about how in practice some entities link warranty provisions with revenue. For example, if history indicates that warranty claims are made on 5% of sales, the warranty provision is booked when the sales are booked.

Staff put forward two views. The first was that examples 1 and 2 are not different in substance. The second is that they are different, and that in this scenario there is only a liability fro CD players that have faults at the time of sale. The Board debated this example for a while, with most Board members stating the facts were not conclusive and that more information was needed to give a view. For example, the consumer legislation could require the vendor to write an identical warranty to that in example 1. Alternatively, it could require a different warranty, or it could just give protection for CD players with a fault at the point of sale (that is, if a fault developed on day 2, the customer would not be protected by the legislation). The remaining two examples deal with non-contractual situations.

Generally, most Board members agreed with the staff that Y does not have a liability. This is because the available evidence indicates the company has complied with health and safety regulations.. Therefore there is no present obligation and there is no potential outflow of resources.

Staff again put forward two views. View A is that Y has no liability until an accident occurs. As at 30 June 20X1, the available evidence indicates that no accidents have occurred as a result of the hazard and therefore there is no potential outflow of resources.

View B is that Y does have a liability because the existence of a hazard creates a stand ready obligation to accept the financial consequences of the hazard causing an accident. There were a variety of views on this example, although the Board did generally agree that there could never be a stand ready obligation unless there is a breach of the health and safety regulations. It was also generally agreed that the answer might depend on how long it would take to rectify the breach.

Discussion at the June 2006 IASB Meeting

Redeliberation of the probability recognition criteria

The Board considered a detailed analysis of the role of probability in the recognition of liabilities. [The staff paper is excellent, and those interested in this area are commended to read it, reproduced in large part as the Observer Note. The explanation of the Board's rationale is much better than that in the Exposure Draft.]

Subject to affirming the measurement requirements proposed in the ED, the Board affirmed its conclusion in the ED, namely that the revised IAS 37 should not include a probability recognition criterion.

However, instead of just explaining that the criterion has been omitted because it is always satisfied, the staff recommends developing a more comprehensive explanation that captures the following points:

• The probability criterion as articulated in the Framework is confused. Furthermore, it is flawed, because in the absence of the notion of a stand-ready obligation, it results in the obviously anomalous conclusion that liabilities such as guarantees, warranties, and insurance obligations should not be recognised until it is probable that claims will arise. Most such obligations would therefore not initially qualify for recognition. Accordingly, the Framework concept that we should be focussing on in the IAS 37 project is the liability definition.
• The only standard that, in practice, currently uses the probability recognition criterion to determine recognition is IAS 37. Furthermore, IAS 37 has established its own unique interpretation of probability.
• The probability recognition criterion as articulated in the current IAS 37 is not related to resolving element uncertainty. Hence, once an entity has concluded that it has a liability, the criterion, as articulated in the current IAS 37, would in most cases not be a determining factor in recognition.
• The notion of a stand ready obligation is a logical extension of the existing Framework. Contractual stand ready obligations entail a flow of economic resources while the entity is standing ready and, hence, satisfy the probability criterion as articulated in the current IAS 37.
• A probability recognition criterion is inconsistent with the measurement requirements proposed in the ED because it results in similar obligations being treated very differently. For liabilities that can be measured reliably, the criterion unnecessarily delays including decision-useful information in the balance sheet.
• Some of the concerns about omitting the probability recognition criterion are concerns about element uncertainty and measurement uncertainty. We are seeking to address these concerns directly. (The Board has already directed the staff to develop more guidance to assist entities in determining when a liability has been incurred. The staff will also be asking the Board to consider what is meant by reliable measurement at a later point in the redeliberations.)

During the debate, Board Members noted that the Board needed to address what was the objective of measurement. Board members were of the view that, at a given measurement date; the objective was to measure the amount of the liability today. It was not to predict the outcome or the amount of the ultimate payment. It was a routine measurement uncertainty issue. Board members also noted the need to address specifically the 'high value, low probability' measurement issue.

Revisiting lawsuits

The Board discussed Examples 1 and 2 included in the Exposure Draft. The Board agreed that:

• Examples 1 and 2 in the ED are contradictory (and Example 1 was wrong).
• the illustrative examples accompanying any final Standard need to include additional guidance on how to address 'element uncertainty' in the context of legal proceedings (and similar regulatory actions).
• the likelihood that an external party will detect an entity's violation of the law or breach of contract is not relevant in determining whether the definition of a liability is satisfied.
• the start of legal proceedings does not of itself obligate an entity.

The Board noted that detection risk (implicit in Example 2) does not affect the existence of a liability (recognition): it does affect measurement. In addition, it was noted that there was no need for symmetry in accounting between the recognition of a liability by one party and the corresponding asset by another.

With respect to ED Example 1, the Board agreed that the start of legal proceedings does not resolve uncertainty about the facts relating to the claim. They agreed with respondents who noted that start of legal proceedings does not resolve uncertainty about whether the entity served harmful food at a wedding and that this food caused the death of ten guests. At the balance sheet date the entity continues to dispute this fact therefore it is not certain that an obligating event has occurred. In the ED, Example 1 concluded the start of legal proceedings gives rise to a present obligation. This suggests that the start of legal proceedings in itself gives rise to a present obligation (regardless of whether a present obligation exists relating to the subject matter of the lawsuit).

The Board agreed with respondents who argued that determining whether a present obligation exists for the underlying claim should be based on an evaluation of all known evidence. The staff notes that the Framework's definition of a liability states that a present obligation arises from past events (as opposed to a single past event). Thus, the start of legal proceedings is just one of a number of different facts, all of which should be taken into account when determining whether a present obligation exists. This approach is also consistent with the guidance in paragraph 16 of the ED (carried forward from the current IAS 37) which states that an entity must take into account all available evidence when determining whether a liability exists at the balance sheet date.

Discussion at the July 2006 IASB Meeting

Redeliberation of the proposal to eliminate the term 'contingent liability

The Board considered a staff analysis of comments on the proposal to eliminate the term 'contingent liability' from IAS 37. The staff noted that several concerns expressed about the proposal to eliminate the term 'contingent liability' related to other proposals included in the ED. Those concerns included omitting the probability recognition criterion, determining when a liability exists, the potential scope of stand-ready obligation,s and the new analysis of liabilities into conditional and unconditional obligations. Those topics either had been, or would be, addressed separately during the Board's redeliberations.

The Board was asked to address two matters specifically:

• Whether to eliminate the term 'contingent liability'; and
• Disclosure about potentially significant risks.

There was little discussion of whether to eliminate the term 'contingent liability'. Board members noted that many of the comment letters stated that the term was 'well understood', but often one respondent's understanding was different from another's. The Board thought that, given the other amendments being made to their proposals as a result of the exposure process, the term was unnecessary and unhelpful. The Board agreed to eliminate the term.

The staff had identified a potential gap in the disclosure requirements proposed in the ED with respect to disclosure about situations when the existence of a liability is uncertain and, therefore, no liability is recognised under the criteria adopted by the Board, as contrasted with disclosure of all potentially significant risks that the entity faces at the balance sheet date.

Board members acknowledged the problem, especially with respect to litigation. They agreed that to require preparers to estimate the amount of something that did not meet the definition of a liability did not make sense. The problem was how to craft a robust definition of the kinds of uncertainties for which disclosure should be required so as to avoid boilerplate disclosure about business risks in general. While litigation was an obvious example of the kinds of 'potentially significant risks' for which disclosure was sought, there were other examples, including illegal acts, environmental laws, and copyright.

The Board did not reach decisions on this topic. They asked the staff to return with a more developed proposal.

Can recognition of a liability influence the outcome of legal proceedings?

The ED proposed that if a range of possible outcomes with respect to a liability exist, the entity would disclose information indicating the uncertainties associated with the future cash outflows that would be required to settle or transfer the liability. The Board considered concerns raised by constituents that applying those principles to a liability, when the facts and circumstances associated with the liability are the subject of a lawsuit, might adversely influence the outcome of legal proceedings.

Constituents' concerns focussed on the legal notion of 'discovery' and that the entity's analyses supporting the disclosure might be subject to discovery, potentially prejudicing their defence. Board members, especially those with corporate backgrounds, were of the opinion that internal documentation and analyses of legal claims and similar uncertain liabilities would exist. The degree to which those analyses would be subject to legal discovery would vary among legal jurisdictions. It would be impossible for the Board to write a Standard to accommodate all legal systems. If an entity was particularly concerned, they should take the necessary steps to have any assessment made the subject of attorney-client privilege.

The Board agreed not to provide any exemption from recognition of a liability on the grounds that it would prejudice the entity. In addition, the Board agreed not to provide an exemption from the disclosures proposed in paragraph 67 of the ED on the grounds of prejudice to the entity. (Paragraph 67 proposes disclosure of the amount and description of each class of recognised non-financial liability.)

Project plan

The Board discussed the public roundtables to be held in Connecticut USA (30 November 2006), London (8 December 2006) and Melbourne, Australia 20 December 2006). The roundtables would discuss the results of the Board's redeliberations, not the original proposals in the ED. In addition, although invitations to participate in the roundtables had been sent to all those who had responded to the IASB ED and the FASB's Invitation to Comment, late applications would be accommodated, subject to space.

