Liabilities — Amendments to IAS 37
In this education session the Board discussed two documents prepared by representatives of the General Counsel 100 Group (GC 100) addressing issues regarding recognition and measurement of liabilities for litigations.
Three representatives of the GC 100 commented on several specific Board queries and gave an overview on how commercial legal teams approach the uncertainties often associated with legal proceedings. The issues were illustrated by three real cases.
The key statements made by GC 100 were:
- The question of whether or not a liability exists in respect of litigation is frequently very complex. In many cases there is not a distinction that can easily or logically be drawn between a general business risk on the one hand and risk in respect of a liability on the other. In addition there is uncertainty about the development of the relevant law over the period of the litigation.
- Particularly at the early stage of a litigation, it is usually not practicable for a legal team to examine whether a present obligation exists. Very often a complex multi-factor analysis with dozens of co-dependent elements has to be performed ('There is no right or wrong in the early stages').
- Because of the complexity inherent in most cases, even when a liability exists the measurement is simply not possible. Therefore, in most cases legal teams are not in the position to give a view as to what outcomes are possible or even to estimate probability-weighted cash flows.
The Board was not happy with these statements.
Some Board members noted that accounting based on these statements would result in liabilities for lawsuits being recognised only in the late stages of a litigation and therefore would not result in improved financial statements.
With regard to the complexity some Board members noted that only information available at the measurement date needs to be taken into consideration, particularly, no estimation of the future development of the underlying law is required. Therefore, a measurement of the liability should be possible in most cases. One Board member pointed out that his practice experience showed that it was always possible to measure the liability ('Bring together the controller, the chief accountant and the lawyer and at the end of the day you always have a number').
One Board member asked what consequences the statements of GC 100 would have for the measurements of insurance contracts as the outcome of insurance contracts often also requires the evaluation of litigations. The representatives of GC 100 were of the opinion that there is a fundamental distinction between litigation and insurance contracts as there are accepted proceedings using statistical data in measuring insurance contracts that do not exist for litigation.
No decisions were made but the Board seemed to reaffirm that except in rare cases, an entity will be able to assess whether a liability exists and to determine a reliable measure of the liability.