Liabilities — Amendments to IAS 37
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.