Discussion at the September 2006 IASB Meeting

Project plan

The Board reviewed and agreed the project plan for the next phases of redeliberations.

Scope of the proposed amendments to the IAS 37 measurement principle

The Board considered three alternatives proposed by the staff:

• Revert back to the wording of the existing IAS 37 measurement principle (the entity's 'best estimate' of the expenditure required to settle the present obligation at the balance sheet date).
• Reconsider the IAS 37 measurement principle and identify all possible measurement principles and evaluate the relative merits of each principle to determine which is the most appropriate for liabilities within the scope of IAS 37.
• Adopt 'fair value' as the IAS 37 measurement principle (without identifying and evaluating other possible measurement principles)

The Board discussed these alternatives, but concentrated on the first bullet. The Board noted that there was much confusion and misunderstanding – some of it at the Board level – that was unhelpful to constituents. The current IAS 37 model, an expected value model, is not a fair value model – although many of the inputs to the model are the same or similar.

A Board member noted that some of the problem was in the use of terminology such as 'best estimate', which was associated with a traditional notion of a single point estimate. The Board's approach is similar to its approach to insurance, but is complicated because IAS 37 is 'schizophrenic' – combining best estimates with expected values. That is, IAS 37 mis-describes the measurement method. In the view of many Board members, an expected value is the current settlement price using current inputs, not an estimate of the ultimate settlement amount.

The Board approved the first approach.

Reconsidering the existing IAS 37 measurement principle

The Board continued its theme of distinguishing the current settlement vs net settlement. Board members noted that there are several notions of settlement in IAS 37, including settlement with the counterparty and transfer of the obligation to a third party (which may or may not represent an extinguishment). Both are 'settlements' for the purpose of IAS 37, but are not necessarily the same amount. Both are current measures and do not incorporate expected changes in law, technology, etc. Neither represents the value of cash expense expected to be incurred in the future.

The Board confirmed that the measurement principle in IAS 37 is current settlement, not ultimate settlement. They concurred with the staff that there are several opportunities in Standard to improve the explanation of this principle, including changes in terminology and improving the explanation in the Basis for Conclusions.

Will a current settlement principle provide better information?

Much of the discussion in this section revolved around the notion of 'reliable'. The Board noted that the Preliminary Views on the Conceptual Framework (Phase 1) contains a better explanation of 'reliable' than what was available when the ED of the IAS 37 proposals was published. The Board asked the staff to ensure that the redraft of IAS 37 subsequent to the current redeliberations should reflect 'reliable' as used in the Conceptual Framework Preliminary Views.

The Board noted that the current settlement approach looks for the mean of the possible current settlement amounts, not the mode. Thus the amount included in the financial statements is one of a range of possible outcomes, estimated at the balance sheet date, and would change from period to period as information about the inputs changed. The Board acknowledged that there are audit issues surrounding verifiability, but at least the inputs are current inputs, not assessments of future inputs.

The Board agreed with the staff recommendation that there should be an explanation of how a measurement principle based on a current settlement notion provided useful information about liabilities within the scope of IAS 37 in the Basis for Conclusions accompanying any final Standard.

Is more guidance on the IAS 37 measurement principle required?

The Board agreed that more guidance is required to ensure that any final standard could be applied consistently in practice. A Board member suggested that such guidance be included as Application Guidance (that is, mandatory material) and that the staff should limit Illustrative Examples to a minimum (if any).

Other points that were noted included that the choice of the discount rate should be that appropriate to the liability and not the entity's cost of capital or the risk free rate. That is, the discount rate should be related to the credit risk of the obligation, not that of the entity.

Discussion at the October 2006 IASB Meeting

Does the proposed measurement principle permit a choice?

The staff reminded the meeting that the measurement principle proposed in the IAS 37 ED was that 'An entity shall measure a liability at the amount that it would rationally pay to settle the present obligation or transfer it to a third party on the balance sheet date'. This principle was derived from the current explanation of 'best estimate' in IAS 37 paragraph 37. The staff proposed removing the notion of 'amount to transfer' from the measurement principle in any final standard. Board members noted that 'settlement' was a broader notion than transfer and opened the door to ambiguity-something acknowledged by the authors of IAS 37 and its UK equivalent. Others expressed concern that 'settle' was being used to imply 'extinguishment' or legal defeasance (that is, the derecognition notion in IAS 39); this was not the measurement objective of IAS 37 as exposed.

Still other Board members noted that in languages other than English, 'settlement' subsumed 'transfer' but 'transfer' excluded 'settlement'.

It was evident that the Board was split on the staff proposal, and for very significant reasons. To use 'transfer' would suggest that the measurement attribute was 'exit fair value'. Senior staff warned the Board that to use terms and notions from FAS 157 Fair Value Measurements was completely inappropriate: that document had not been through the IASB's due process and should not be assumed to be part of the IASB's canon of guidance.

Board members suggested that the Board should clarify what the measurement objective in IAS 37 was and what the components of that measure should be. Other Board members saw this as an inappropriate extension of the scope of the project. These Board members noted that constituents (and Board members) could identify two or three possible measures in IAS 37:

• The amount that the entity could rationally agree [settle] with a third party to assume the obligation (the entity retains the credit risk);
• The amount that the counter-party will accept from the entity to settle [extinguish] the obligation;
• The sum of the cash payments that the entity expects to make to settle [extinguish] the obligation, discounted to the balance sheet date.

Board members discussed these notions for a while. It was noted that, given the limited scope of the project, the Board might have to accept that there were different approaches to measurement in IAS 37 and that the IASB should not pre-judge its fair value measurement project. Consequently, the IASB should explain that 'settlement' can occur either with the counter-party or with a third party. It was also noted that the discount rate used must include a risk premium appropriate to the obligation. As IAS 37 measures liabilities, the risk premium reduces the discount rate and increases the liability on the balance sheet. (A Board member noted that as a result of the implementation of IFRIC 1, it became apparent that preparers had been using the wrong discount rate – somewhere between the risk-free rate and the entity's investment hurdle rate.)

The Board also noted that 'rationally' was not a synonym for 'economically rational' – that is, it was possible that an entity might make a current estimate of the amount to settle the obligation as 100, but to transfer that obligation to a third party would cost 120. This was because, depending on the nature of the liability, the third party might demand a higher risk premium than the entity would incur. Alternatively, the higher premium might be the amount the entity would be prepared to pay to transfer the liability at the balance sheet date.

Board members seemed to accept that, for many obligations, measurement would have to include entity-specific inputs. Some Board members were very uncomfortable with this, but seemed to accept that imposing the alternative markets requirements in FAS 157 was impractical (and would trigger re-exposure).

The Board did not reach a conclusion on the staff's proposals and asked the staff to consider further the matters raised in the debate.

November 2006: Round-table discussions are planned

The IASB will hold public round-table discussions with constituents on the IASB's Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The purpose of these discussions is to explore the issues articulated by constituents in their comment letters on the proposed amendments and to allow the IASB to clarify and better explain the principles underlying the proposed amendments.

Discussion at the January 2007 IASB Meeting

Round-table discussions: summary report

The IASB staff presented a 'Summary of Outcomes' of the roundtable discussions held in the US, UK and Australia during November and December 2006. It is intended that a revised version of the agenda paper would be posted to the IASB Website as a permanent record of these meetings.

Board members thought that the summary was both comprehensive and balanced. However, a disclaimer should be included to the effect that the summary reflected participants' views and assertions and that the roundtable meeting format was not intended to and did not allow Board members to challenge participants' views. As such, Board members and participants might not have a common understanding of what was said.

Next steps

Main issues: measurement

In light of the concerns expressed by roundtable participants with respect to measurement in IAS 37, the staff asked the Board to confirm the scope of the current project: that an objective of the proposed revisions to IAS 37 was to clarify the measurement guidance in IAS 37 rather than to introduce new a new measurement objective.

Board members expressed differing views. Some accepted that the project had not set out to fix measurement, but rather clarify the existing guidance and limit alternatives. To address measurement now might pre-empt the conceptual framework project's measurement debate. Other Board members wanted to address measurement; to amend IAS 37 and leave measurement alternatives in it would not be acceptable to them.

All Board members seemed to accept that there was a need to fix the notion that, just because a liability had a range of possible outcomes, the correct measurement of that liability in the financial statements was zero.

The staff noted that IAS 37 lacks a measurement objective. However, it might be possible to identify the inputs to measuring a liability which had a high degree of uncertainty by identifying the inputs necessary to measure that liability and build on guidance already in IFRS to eliminate the inconsistencies that exist currently. The Board explored this idea, with some Board members expressing a desire to see symmetry between the components of the measurement of 'uncertain assets' (that is, measuring the recoverable amount of an asset under IAS 36) and 'uncertain liabilities' in IAS 37.

