Short-term Convergence — Provisions, Contingent Liabilities and Contingent Assets
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.