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Amendments to IAS 37

Date recorded:

Project plan

The Board reviewed and agreed the project plan for the next phases of redeliberations.

Scope of the proposed amendments to the IAS 37 measurement principle

The Board considered three alternatives proposed by the staff:

  • Revert back to the wording of the existing IAS 37 measurement principle (the entity's 'best estimate' of the expenditure required to settle the present obligation at the balance sheet date).
  • Reconsider the IAS 37 measurement principle and identify all possible measurement principles and evaluate the relative merits of each principle to determine which is the most appropriate for liabilities within the scope of IAS 37.
  • Adopt 'fair value' as the IAS 37 measurement principle (without identifying and evaluating other possible measurement principles)

The Board discussed these alternatives, but concentrated on the first bullet. The Board noted that there was much confusion and misunderstanding - some of it at the Board level - that was unhelpful to constituents. The current IAS 37 model, an expected value model, is not a fair value model - although many of the inputs to the model are the same or similar.

A Board member noted that some of the problem was in the use of terminology such as 'best estimate', which was associated with a traditional notion of a single point estimate. The Board's approach is similar to its approach to insurance, but is complicated because IAS 37 is 'schizophrenic' - combining best estimates with expected values. That is, IAS 37 mis-describes the measurement method. In the view of many Board members, an expected value is the current settlement price using current inputs, not an estimate of the ultimate settlement amount.

The Board approved the first approach.

Reconsidering the existing IAS 37 measurement principle

The Board continued its theme of distinguishing the current settlement vs net settlement. Board members noted that there are several notions of settlement in IAS 37, including settlement with the counterparty and transfer of the obligation to a third party (which may or may not represent an extinguishment). Both are 'settlements' for the purpose of IAS 37, but are not necessarily the same amount. Both are current measures and do not incorporate expected changes in law, technology, etc. Neither represents the value of cash expense expected to be incurred in the future.

The Board confirmed that the measurement principle in IAS 37 is current settlement, not ultimate settlement. They concurred with the staff that there are several opportunities in Standard to improve the explanation of this principle, including changes in terminology and improving the explanation in the Basis for Conclusions.

Will a current settlement principle provide better information?

Much of the discussion in this section revolved around the notion of 'reliable'. The Board noted that the Preliminary Views on the Conceptual Framework (Phase 1) contains a better explanation of 'reliable' than what was available when the ED of the IAS 37 proposals was published. The Board asked the staff to ensure that the redraft of IAS 37 subsequent to the current redeliberations should reflect 'reliable' as used in the Conceptual Framework Preliminary Views.

The Board noted that the current settlement approach looks for the mean of the possible current settlement amounts, not the mode. Thus the amount included in the financial statements is one of a range of possible outcomes, estimated at the balance sheet date, and would change from period to period as information about the inputs changed. The Board acknowledged that there are audit issues surrounding verifiability, but at least the inputs are current inputs, not assessments of future inputs.

The Board agreed with the staff recommendation that there should be an explanation of how a measurement principle based on a current settlement notion provided useful information about liabilities within the scope of IAS 37 in the Basis for Conclusions accompanying any final Standard.

Is more guidance on the IAS 37 measurement principle required?

The Board agreed that more guidance is required to ensure that any final standard could be applied consistently in practice. A Board member suggested that such guidance be included as Application Guidance (that is, mandatory material) and that the staff should limit Illustrative Examples to a minimum (if any).

Other points that were noted included that the choice of the discount rate should be that appropriate to the liability and not the entity's cost of capital or the risk free rate. That is, the discount rate should be related to the credit risk of the obligation, not that of the entity.