Board members noted that IAS 36 paragraph 30 requires the following components as part of the assessment of the impairment calculation. Board members also noted that these components are expressed in terms of the value in use calculation and that, consequently, they might no map easily on to the measurement of a liability. However, what was important was the nature of the components, which were current estimates of:

• future cash flows
• possible variations in the amount or timing of those future cash flows
• the time value of money, represented by a current market risk-free interest rate
• a risk margin specific to the item being assessed; and
• other factors that market participants would reflect in the pricing the future cash flows.

The Board accepted that, with any adaptation that might be necessary to render them suitable for liabilities, these were the appropriate components for the measurement of an uncertain item.

The Board also suggested that the staff develop the measurement model for legal/ contractual liabilities first, and then examine what needs to be done differently for non-contractual liabilities. Although some Board members did not accept that all contractual liabilities had a settlement notion (in that some contractual liabilities involve an unknown counterparty), the staff was asked to proceed on this basis.

Interaction with other IASB projects

The Board noted that some of the issues addressed in the IAS 37 project touched on issues in the conceptual framework and IAS 18 projects. With respect to the conceptual framework project, the Board did not think there were any serious cross-cutting issues that should delay progress on this project. Any peripheral issues that developed could be addressed later. More immediate was the dividing line between revenue and liabilities. The IFRIC, in particular, was often faced with issues related to multiple element transactions and the identification of incidental liabilities. Board members thought that the building block approach to be adopted would help resolve many of these issues.

Project timetable

The Board reviewed and accepted the project timetable (available in the Observer note 4B), which would result in a revised standard being issued in the fourth quarter 2008.

Discussion at the March 2007 IASB Meeting

The Board continued its redeliberations of the proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, concentrating on the distinction between a liability and a business risk, and the definition of a 'stand ready obligation'.

Distinguishing between a liability and a business risk

The discussion was based on several examples presented in the staff paper (for details see Agenda Paper 3B available in the Observer Notes section of the IASB's website).

The Board acknowledged that a business risk itself existing at the balance sheet date does not meet the definition of a liability. It was noted that an entity does not have a present obligation as a result of a business risk since the entity can choose to take action to avoid or mitigate the impact of a risk.

The Board reaffirmed the conclusions inherent in the ED that a liability requires both an irrevocable action or event that occurs on or before the balance sheet date and a mechanism that establishes an external party's right to claim from the entity.

By agreeing to the staff's conclusions on Examples 1A to 3A in Agenda Paper 3B the Board acknowledged that:

• Laws (including contractual law) and regulations by themselves are not present obligations. But they may be mechanisms that establish an external party's right to call upon the entity to complete a particular action.
• Planning a future irrevocable action or event in a jurisdiction where there is a mechanism that establishes an external party's right to call upon the entity exists does not give rise to a present obligation and hence, does not satisfy the definition of a liability.
• A revocable action or event or a non-binding offer does not satisfy the definition of a liability, even in a jurisdiction where a mechanism that establishes an external party's right to call upon the entity when that action is taken.
• Making or receiving an offer that can be refused because the offer is not legally binding does not give rise to a present obligation and hence, does not satisfy the definition of a liability.

The Board then discussed the following fact pattern (Example 3B in Agenda Paper 3B):

A vendor sells hamburgers in a jurisdiction with no minimum food hygiene standards. But the law of that jurisdiction stipulates that if a customer is hospitalised as a result of eating a contaminated hamburger, the supplier of that hamburger must pay compensation of £100,000 to the customer. On 31 December 200X the vendor has sold one hamburger to a customer. The customer has eaten the hamburger, but is not hospitalised. The key issue is whether the sale of the hamburger establishes a present obligation or whether it illustrates uncertainty about the existence of a present obligation (element uncertainty).

View 1

The sale itself does not give rise to a present obligation. A liability arises if the hamburger is contaminated and the customer is hospitalised. It was noted that past experience may provide useful information in addressing the uncertainty about the existence of a liability. (7 Board members were in favour of this view)

View 2

Same as view 1 but the liability arises when the hamburger is contaminated irrespective of whether the customer is hospitalised. (2 Board members were in favour of this view)

View 3

The sale gives rise to a present obligation. It was noted that past experience may provide useful information in addressing the uncertainty about the measurement of the liability. (5 Board members were in favour of this view)

No consensus was reached and the Board decided to continue the discussion at a future meeting.

Stand ready obligations

The Board reaffirmed that the notion of a stand ready obligation describes those unconditional obligations whereby an external party has a present enforceable right to call upon an entity to act in a certain way in the future, but may not do so.

The Board acknowledged that the notion of a stand ready obligation also applies to non-contractual scenarios (e.g. enforceable laws and statute/regulations).

Based on comments received from constituents the Board discussed whether the term 'stand ready obligation' is useful or whether it should be eliminated. There seems to be a consensus that the concept of stand ready obligation should remain unchanged. However, some Board members were indifferent on the labelling. It was tentatively decided to keep the term.

Discussion at the April 2007 IASB Meeting [Education Session]

In this education session the Board discussed two documents prepared by representatives of the General Counsel 100 Group (GC 100) addressing issues regarding recognition and measurement of liabilities for litigations.

Three representatives of the GC 100 commented on several specific Board queries and gave an overview on how commercial legal teams approach the uncertainties often associated with legal proceedings. The issues were illustrated by three real cases.

The key statements made by GC 100 were:

• The question of whether or not a liability exists in respect of litigation is frequently very complex. In many cases there is not a distinction that can easily or logically be drawn between a general business risk on the one hand and risk in respect of a liability on the other. In addition there is uncertainty about the development of the relevant law over the period of the litigation.
• Particularly at the early stage of a litigation, it is usually not practicable for a legal team to examine whether a present obligation exists. Very often a complex multi-factor analysis with dozens of co-dependent elements has to be performed ('There is no right or wrong in the early stages').
• Because of the complexity inherent in most cases, even when a liability exists the measurement is simply not possible. Therefore, in most cases legal teams are not in the position to give a view as to what outcomes are possible or even to estimate probability-weighted cash flows.

The Board was not happy with these statements.

Some Board members noted that accounting based on these statements would result in liabilities for lawsuits being recognised only in the late stages of a litigation and therefore would not result in improved financial statements.

With regard to the complexity some Board members noted that only information available at the measurement date needs to be taken into consideration, particularly, no estimation of the future development of the underlying law is required. Therefore, a measurement of the liability should be possible in most cases. One Board member pointed out that his practice experience showed that it was always possible to measure the liability ('Bring together the controller, the chief accountant and the lawyer and at the end of the day you always have a number').

One Board member asked what consequences the statements of GC 100 would have for the measurements of insurance contracts as the outcome of insurance contracts often also requires the evaluation of litigations. The representatives of GC 100 were of the opinion that there is a fundamental distinction between litigation and insurance contracts as there are accepted proceedings using statistical data in measuring insurance contracts that do not exist for litigation.

No decisions were made but the Board seemed to reaffirm that except in rare cases, an entity will be able to assess whether a liability exists and to determine a reliable measure of the liability.

Discussion at the May 2007 IASB Meeting

Uncertainty about the existence of a present obligation

The Board continued its deliberations on distinguishing uncertainty about the existence of a present obligation from a stand-ready obligation. The issue raised in the March 2007 meeting was whether the sale of a hamburger establishes a present obligation or whether it illustrates uncertainty about the existence of a present obligation (element uncertainty). The discussion was based on the following modified fact pattern:

Vendor sells hamburgers in a jurisdiction where the law stipulates that the vendor must pay compensation of £100,000 to each customer that purchases a contaminated hamburger. On 31 December 200X (the balance sheet date), Vendor has sold one hamburger to Customer. Past experience indicates that one in a million hamburgers sold by Vendor is contaminated. No other information is available.

The staff presented the following alternatives reflecting the views expressed by Board members in March:

View A

A present obligation arises when the hamburger is contaminated and all available evidence is used to determine whether or not a present obligation exists. Under the fact pattern outlined above no present obligation exists because the available evidence (here: past experience) does not indicate that Vendor sold a contaminated hamburger.

View B

The sale itself gives rise to a present obligation and all available evidence is used to reflect uncertainty in the measurement of that present obligation.

The Board remained nearly equally split between the two views. Some Board members holding view B made reference to incurred but not reported (IBNR) situations in the insurance industry, in which they saw the issue as a question of 'do I or do I not have a claim?'.

A member of the senior staff raised the question about what measurement implications the different views would have. He asked Board members whether, under View A, a liability of zero would be acceptable if it is concluded that no present obligation exists; and whether under view B, based on the degree of probability, a liability always has to be recognised (even if it is measured at a small amount). The Board discussed this issue for a while but did not reach an agreement.

After a lengthy discussion there seemed to be a consensus that the crucial question is to determine 'whether a contaminated hamburger has been sold' and the labelling as currently outlined under view A and view B is of less importance.

No conclusion was reached, but the staff was asked to redraft the paper by focusing on the identified crucial question.

Constructive obligations

The Board redeliberated the definition of a constructive obligation in order to reflect the outcome of the redeliberations regarding the distinction between a liability and a business risk.

