Liabilities — Amendments to IAS 37
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).|
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)
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)
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.