Liabilities — Amendments to IAS 37
The staff presented to the Board an analysis of the responses received on the exposure draft on the measurement of liabilities, summarising the key issues identified by constituents as:
- relevance of expected value
- reliability and cost of measuring expected values
- judgement about whether a liability exists
- US convergence concerns
- use of contractor prices
- risk adjustment
- existing diversity in practice, especially whether it is acceptable to include the effect of non-performance risk in discount rates
- comments on other sections of the working draft IFRS.
The staff concluded that the future direction of the project largely depends on the Board's reaction to the comments about expected values. The staff presented three alternatives on how to proceed with the project:
- Option 1 - Abandon the project to replace
- Option 2 - Amendment with regards to improve on the weaknesses in the Standard, without revising the measurement requirements
- Option 3 - Continue to develop a new IFRS to replace IAS 37 with an expected value model but address reliability/cost concerns.
Several Board members expressed their support for Option 3 as they saw the proposals developed by the Board to date as an improvement to the existing guidance in IAS 37. It was noted that IAS 37 was developed quite a long time ago and although it provided a good basis for the financial reporting of liabilities at the time, things have moved on from then. Some Board members also observed that expected value measurement has been embedded into the proposals on insurance, revenue recognition and leases and by not carrying forward this cross-cutting principle to the measurement of liabilities, would be short-sighted and stupid. Other Board members noted that the Board has invested too much time and effort in developing some good proposals to date and that all the hard work would be lost if the project is discontinued.
Despite their strong support for continuing the development of a replacement for IAS 37, these Board members raised a few concerns with the proposals suggested in the agenda papers. It was suggested that, should the Board decided to continue with the project, some effort should be put into fleshing out exactly what is meant with "expected values" and whether it is consistent with the concept of expected values applied in other projects. Some Board members also recommended eliminating the "more likely than not" threshold from determining whether a liability exists. A number of concerns have also been raised about risk adjustment and how practical it would be for entities to determine.
However, some Board members were in favour of abandoning the project and admitting defeat. These Board members noted that the Board has failed in convincing constituents that principles of IAS 37 are flawed. They also noted that the Board has failed in justifying the decision on changing the measurement of liabilities. They are not convinced that the Board would not be creating more problems with the current proposals, instead of solving the existing problems.
When put to a vote, the Board was in favour, by a large majority (10-4), of continuing the development of a new IFRS to replace IAS 37 with an expected value model, but also to address the concerns raised by constituents on once-off obligations such as litigation, risk adjustment, contractor prices and other additional request for guidance but only if it can be resolved without prolonged discussion. One of the Board members voting against continuing with the project requested the Board to be very careful when communicating its decision to continue with the project as the Board has received strong opposition to the previous EDs issued and risk damage to its reputation as a global standard-setter if it is perceived as ignoring the concerns raised by constituents.
Another Board member raised the question about the likely timing of publishing a new ED. The Chairman, supported by the staff, observed that the Board need to prioritise the the MoU projects first and where possible, time will be made available on the agenda of future meetings to continue the deliberations on this project. However, the Chairman warned the Board to accept that it may not be possible to issue an exposure draft before June 2011. It was also stressed that whatever decisions the Board makes on this project, it will need to consider what further actions need to be taken to address concerns about applying the requirements of expected value measurement to US litigation cases. The Board agreed to stay informed on any future decisions taken by the FASB on the measurement and disclosure of liabilities.