In March 2007 the Board tentatively concluded that a present obligation exists when (a) an entity is irrevocably committed to act in a particular way and (b) an external party has an enforceable right to call upon the entity to act in that particular way. IAS 37 ED defines a constructive obligation as a 'present obligation that arises from an entity's past actions'.

Accordingly a constructive obligation is only a present obligation when the external party has an enforceable right to call upon the entity to act in a particular way.

The Board discussed five options to address the term 'enforceable right' in the tentative description of a present obligation in the definition/description of a constructive obligation.

Option 1:

Limit constructive obligations to those that a court would enforce.

Option 2:

Consider amending the tentative description of a present obligation in paragraph 13 and 15 of the IAS 37 ED to explain that an external party may have a right that is 'enforceable by legal or equivalent means'.

Option 3:

Use the explanatory text already in paragraph 15 of the IAS 37 ED as a proxy for explaining 'enforceable by equivalent means'.

Under this option paragraphs 13 and 15 of the IAS 37 ED could be amended in a manner similar to:

Paragraph 13

An essential characteristic of a liability is that the entity has a present obligation arising from a past event. A present obligation exists when the entity is irrevocably committed to act in a particular way and an external party has an enforceable right to call upon the entity to act in that particular way. An external party's right may be enforceable by legal or equivalent means. For a past event to give rise to a present obligation, the entity must have little, if any, discretion to avoid settling it. A past event that creates a present obligation is sometimes referred to as an obligating event.

Paragraph 15

In the absence of legal enforceability, particular care is required in determining whether an entity has a present obligation. that it has little, if any, discretion to avoid settling. In the case of a constructive obligation, tThis will be the case only if:

• (a) the entity has indicated to other parties that it will accept particular responsibilities;
• (b) the other parties can reasonably expect the entity to perform those responsibilities; and
• (c) the other parties will either benefit from the entity's performance or suffer harm from its non-performance.

Option 4:

Continue developing the Board's tentative description of a present obligation in the Conceptual Framework project but drop the description in the IAS 37 project.

Option 5:

Revisit the Board's tentative conclusions in March to see whether it is possible to distinguish a liability from a business risk without introducing the idea of enforceability.

Some Board members raised the concern that a restriction to legally enforceable rights would be too narrow as there is 'something else' that can result in a present obligation. One Board member noted that such a restriction could even result in the necessity to re-exposure the IAS 37 ED.

The discussion focussed on 'what else' other than legal enforceability can establish a present obligation. Some Board members pointed out that in some circumstances economic compulsion could result in a present obligation, in particular when 'doing nothing' would mean that the entity has to give its business. For example, in case of participation contracts reducing payments to the contractual minimum would mean for the insurance company to be pushed out of the market. Other examples mentioned were pensions and jubilee bonus.

No decisions were made but the staff was asked to further elaborate this issue. In doing so options 1 and 3 should be taken into consideration. Eight and eleven Board members, respectively, were in favour of pursuing these options (multiple votes were permitted).

Discussion at the July 2007 IASB Meeting

The purpose of this session was summarise the current status of the project, to identify unresolved issues and to agree on the extent of further work required on these topics in the IAS 37 project.

Distinguishing a liability from a business risk

The Board reaffirmed its previous decision that the occurrence of a past event (i.e. not a potential outflow of economic benefits) distinguishes a liability from a business risk. A present obligation arises after something has happened. In contrast, a business risk is something that might happen in the future as a result of conditions that exist on the balance sheet date.

The Board then discussed a related issue with regard to the definition of a liability. The staff noted that the phrase 'little, if any, discretion' used in paragraph 13 of the ED to describe when and why an entity has a present obligation might be ambiguous and asked the Board whether this term should be replaced by more emphatic phrases such as 'irrevocably committed', 'no discretion' or 'something an entity cannot avoid'.

One Board member noted that the main problem with the phrase 'little, if any, discretion' is that it is sometimes applied to answer the question whether the outflow of resources can be avoided.

Overall the Board was not convinced that a more emphatic phrase would make things better and decided to keep the phrase 'little, if any, discretion'.

Stand ready obligations

The Board reaffirmed that a stand ready obligation must satisfy the definition of a liability and that the term 'stand ready obligation' is just a label for situations where an entity has an unconditional obligation associated with a contractual obligation (for example, product warranty and written options).

The staff presented revised wording for paragraphs 22 to 26 of the ED reflecting the Boards tentative conclusion. Subject to editorial changes the Board agreed to the proposal.

Existence of a present obligation The Board identified three general situations when uncertainty about the existence of a present obligation might arise:

• (a) Did a past event occur?
• (b) How does authoritative guidance (including statute, law, contract and regulation) apply to known facts?
• (c) In the absence of legal enforceability, do cumulative events and circumstances provide sufficient evidence to confirm that a present obligation exists?

Situations (a) and (b)

The Board noted that an entity must use judgment to determine whether a present obligation exists and that the evidence an entity considers and the relative weight assigned to each piece of evidence will depend on the individual facts and circumstances of each case. Subject to some editorial changes it was decided to give additional guidance on situations (a) and (b) by providing indicators such as:

• The entity's own experience with identical or similar items
• The experience of others with identical or similar items
• The opinion of experts
• Additional evidence provided by events after the balance sheet date about conditions that existed on the balance sheet date
• Any evidence of a potential breakdown or weakness in an entity's internal controls (for example a letter of complaint, the start of legal proceedings or an internal audit report).

One Board member observed that the purpose of the indicators is to indicate whether a certain event that has happened leads to a liability rather than solely whether an event has happened, and that this should be clarified in the standard. At this point the Board redeliberated the 'hamburger example'. The Board discussed this example in March and May 2007 but did not reach a conclusion whether:

• The sale itself gives rise to a present obligation and all available evidence is used to reflect uncertainty in the measurement of that present obligation.
• A present obligation arises only when the hamburger is contaminated and all available evidence is used to determine whether or not a present obligation exists.

One Board member recalled a previous discussion, in which the Board was content to conclude that performing operations in a hospital did not create liabilities, only when an operation went wrong. There was a strong analogy between the examples. However, Board members noted that the staff had made real progress towards solving a very real problem in accounting and encouraged them to spend a bit more time to see whether a definitive solution could be developed. The Board agreed to ask the staff to investigate the issue further.

Situation (c)

As agreed at the May 2007 meeting the staff explored the following three options to address uncertainty in the ED:

Option 1: Limit the recognition of constructive obligations to those a court could enforce;

Option 2: Recognise both constructive obligations that a court could enforce and constructive obligations that are enforceable 'by equivalent means' and explore the meaning of 'by equivalent means';

Option 3: Option 2, but use the explanatory text already in paragraph 15 of the ED as a proxy for explaining 'by equivalent means'. The staff proposed the following revised wording:

'In the absence of legal enforceability, particular care is required in determining whether an external party has a right to call upon an entity to act in a particular way. In the case of a constructive obligation, this will only be the case if:

• (a) the entity has indicated to other parties that it will accept particular responsibilities;
• (b) the other parties can reasonably expect the entity to perform those responsibilities; and
• (c) the other parties will either benefit from the entity's performance or suffer harm from its non-performance.'

The Board agreed to proceed with option 3. The Board draw particular attention to the phrase 'an external party has a right' that is, any kind of economic compulsion would not meet the criteria of an obligation.

The 'more likely than not' recognition criterion

The Board was asked whether an explicit 'more likely than not' criterion should be included in any final standard.

The Board was nearly equally split. Board members against including the criterion argued that assessing whether a present obligation exists is a judgemental, not a mathematical issue. In addition, including the criterion would create a 'safe harbour' that would help preparers to avoid tough decisions. Those Board members who favoured including the criterion would include it, provided that it was not seen as determinative.

The Board will continue its deliberations at a subsequent meeting.

Discussion at the October 2007 IASB Meeting

Uncertainty about the existence of a present obligation

In May 2007, the Board considered an example that illustrated uncertainty about the existence of a present obligation. The facts of the example were:

The Board decided that on 31 December 200X the vendor would have a present obligation only if it had supplied a contaminated hamburger. However, the Board did not reach any conclusions on how to address the uncertainty in this example. Three possibilities were discussed by the Board:

• View A: The event that gives rise to the obligation is the supply of a contaminated hamburger. It is uncertain whether this event has occurred so it is uncertain whether an obligation has arisen.
• View B: The event that gives rise to an obligation is the inception of the contract to sell a hamburger. The obligation is the unconditional promise that the vendor makes to the customer: to supply a good hamburger or pay compensation if the hamburger supplied is contaminated.
• View C: A third possible view is that the event that gives rise to the obligation to pay compensation is the supply of a hamburger to the customer. This view was not explored in the papers for the May meeting, but has been discussed by the staff since.

The Board also discussed additional examples relating to a hospital death, libel claim and speeding fines (outlined in Agenda Paper 13 available on the IASB's website).

The Board agreed to reject View B, and went on to discuss views A and C in detail. Some Board members favoured the approach in View A. In terms of measurement, View A was further disaggregated into View A1 and View A2:

• View A1: Measurement under View A1 assumes that management have judged the obligation correctly.
• View A2: View A2 measurement reflects uncertainty about existence using expected values.

