Liabilities — Amendments to IAS 37
Uncertainty about the existence of a present obligation
In May 2007, the Board considered an example that illustrated uncertainty about the existence of a present obligation. The facts of the example were:
A vendor sells hamburgers in a jurisdiction where the law stipulates that the vendor must pay compensation of 100,000 to each customer who receives a contaminated hamburger.
On 31 December 200X, the last day of the reporting period, the vendor sold one hamburger.
Past experience indicates that one in every million hamburgers sold by the vendor is contaminated. No other information is available.
The Board decided that on 31 December 200X the vendor would have a present obligation only if it had supplied a contaminated hamburger. However, the Board did not reach any conclusions on how to address the uncertainty in this example. Three possibilities were discussed by the Board:
- View A: The event that gives rise to the obligation is the supply of a contaminated hamburger. It is uncertain whether this event has occurred so it is uncertain whether an obligation has arisen.
- View B: The event that gives rise to an obligation is the inception of the contract to sell a hamburger. The obligation is the unconditional promise that the vendor makes to the customer: to supply a good hamburger or pay compensation if the hamburger supplied is contaminated.
- View C: A third possible view is that the event that gives rise to the obligation to pay compensation is the supply of a hamburger to the customer. This view was not explored in the papers for the May meeting, but has been discussed by the staff since.
The Board also discussed additional examples relating to a hospital death, libel claim and speeding fines (outlined in Agenda Paper 13 available on the IASB's website).
The Board agreed to reject View B, and went on to discuss views A and C in detail. Some Board members favoured the approach in View A. In terms of measurement, View A was further disaggregated into View A1 and View A2:
- View A1: Measurement under View A1 assumes that management have judged the obligation correctly.
- View A2: View A2 measurement reflects uncertainty about existence using expected values.
Board members who supported View A favoured the approach in A2. Supporters of View A argued that View C was not helpful in distinguishing business risk from 'real' liabilities. Others argued that the difference between View C and business risk was that View C only applies to events that have already occurred. The Board then had a wide ranging discussion on how to deal with uncertainty. The discussion appeared to indicate that the Board did not support the inclusion of the 'more likely than not' criterion.
The Board discussed the fact that an event or activity must have occurred. Further, the Board indicated that there would need to be some kind of evidence that a liability has arisen. The Board did not conclude on a view and directed staff to prepare a paper to clarify how element uncertainty is taken into account in measurement.