Liabilities – IFRS to replace IAS 37
The Board considered possible revisions to the recognition requirements as a result of comments received on the working draft of the IFRS. The Board will discuss measurement at a future meeting.
Recognition criteria - threshold for 'liability exists' criterionThe Board voted that the IFRS should specify a more-likely-than-not threshold for judgement about whether a liability exists. This vote reverses a prior decision of the Board and is consistent with the current guidance in IAS 37. Most members supported adding-back this criterion, noting it was consistent with the Framework and that it provided a practicability aspect that makes the standard workable. However, one member cautioned the Board as to what signal this may be giving for other projects, such as revenue recognition and the consideration of variable consideration. He noted that constituents have asked for a more-likely-than-not threshold for variable consideration as it relates to revenue recognition and was concerned as to the message this would be sending. Others countered that what distinguished the addition of this criterion from revenue recognition is the existence of a contractual arrangement.
Recognition - guidance for 'liability exists' criterion
In response to requests from constituents, the Staff drafted additional guidance and examples on how entities should apply the recognition criteria if there is uncertainty as to whether a liability exists. The Board discussed this additional guidance. Specifically, the Board voted that the guidance should specify that an entity defending a lawsuit should judge that a liability exists if the available evidence indicates that either:
- If the case proceeds to court, its more-likely-than-not that the courts will rule against the entity, or
- Its more-likely-than-not that the entity will offer an out-of-court settlement instead of defending the case.
Regarding the second condition, the Board noted that clarification should be made in drafting that this is limited to cases where practice/past evidence suggests the case is not going to reach the court (such as with patent infringement claims, as discussed within the Agenda Paper). The Board also noted that, in drafting, it should be clear this guidance could apply to situations where, mid-trial, the parties decide to settle. One Board member also suggested consideration should be made as to whether the entity is going to accept a settlement offer or not (versus making a non-substantive offer).
One Board member noted "delight" with this guidance as to help limit situations where a few days after a report is issued an entity announces a settlement, noting that in many cases, the entity was thinking about the settlement prior to the report being issued.
The Board also voted that the IFRS should require management to judge whether a liability exists even in the early stages of legal proceedings, when specific evidence might be limited. In other words, entities should not delay recognition of a liability until there is sufficient evidence to support a particular level of confidence in the judgment. Some members noted this addition was to address concerns raised by constituents and questioned whether this guidance was still needed now that the Board had added-back the more-likely-than-not existence threshold. However, the Board noted the additional guidance was primarily to address concerns from U.S. constituents and therefore the Board voted to include.
The Staff noted they will be reflecting this additional guidance/examples in an updated staff draft and will be performing additional outreach to constituents to seek informal comments on the draft guidance.
Recognition - removal of 'probable outflows' criterion
The Board tentatively re-affirmed its previous decision to remove the probable outflows criterion from the IFRS that replaces IAS 37. The Staff will perform additional outreach and testing of the revised recognition criterion to determine whether they address the current practice issues with IAS 37.
The Staff will reflect the Board's decisions within the Staff Paper and provide to interested constituents, seeking informal feedback. The Board will schedule future deliberations based on priorities with other projects, but expect to further deliberate in 2011.