The Board discussed the fact that an event or activity must have occurred. Further, the Board indicated that there would need to be some kind of evidence that a liability has arisen. The Board did not conclude on a view and directed staff to prepare a paper to clarify how element uncertainty is taken into account in measurement.

Discussion at the December 2007 IASB Meeting

The IASB staff presented a paper to the board discussing comments received in relation to the measurement proposals in the IAS 37 Exposure Draft. The staff indicated that the scope of the IAS 37 project did not include a fundamental review of the existing measurement requirements; however the Board acknowledged the ambiguities in the existing requirements and proposed limited amendments to clarify that:

• (a) the objective is to measure the liabilities at its current settlement or transfer amount, that is, the amount that the entity would rationally pay to settle the obligation or transfer it to a third party on the measurement date; and
• (b) an 'expected cash flow' approach is an appropriate way of estimating this amount, even for single obligations.

In previous meetings, the Board has rejected commentators' suggestions that these proposals would change rather than clarify the existing requirements of IAS 37.

Clarification or change

The Board first considered how to address concerns that it is changing, rather than clarifying, the measurement requirements of IAS 37.

The staff noted that some respondents to the Exposure Draft thought that, at present, IAS 37 requires liabilities to be measured on the basis of the ultimate future costs and permits individual obligations to be measured at their most likely outcome. The staff believed that the existing requirements of IAS 37 are being misinterpreted and, therefore, it is important for them to be clarified.

The staff proposed that concerns that the existing requirements are being changed, not clarified, would be adequately addressed by greater explanation in the Basis for Conclusions. It was noted by one Board member that many constituents would not accept the revisions regardless of any changes made to the Basis of Conclusions.

Settlement or transfer amount

The Board then moved on to consider whether one or the other of the two measurement objectives (namely settlement amount or transfer amount) should be removed from the proposed measurement requirements.

Staff noted that some respondents to the Exposure Draft had expressed the view that it was not clear:

• whether there was a difference between the amount that would be required to settle an obligation and the amount that would be required to transfer it to a third party; and
• if there were a difference, what that difference would be and whether entities had a free choice between the two measurement objectives.

The Board had an extensive discussion around whether the amounts were different, with some Board members of the view that the amounts would be the same, and others of the view that they could be different. One Board member illustrated this via an example in which:

• an entity has an obligation of 100;
• there is a 50% likelihood that the obligation will be settled for 100 and a 50% likelihood that the obligation will be settled for nil.

The expected future cash flows are 50. If settlement is used as the measurement basis the liability would be less than 50 as an entity would rationally accept less than 50 to settle the obligation (for example, they would accept less than 50 in exchange for the certainty of receiving the cash). However, using a transfer notion for measurement of the liability a counterparty taking on the liability would require more than 50 to assume the liability, for example, because of risk margin, profit margin, and other factors.

Not all Board members agreed that this example was valid.

The Board could not agree on whether there was a difference between the settlement and transfer measurement objectives and requested that a small group of staff and Board members take the issue offline to have one more attempt to articulate the concepts discussed. The issue will brought back to a future Board meeting.

Rationale for current settlement/transfer amount

The Board briefly discussed the proposed text to the Basis for Conclusions (not publicly available) and agreed that the proposed changes would be useful.

Discussion at the February 2008 IASB Meeting

The Board continued its deliberation regarding the measurement requirements and the removal of the probability recognition criterion in the Exposure Draft of Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits (the ED).

Measurement objective

At the December 2007 meeting the Board discussed concerns that the proposed measurement requirements are unclear because they refer to both the amount to settle an obligation and the amount to transfer it to a third party. No final conclusion was reached and the Board decided to further investigate this issue in small-group meetings of staff and Board members. At this meeting the Board continued its deliberations by following up the main issues that arose from these meetings.

Clarification of the measurement objective

The staff suggested amending the measurement requirement as follows:

'An entity shall measure a liability at the amount that it would rationally pay on the measurement date to settle the present obligation with the counterparty or to transfer it to a third party.'

In addition, the staff suggested explaining the measurement principle by additional guidance like:

'The amount that an entity would rationally pay to settle or transfer an obligation is the least cost amount, that is: (a) the amount that a third party would demand to assume the obligation; or (b) the amount that the counterparty would demand to settle the obligation, if there is objective evidence that this amount is lower than (a).'

There seemed to be a consensus that settlement amount and transfer amount are current exit amounts and that no choice of measurement bases is permitted.

Some Board members were concerned that the measurement requirement would not work in cases in which no market to transfer the obligation exists (liabilities for environmental damages, lawsuits etc.). These Board members expressed the view that no market-based approach would be possible, but entity-specific assumptions should be used to measure those liabilities. One Board member suggested developing separate measurement guidance for these liabilities. Other Board members noted that these cases are similar to 'level 3 valuations' in accordance with FAS 157 Fair Value Measurements and, therefore, the use of entity specific assumptions would not be prohibited. Those Board members were of the view that the third party to assume the obligation would be a hypothetical market participant who has the same level of information as the entity.

The Board had a substantial discussion on this topic. Eventually, the Board decided by majority vote to adopt the staff's suggestion in principle but to add guidance on what is meant by 'third party' in the definition of transfer amount. There seemed to be a consensus that in this context the 'third party' should be described as 'knowledgeable' meaning that the third party has 'the same information about the liability as the entity'. The staff was asked to redraft the ED accordingly and to take into consideration combining the two pieces of guidance outlined above. In addition, the guidance should be enhanced by examples.

Risk adjustment for diversifiable risks

Carrying forward the existing requirements of IAS 37, paragraph 35 of the ED proposes that, when measuring a liability, 'an entity shall include the effects of risks and uncertainties'.

The Board decided not to give further guidance on risk assessment as part of this project; for example, how to treat risks that are diversifiable and in a perfect market would not be reflected in the market price of a liability.

Probability recognition criterion

The Board discussed responses received objecting to the removal of the probability recognition criterion. The staff suggested not reinstating this criterion mainly for the following reasons:

• The removal of the criterion would not lead to many more liabilities to be recognised.
• Many liabilities that are surrounded by great uncertainties such as large unprecedented legal actions would be covered by the ;reliable measurement; recognition criterion.

The Board agreed with the staff and decided not to reinstate the probability recognition criterion.

Discussion at April 2008 IASB Meeting - Liabilities (IAS 37 Amendment)

Measurement Guidance

The IASB staff introduced the first draft of possible application guidance to accompany the measurement requirements of proposed revisions to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

The Board did not make any real progress, and it was evident that they were still divided as to their understanding of 'transfer' and 'settlement'; the notion of 'rational' actions; and the measurement attribute being applied.

Some Board members thought that they had decided (in January 2008) that 'settlement' implied that there was a counterparty. Other Board members noted that, in some cases, there is an obligation but no counterparty, often because the obligation is imposed by stature or as a condition of a mineral resource licence.

Board members noted that, for some liabilities, it was not possible to transfer the liability and that the only 'rational' action for the entity would be to discharge the obligation itself (which challenged the 'settlement with counterparty' understanding noted above). Environmental remediation obligations were cited as a good example for such liabilities. Other Board members expressed unease with the suggested 'building blocks': probability-weighted cash flows, time value of money, and adjustments for risk. In particular, the adjustment for risk was challenged. A Board member noted that if risk can be diversified, it should not affect measurement. Other Board members agreed with that as a general proposition but noted in return that liabilities related to asset retirement and environmental remediation obligations were often not capable of such risk diversification.

A simple example demonstrated that IAS 37 supported at several notions of measurement. Using the example of a deep-sea oil rig to be decommissioned in 20-30 years' time (see IAS 37.App C, Ex 3), these included:

• (a) what it would cost the entity to transfer the obligation to decommission the rig in 20-30 years' time to an unrelated party at the balance sheet date;
• (b) what it would cost the entity if the asset was retired at the balance sheet date (that is, cease production now, before the end of the oil well/rig's useful life, and dismantle the rig);
• (c) the present day price to decommission the rig in 20-30 years' time adjusted for future price changes and discounted back to the present day assuming the entity undertakes the work;
• (d) as for (c) but assuming that the entity will sub-contract the work to another entity (that is, the sub-contractor will expect to earn a margin).

At this point, the debate was closed. The staff was asked to work with the Board advisers on the project and to return with proposals at a subsequent meeting.

General Requirements for Restructuring Costs and Specific Guidance for Contract Termination Costs

The Board discussed several issues that had been included in the 2005 Exposure Draft but that had not yet been redeliberated by the Board.

Whether disclosures similar to those in FAS 146 Accounting for Costs Associated with Exit or Disposal Activities, paragraph 20, should be included in the revised IAS 37

The Board agreed in principle that disclosures similar to those in FAS 146.20 should be included in the revised IAS 37. However, several Board members expressed reservations. One was concerned that such a requirement would lead to unnecessary disclosure that is included 'to be on the safe side' without any real consideration of its information content. Another disagreed with taking this decision before the Board had determined what the measurement attribute in IAS 37 was. They said that the discussion in the previous session seemed to prove that in five years work revising IAS 37, the Board was still uncertain as to what that attribute was.

