Liabilities: Amendments to IAS 37
Disclosure - possible obligations
The Board discussed whether specific disclosure requirements were required in the revised version of IAS 37 with respect to possible obligations - those matters that do not meet the definition of a liability (currently called 'contingent liabilities') - and whether the notes to the financial statements should contain details of situations in which it is uncertain that a present obligation exists and the entity has judged that none does.
The staff had suggested that specific requirements could be avoided in IAS 37 because of the operation of IAS 1 paragraphs 122 (disclosure of significant judgements in applying accounting policies) and/ or paragraph 125 (measurement uncertainty).
However, during the discussion they (and several Board members) agreed that neither of those two paragraphs would capture the events intended. The paragraphs in IAS 1 relate to the accounting standards and measurement uncertainties for items recognised in the financial statements. As the items at issue are explicitly not recognised, the disclosures in IAS 1 would not apply.
The Board had an extended discussion, but ultimately agreed that:
- a disclosure requirement should be added to the revised standard; and
- disclosure should be required only if specific indicators that the entity might have a present obligation are met.
The Board discussed what those 'specific indicators' should be. There was general consensus that the indicators should include governmental, legal, and arbitration proceedings (including any such proceedings that are pending or threatened of which the entity is aware). However, there was considerable disagreement about how best to filter the information such that the 'frivolous' items could avoid disclosure.
The Board acknowledged that they were trying to balance the decision-usefulness of information with the inevitably hazardous nature of litigation. Some thought that the general principles of materiality could be used effectively. However, one Board member observed that a frivolous lawsuit for multiples of the entity's book value would always be material, no matter how frivolous the claim was. Another Board member suggested that the only way in which materiality would work to achieve the Board's intention would be to remove all triggers or indicators. If the Board wanted indicators that a possible obligation existed, it could not use materiality as the filter.
Some Board members noted that the Board was using the word 'liability' in different ways to describe where on the spectrum of liability recognition the [potential] obligation was.
The Board seemed to agree that:
- When there was no present obligation, disclosure was not required.
- When there was no present obligation, but there was also uncertainty about whether an obligation might develop, specific disclosures would be required.
- When there was no present obligation, but the outcome (e.g. of a lawsuit) was uncertain, specific disclosures would be required.
The staff agreed that they would return to the Board at a later date with a revised proposal. A Board member suggested that, when they presented these proposals, they should also present an analysis aligning the examples used by the Board to test the recognition principles ('the hamburger', the hospital operation, etc) with the disclosure requirements to ensure that the Board was being consistent.