Liabilities — Amendments to IAS 37
Round-table discussions: summary report
The IASB staff presented a 'Summary of Outcomes' of the roundtable discussions held in the US, UK and Australia during November and December 2006. It is intended that a revised version of the agenda paper would be posted to the IASB Website as a permanent record of these meetings.
Board members thought that the summary was both comprehensive and balanced. However, a disclaimer should be included to the effect that the summary reflected participants' views and assertions and that the roundtable meeting format was not intended to and did not allow Board members to challenge participants' views. As such, Board members and participants might not have a common understanding of what was said.
Main issues: measurement
In light of the concerns expressed by roundtable participants with respect to measurement in IAS 37, the staff asked the Board to confirm the scope of the current project: that an objective of the proposed revisions to IAS 37 was to clarify the measurement guidance in IAS 37 rather than to introduce new a new measurement objective.
Board members expressed differing views. Some accepted that the project had not set out to fix measurement, but rather clarify the existing guidance and limit alternatives. To address measurement now might pre-empt the conceptual framework project's measurement debate. Other Board members wanted to address measurement; to amend IAS 37 and leave measurement alternatives in it would not be acceptable to them.
All Board members seemed to accept that there was a need to fix the notion that, just because a liability had a range of possible outcomes, the correct measurement of that liability in the financial statements was zero.
The staff noted that IAS 37 lacks a measurement objective. However, it might be possible to identify the inputs to measuring a liability which had a high degree of uncertainty by identifying the inputs necessary to measure that liability and build on guidance already in IFRS to eliminate the inconsistencies that exist currently. The Board explored this idea, with some Board members expressing a desire to see symmetry between the components of the measurement of 'uncertain assets' (that is, measuring the recoverable amount of an asset under IAS 36) and 'uncertain liabilities' in IAS 37.
Board members noted that IAS 36 paragraph 30 requires the following components as part of the assessment of the impairment calculation. Board members also noted that these components are expressed in terms of the value in use calculation and that, consequently, they might no map easily on to the measurement of a liability. However, what was important was the nature of the components, which were current estimates of:
- future cash flows
- possible variations in the amount or timing of those future cash flows
- the time value of money, represented by a current market risk-free interest rate
- a risk margin specific to the item being assessed; and
- other factors that market participants would reflect in the pricing the future cash flows.
The Board accepted that, with any adaptation that might be necessary to render them suitable for liabilities, these were the appropriate components for the measurement of an uncertain item.
The Board also suggested that the staff develop the measurement model for legal/ contractual liabilities first, and then examine what needs to be done differently for non-contractual liabilities. Although some Board members did not accept that all contractual liabilities had a settlement notion (in that some contractual liabilities involve an unknown counterparty), the staff was asked to proceed on this basis.
Interaction with other IASB projects
The Board noted that some of the issues addressed in the IAS 37 project touched on issues in the conceptual framework and IAS 18 projects. With respect to the conceptual framework project, the Board did not think there were any serious cross-cutting issues that should delay progress on this project. Any peripheral issues that developed could be addressed later. More immediate was the dividing line between revenue and liabilities. The IFRIC, in particular, was often faced with issues related to multiple element transactions and the identification of incidental liabilities. Board members thought that the building block approach to be adopted would help resolve many of these issues.
The Board reviewed and accepted the project timetable (available in the Observer note 4B), which would result in a revised standard being issued in the fourth quarter 2008.