Constructive obligations

The staff noted that the manner in which constructive obligations were discussed in the Exposure Draft may have contributed to commentators' misunderstanding of the Board's intentions. The Board accepted a staff proposal to amend paragraph 15 of the 2005 ED as follows:

15 In the absence of legal enforceability, particular care is required in determining whether another party can rely on the entity to act or perform in a particular way. an entity has a present obligation that it has little, if any, discretion to avoid settling. In the case of a constructive obligation, this This will be the case only if:

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

(b) as a result the entity has created a valid expectation in that party the other parties that it can reasonably rely on expect the entity to perform those responsibilities; and

(c) the other party parties will either benefit from the entity's performance or suffer harm from its non-performance.

Board members expressed concern with aspects of drafting, especially paragraph 15(b), which several thought 'too weak'. Those Board members thought that the counterparty should have a legal remedy against the entity: while this was very close to the US notion of promissory estoppel [a contractually enforceable right that protects a party who would suffer harm], without that notion earnings management would be very easy.

Onerous contracts

The Board agreed to clarify guidance paragraph 57 of the Exposure Draft about contracts that become onerous due to factors outside the entity's control along the following lines:

In some cases, contracts become onerous as a result of events outside the entity's control. For example, a contract that requires an entity to make specified payments regardless of whether it takes delivery of contracted products or services may become onerous if the market price of the products or services declines below the contracted price and as a consequence the benefits that the entity can derive from the products or services become less than the unavoidable costs under the contract....

The staff suggested clarifying the Board's intention with respect to contracts that become onerous through the entity's own actions by amending the illustrative examples and clarifying the Basis for Conclusions. While not disagreeing with those proposed changes, Board members expressed the view that the clarification should also be made in the Standard; amending non-authoritative material was not enough.

The Board agreed that amendments to the text in the Exposure Draft were unnecessary with respect to a perceived inconsistency between ED paragraphs 15 and 55 with respect to constructive obligations; nor with respect to guidance in ED paragraph 58 on sublease income.

The Board agreed to amend ED paragraph 55 to state that 'if an entity has a contract that is onerous, it shall recognise as a liability the net present obligation under the contract...' In addition, it agreed to amend ED paragraph 58 as follows: 'If the contract is an operating lease of an asset that the entity no longer uses, the entity determines the net present obligation unavoidable cost by reference to the remaining lease rentals payable, reduced by estimated sublease rentals that could be reasonably obtained for the property, even if the entity does not intend to enter into a sublease.'

Discussion at the May 2008 IASB Meeting

Liabilities – Amendments to IAS 37

The staff presented an analysis of the comments received on the exposure draft relating to the proposed amendments to IAS 19 Employee Benefits. IAS 19 was would be amended as part of the liabilities project principally to converge the accounting for termination benefits with US GAAP (in particular with SFAS 146 and SFAS 88 but not necessarily with all aspects of US GAAP).

The staff pointed out that, overall, most respondents were in favour of the proposed amendments, though some concerns have been raised.

Definition of termination benefits

Some constituents asked for clarification of the term 'short period' in the definition of voluntary termination benefits. In particular, they asked whether 'short period' relates to (1) the period between the employer making the offer and the employee's acceptance of the offer or (2) the period between the employee's acceptance and the actual termination of the employee.

The Board agreed that (2) was the intended interpretation and to clarify this in the proposed paragraph 7(b) of IAS 19. There seemed to be a consensus that judgement is required in determining what a 'short period' is. The Board decided not to give any further guidance in this respect.

The Board agreed to a staff analysis that the term 'short period' implies that the bonus feature of (voluntary) long-term early retirement programs does not meet the criteria of a termination benefit even if such bonus features are not compensation for services rendered by the employee.

Recognition of termination benefits

The main concerns raised by respondents were:

• The proposal to recognise voluntary termination benefits only when the employee accepts the offer is inconsistent with the unconditional and constructive obligation principles set out in IAS 37 in cases where the entity cannot withdraw the offer (irrevocable voluntary termination benefits).
• More guidance should be provided on whether recognition of involuntary termination benefits requires specific communication to individual employees or just to the affected group of employees.

Regarding the first issue the Board decided that irrevocable offers of voluntary termination benefits should be treated in the same way as involuntary termination benefits and that the proposed paragraph 137 of IAS 19 should be amended accordingly. Regarding the second issue Board members expressed mixed views. Finally, there was a consensus that communication of the termination to each of the individual employees affected is not required for a present obligation to exist. A majority of Board members was of the view that the affected employees or group of employees must be aware of the fact that they are to be terminated. That is, a general statement that, for example, 10% of the employees of an entity will be terminated would not be sufficient. Subject to some drafting comments the Board agreed to amend the proposed paragraph 138 to something like:

...an entity shall recognise a liability and expense for involuntary termination benefits when it has a plan of termination that it has communicated to each of the affected employees being terminated, and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn...

Recognition of involuntary termination benefits that relate to future services

Some respondents suggested that involuntary termination benefits paid in exchange for future services should be recognised in the same way as voluntary termination benefits rather than spread over the assumed future service period. These constituents believed that the communication of the plan is the obligating event and the entity should recognise the amount that it expects to pay. Other respondents commented that the standard should also provide for situations where voluntary termination benefits would be provided in exchange for future services.

The Board reaffirmed its decision that because of the notion of 'short period' voluntary termination benefits can never be recognised in exchange for future services and agreed to clarify this in the basis for conclusion.

The Board also reaffirmed its decision that involuntary termination benefits in exchange for future services should be recognised over the period of the future services.

Discussion at the December 2008 IASB Meeting

Disclosure – possible obligations

The Board discussed whether specific disclosure requirements were required in the revised version of IAS 37 with respect to possible obligations – those matters that do not meet the definition of a liability (currently called 'contingent liabilities') – and whether the notes to the financial statements should contain details of situations in which it is uncertain that a present obligation exists and the entity has judged that none does.

The staff had suggested that specific requirements could be avoided in IAS 37 because of the operation of IAS 1 paragraphs 122 (disclosure of significant judgements in applying accounting policies) and/ or paragraph 125 (measurement uncertainty).

However, during the discussion they (and several Board members) agreed that neither of those two paragraphs would capture the events intended. The paragraphs in IAS 1 relate to the accounting standards and measurement uncertainties for items recognised in the financial statements. As the items at issue are explicitly not recognised, the disclosures in IAS 1 would not apply.

The Board had an extended discussion, but ultimately agreed that:

• a disclosure requirement should be added to the revised standard; and
• disclosure should be required only if specific indicators that the entity might have a present obligation are met.

The Board discussed what those 'specific indicators' should be. There was general consensus that the indicators should include governmental, legal, and arbitration proceedings (including any such proceedings that are pending or threatened of which the entity is aware). However, there was considerable disagreement about how best to filter the information such that the 'frivolous' items could avoid disclosure.

The Board acknowledged that they were trying to balance the decision-usefulness of information with the inevitably hazardous nature of litigation. Some thought that the general principles of materiality could be used effectively. However, one Board member observed that a frivolous lawsuit for multiples of the entity's book value would always be material, no matter how frivolous the claim was. Another Board member suggested that the only way in which materiality would work to achieve the Board's intention would be to remove all triggers or indicators. If the Board wanted indicators that a possible obligation existed, it could not use materiality as the filter.

Some Board members noted that the Board was using the word 'liability' in different ways to describe where on the spectrum of liability recognition the [potential] obligation was.

The Board seemed to agree that:

• When there was no present obligation, disclosure was not required.
• When there was no present obligation, but there was also uncertainty about whether an obligation might develop, specific disclosures would be required.
• When there was no present obligation, but the outcome (for example, of a lawsuit) was uncertain, specific disclosures would be required.

The staff agreed that they would return to the Board at a later date with a revised proposal. A Board member suggested that, when they presented these proposals, they should also present an analysis aligning the examples used by the Board to test the recognition principles ('the hamburger', the hospital operation, etc) with the disclosure requirements to ensure that the Board was being consistent.

Discussion at the April 2009 IASB Meeting

The Board agreed that they should endeavour to issue revisions to IAS 37, even if some issues remain unresolved. To do so would 'save' the following items, which several Board members saw as significant improvements to IAS 37:

• removing the probability recognition criterion. At present, IAS 37 requires entities to recognise liabilities only if it is probable that there will be an outflow of economic benefits. This requirement is inconsistent with the recognition requirements for liabilities in other standards-such as IAS 39. In particular, it is inconsistent with the requirements in IFRS 3 Business Combinations, which does not apply the probability recognition criterion for contingent liabilities that an entity acquires in a business combination.
• removing the term 'contingent liability' and updating guidance on identifying liabilities. The guidance in IAS 37 on identifying liabilities is unclear. IAS 37 uses the term 'contingent liability' to describe various things, some of which are liabilities and some of which are not liabilities. The proposed revisions would remove the label 'contingent liability' and focus solely on whether an item does or does not meet the definition of a liability. They would also include more guidance to help entities to identify liabilities – particularly for situations in which the outcome is dependent on the occurrence or non-occurrence of future events. The concepts and terminology developed in the Exposure Draft are consistent with those now being used in other projects, such as revenue recognition and insurance.
• improving the general guidance on identifying constructive obligations and hence the specific requirements for restructuring liabilities. The Board proposes to tighten the definition of constructive obligations by specifying that entities must have a present duty or responsibility to another party who will benefit from the entity's performance of its duty or responsibility. This additional guidance should make it easier for entities to distinguish between constructive obligations and economic compulsion, and align IFRSs more closely with US GAAP.

  In particular, by tightening the definition of a constructive obligation, the Board can change the requirements for recognising liabilities for restructuring costs. The change will improve a weak area of IAS 37 and eliminate the main differences between IAS 37 and US accounting standard FAS 146 Accounting for Costs Associated with Exit or Disposal Activities.

• clarifying that entities should measure all liabilities on the basis of expected value, not most likely outcome. At present the guidance in IAS 37 is ambiguous. It is widely interpreted as permitting entities to measure single obligations at their most likely outcome.
• making a range of other minor improvements, for example removing outdated terminology (eg 'provisions'), clarifying that IAS 37 applies to all liabilities that are not within the scope of other standards and adding guidance on identifying and measuring onerous contracts.

Measurement guidance

The staff presented its proposals seeking to address the Board's desire to clarify the measurement objective and explain more fully how entities should apply those requirements. This was presented in the form of Draft Application Guidance. The Board quickly returned to its favourite discussion: what does the measure in IAS 37 represent? The Board discussed this issue at length. A Board member was concerned that the Application Guidance as drafted could be read in several different ways, which was unacceptable. Several Board members offered their views of what cash flows would be considered in determining the measure of the IAS 37 liability.

A possible solution was advanced late in the discussion. There was general consensus that the following proposed application guidance would be appropriate for liabilities such as lawsuits-those not involving the delivery of services:

If the obligation is of a type that is fulfilled by making payments to the counterparty, the relevant cash flows include:

• a) the amounts that are expected to be paid to the counterparty; and
• b) associated costs, such as legal fees.

In those situations in which the obligation is fulfilled by undertaking a service, the relevant cash flows include the profit margin that the entity would charge in the market to fulfil the obligations of another market participant. (Company A has a decommissioning obligation; it has the capacity to discharge that obligation itself or to contract with Company Z to do the decommissioning for it. When measuring the IAS 37 obligation, it considers it would consider both what Company Z would charge and what it would charge to do the work (that is, with its own profit margin included in the measure). In a competitive market, these two measures may be similar.

If the entity is not in a position to discharge the obligation itself, then it would have to use the third party amount - that is, the current exit price for that obligation.

A majority of the Board indicated that they would support a measurement principle based on this approach.

Restructuring disclosure

Description of restructuring activity

The Board decided that the information entities should give when describing the restructuring activity should be the same disclosure as FAS 146, that is, a description of the exit or disposal activity, including the facts and circumstances leading to the expected activity and the expected completion date.

Other disclosure

There was less agreement about what other disclosure should be required and the extent to which IAS 37 should be conformed to the disclosure requirements in FAS 146. There seemed to be a desire for a greater degree of conformity with FAS 146 than the staff had proposed, but in any event, the disclosure package will have to come back to the Board.

Discussion at the June 2009 IASB Meeting

Applying the proposed requirements to litigation liabilities

The Board discussed concerns raised by some constituents and Board members that defendants in some legal proceedings might encounter practical problems when applying aspects of the proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Recognition would prejudice the outcome of the proceedings

The staff presented an analysis that concluded that:

• the proposed amendments to the recognition and measurement requirements do not significantly increase the risk of prejudicial information being disclosed; and
• some useful information would be lost if liabilities were instead either not recognised at all, or recognised at a less relevant amount, such as the minimum or maximum amount in the range of reasonably possible outcomes.

Some Board members were uncomfortable with requiring preparers to quantify the expected outcomes of a piece of significant litigation, preferring a disclosure approach. The numbers produced would be too variable to be useful. Other Board members were not content with that approach, fearing that the disclosure would quickly reduce to boilerplate. Board members noted that the staff recommendation was not a great distance from the current situation in IAS 37 and as such was evolutionary not revolutionary, and was still subject to a 'prejudice' exemption. The result should be better information than was provided currently. The Board agreed (one opposed) that the standard should not make any exceptions to the proposed recognition and measurement requirements for litigation liabilities.

One-off litigation liabilities not capable of reliable measurement

The Board discussed the common concern that the outcomes of major one-off legal proceedings can be very difficult to predict and, consequently cannot be measured reliably.

The Board discussed the issues related to major items of litigation, but concluded that the standard should continue to describe the circumstances in which liabilities cannot be measured reliably as 'extremely rare' and that no guidance on how this should be interpreted should be provided.

Practical problems for US entities

The staff asked the Board for direction in light of comments made in the United States that IAS 37 might be 'incompatible with the legal environment in the US because preparers would be compelled to reveal potentially damaging information about their litigation.' Some Board members noted that while there is a 'prejudicial' exemption for disclosure, there is none for recognition and that items recognised in the financial statements are subject to 'discovery' under US legal procedure.

Board members noted that the problems identified exist in IAS 37 at present and that the Board should not delay the finalisation of the standard for this potential issue. Board members did not want to move towards existing US GAAP in this area. If, as part of a transition to IFRS, operational issues with respect to the application of this standard were identified, these could be raised with the IASB in the normal manner.

Reimbursement rights

The Board agreed that the standard should not include any measurement requirements for reimbursement rights. However, it should state explicitly that the assumptions used to measure a reimbursement right should be consistent with those used to measure the related liability.

There was some discussion about whether IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds should be amended to remove the 'lower of the amount of the decommissioning obligation recognised and the reimbursement right' in paragraph 9. A majority of the Board favoured removing the asset ceiling test from IFRIC 5.

Disclosure of possible obligations

The Board discussed the circumstances in which an entity should disclose information about 'possible obligations' (that is, those for which there is uncertainty about whether an obligation exists, but for which based on current information, management has concluded that the recognition criteria are not met and no liability has been recognised).

The Board agreed that there should be disclosure of possible obligations (subject to materiality) whenever the possibility of the outflow of economic resources is other than remote.

The Board agreed that in such circumstances, an entity would disclose:

• a description of the circumstances;
• an indication of the financial effects;
• an indication of uncertainties relating to the amounts or timing of any outflow of economic benefits; and
• the possibility of any reimbursement.

Stand-ready obligations

The staff presented a 'refined analysis' of the attributes of stand-ready obligations and the circumstances in which they might arise. Board members were generally content with the revised analysis and supported its use in the drafting of the standard and related application guidance. In particular, some Board members thought it was very helpful to them in distinguishing stand-ready obligations and 'incurred but not reported' obligations. The Board agreed that the staff paper reflected correctly the Board's conclusions.

Discussion at the July 2009 IASB Meeting

Staff presented a paper proposing more detailed specification of the measurement objective underpinning the proposed measurement guidance for IAS 37. The objective is to facilitate the use of the IAS 37 measurement model for other types of liabilities (for example, insurance). The Board agreed in principle to include more detailed guidance. Nonetheless, Board discussion suggested that reaching conclusion on the detailed guidance would be difficult, as many Board members have differing views. The most contentious issues relate to including profit in measuring of liabilities, with some Board members concerned that this would create 'a mess' in accounting. However, other Board members argued that a notion of risk margin must be included in the measurement guidance as it reflects the risk of investment and business (as the objective of business is not to earn a risk free interest rate). They saw the risk margin as the conceptually sound solution and understood is as a compensation for bearing the risk, not as a profit. Another Board member said that while he was happy to include the risk margin in the framework of a performance obligation of revenue recognition, he struggled to see the benefit for other liabilities.

After a prolonged discussion the Board agreed in principle that the measurement objective should be the lower of the value to entity of not having to fulfil the obligation and the amount that the entity would have to pay to cancel the obligation or to transfer it. The Board decided that the details will be drafted by staff with a group of Board members before the amendments to IAS 37 are finalised. Several Board members disagreed with this approach.

Discussion at the September 2009 IASB Meeting

The Board discussed the details of the measurement guidance for service obligations. The issue was discussed on the July meeting when several Board members expressed their concerns regarding the earlier tentative decision.

The Board agreed with the staff that 'if a market exists for such services, the amount is the price that the contract would charge'. Most of the discussion concentrated on the attributes concerning the existence of market. The Board considered the notions of efficient, functioning, competitive, and active market, but significant differences arouse between the Board members. As each of the words describing the attributes of the market posed a specific challenge, the Board finally decided to drop any of them in the definition itself.

In addition, the Board considered an illustrative example provided by the staff. After a long discussion the Board agreed that calculation should be based on the estimation of how much a contractor would charge today, estimated outflows and associated probabilities, adjustment for risk and uncertainty (risk margin reflecting the uncertainty about the future assumptions) and time value of money. Some members were concerned that by adjustment for risk and uncertainty the Board would create a double counting, but the majority of the Board disagreed.

The Board continued its discussion with assessment of the requirements when efficient market does not exist. The staff proposed a new guidance based on direct costs, allocation of overheads and required return on capital employed. The Board decided not to develop a new guidance based on the staff proposal but to base the measurement on the estimate of what a (hypothetical) contractor would charge based on the guidance on building blocks included already in the standard and the guidance on probabilities, risk margin and time value of money agreed before.

The Board without much discussion approved the consequential amendments to IFRS 3 and IFRIC 5. The Board asked the staff to try to incorporate all the guidance contained in the related IFRICs (IFRIC 1, IFRIC 5, and IFRIC 6) in the amended standard. The staff replied that they would include the guidance as far as possible.

Consequently, the Board agreed that it would issue the amended standard as an IFRS rather than amendments to IAS 37 in order to adopt the structure of an IFRS.

Finally, the Chairman asked about the overall support for the new standard. Six Board members dissented, with one of those saying he might reconsider his dissent once drafting was complete.

Discussion at the October 2009 IASB Meeting

Decision about re-exposure

The staff presented one issue to the Board: whether re-exposure of the IAS 37 amendments package was necessary or whether the Board could proceed directly to issue an IFRS. In doing so, they reviewed with the Board the criteria for re-exposure in the IASB's Due Process Handbook, paragraphs 46-48, and the decision summary of redeliberations.

Three options were proposed:

1. Issue an IFRS without re-exposure;
2. Undertake a limited-scope re-exposure of selected changes to the propels; or
3. Re-expose the entire standard.

After an extended debate, the Board agreed that it would:

• Ballot the IFRS and prepare the Basis for Conclusions for the IFRS other than the measurement guidance and release this as a Near-final Draft on the IASB's Website; and
• Expose for public comment its proposed clarification of the measurement requirements. Those requirements, in the Board's view, are a re-articulation of the current measurement requirements in IAS 37, not a new measurement basis. Based on decisions reached in July and September 2009, the revised standard would state that:
  • the requirement is to measure the amount that the entity would rationally pay on the reporting date to be relieved of the present obligation.
  • the amount that the entity would rationally pay to be relieved of the present obligation is the lowest of:
    • the value the entity would gain if it did not have to fulfil the obligation;
    • the amount the entity would have to pay the counterparty to cancel the obligation; and
    • the amount the entity would have to pay a third party to transfer the obligation to that party.
  • If there is no evidence that the entity could cancel the obligation or transfer it to a third party for a lower amount, the entity measures the liability at the value it would gain if it did not have to fulfil the obligation.
  • An entity estimates the value it would gain if it did not have to fulfil the obligation using expected present value techniques. The calculations take into account:
    • the outflows of resources expected to be required to fulfil the obligation (the probability-weighted average of the possible outcomes);
    • the time value of money; and
    • if the amount or timing of the outflows is uncertain, any additional amount the entity would rationally pay to be relieved of risk.
  • An entity should measure the resource outflows at their value, not cost. If the obligation is to provide a service at a future date, the entity measures the service outflows at the amount it would rationally pay a contractor at the future date to carry out the service on its behalf.
    • if a market exists for such services, the amount is the price that a contractor would charge.
    • if no market exists, the entity would estimate the amount.

  Board members stressed that the ED of the proposed clarification of the measurement approach and the near-final draft of the IFRS should be available at the same time.

At least five Board members indicated that they would dissent to the ED on the basis of the measurement approach being adopted.

Discussion at the November 2009 IASB Meeting

Application of the measurement guidance to onerous contracts

The Board discussed how to resolve a conflict identified by the staff. Previously, the Board decided to clarify that entities should measure liabilities in the scope of IAS 37 by reference to the value, rather than the cost, of the outflows required to fulfil the obligation. Applying that principle, the attribute of the outflows used to measure an onerous contract (value) would be different from that used to identify the contract as onerous in the first place (cost).

After a short discussion, the Board agreed:

• (a) to create a limited exception to the proposed measurement requirements in the revised IAS 37. The exception will be restricted to onerous contracts arising from transactions in the scope of IAS 18 Revenue and IFRS 4 Insurance Contracts. It should allow entities to measure their contractual obligations to provide goods or services on the basis of the expected cost, rather than the value, of the goods or services; and
• (b) that the Board emphasises in any guidance accompanying the revised IFRS that:
  • (i) the purpose of the exception is to postpone any change in practice for measuring those contracts, pending completion of the revenue and insurance projects; and
  • (ii) when the Board issues its new revenue and insurance standards, it will either confirm the exception (possibly taking the contracts out of the scope of IAS 37) or delete it (bringing the measurement requirements for onerous sales and/or insurance contracts into line with the measurement of other liabilities in the scope of IAS 37).

Measurement guidance – wording

The staff reminded the Board that the measurement attribute for an IAS 37 liability is the amount that an entity would rationally pay at the end of the reporting period to be relieved of an obligation. The Board had decided that this amount is the lowest of:

• (a) the value the entity would gain if it did not have to fulfil the obligation;
• (b) the amount the entity would have to pay to cancel the obligation; and
• (c) the amount the entity would have to pay to transfer the obligation to a third party.

The staff noted that in drafting the proposed measurement guidance, several people had indicated that (a) was unclear. Accordingly, the staff is seeking guidance from the Board about how best to clarify the Board's intention.

Several alternatives were discussed in a wide-ranging debate. The Board eventually agreed that the amount in (a) would be expressed as:

(a) the value the entity would forego gain if it had did not have to fulfil the obligation;

The Board agreed that the staff should work on any further refinements necessary with the Board advisors. Provided the intention of the measurement guidance (namely, measuring value, not cost) did not change, the Board did not need to review the wording further.

A Board member expressed extreme frustration that the Board was about to issue guidance that demonstrated that emission rights were not a liability, and yet the same Board had given direction on 18 November to the staff to develop guidance in a different project that would say that emission rights were a liability. He thought this an unconscionable situation. The Board was thrown into slight disarray by this uncomfortable observation.

The Board seemed to agree that the application guidance accompanying the IAS 37 revision would include an example demonstrating that emission rights were not a liability under the revised proposals. If the Emission Rights project continues to go in the direction indicated by the Board on 18 November (that emission rights give rise to an obligation), this would be subject to the usual due process. Although Board members accepted this approach, it was clear that several, including the Board member who raised the issue, were uncomfortable.

The Chairman asked Board members whether the discussion had undermined support for the Board's conclusions in the proposed revision of IAS 37. The Board confirmed that 9 Board members supported the revisions, just sufficient to issue an IFRS.

Discussion at the December 2009 IASB Meeting

Comment deadline for limited-scope re-exposure draft Measurement of liabilities in IAS 37

The Board plans to publish an exposure draft (ED) on the revised proposals for the measurement of liabilities in IAS 37. The normal period for comment is 120 days, but the Due Process Handbook provides that if a matter is urgent, the document is short, or the IASB expects there to be broad consensus on the matter, a shorter comment period may be appropriate. As the re-exposure draft is a limited-scope document and significantly shorter than the entire Standard, the staff proposed a comment period ending on 12 April 2010, which approximates a comment period of 90 days. This will allow the staff to analyse the comments received in time for discussion at the May 2010 meeting. The staff mentioned that even if the ED is published in December, the comment period will still close on 12 April.

One Board member questioned whether there would be an overlap in comment periods between this ED and the ED on insurance contracts, due to the interaction between the two documents. Another Board member suggested extending the comment period to 120 days to allow some overlap as it is expected that the insurance ED will issued in April 2010.

When put to vote, the Board, by a narrow majority agreed to a shorter comment period of approximately 90 days ending on 12 April 2010.

January 2010: IASB re-exposes liability measurement proposals

On 5 January 2010, the IASB published for comment a revised exposure draft (ED/2010/1) of one section of a replacement for IAS 37 Provisions, Contingent Liabilities and Contingent Assets. That section deals with measurement of liabilities that are within the scope of IAS 37. IAS 37 applies to liabilities not covered by other accounting standards, including liabilities to decommission assets, environmental liabilities, obligations under onerous contracts, and liabilities arising from legal disputes. In June 2005, the IASB had published Proposals to amend IAS 37, including revised measurement requirements. In the light of the comments received, the IASB has decided to issue revised proposals that include more guidance on measurement. Comment deadline is 12 April 2010. The IASB intends to replace IAS 37 in the third quarter of 2010. Click for IASB Press Release (PDF 100k).

The effects of the proposals for a revised recognition and measurement of liabilities include:

• More liabilities may be recognised for 'improbable' obligations such as legal cases that are not expected to be lost
• Items previously treated as 'contingent liabilities' may be recognised in the statement of financial position
• The proposed measurement requirement of measuring liabilities using a 'hypothetical contractor' may effectively include a third-party profit margin in liability measurement in some cases
• The revised disclosure requirements may be commercially sensitive

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – IASB Refines Proposals for the Measurement of Liabilities in IAS 37 (PDF 74k), which explains the proposals in the ED.