Liabilities — Amendments to IAS 37
Applying the proposed requirements to litigation liabilities
The Board discussed concerns raised by some constituents and Board members that defendants in some legal proceedings might encounter practical problems when applying aspects of the proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Recognition would prejudice the outcome of the proceedings
The staff presented an analysis that concluded that:
- the proposed amendments to the recognition and measurement requirements do not significantly increase the risk of prejudicial information being disclosed; and
- some useful information would be lost if liabilities were instead either not recognised at all, or recognised at a less relevant amount, such as the minimum or maximum amount in the range of reasonably possible outcomes.
Some Board members were uncomfortable with requiring preparers to quantify the expected outcomes of a piece of significant litigation, preferring a disclosure approach. The numbers produced would be too variable to be useful. Other Board members were not content with that approach, fearing that that the disclosure would quickly reduce to boilerplate. Board members noted that the staff recommendation was not a great distance from the current situation in IAS 37 and as such was evolutionary not revolutionary, and was still subject to a 'prejudice' exemption. The result should be better information than was provided currently. The Board agreed (one opposed) that the standard should not make any exceptions to the proposed recognition and measurement requirements for litigation liabilities.
One-off litigation liabilities not capable of reliable measurement
The Board discussed the common concern that the outcomes of major one-off legal proceedings can be very difficult to predict and, consequently cannot be measured reliably.
The Board discussed the issues related to major items of litigation, but concluded that the standard should continue to describe the circumstances in which liabilities cannot be measured reliably as 'extremely rare' and that no guidance on how this should be interpreted should be provided.
Practical problems for US entities
The staff asked the Board for direction in light of comments made in the United States that IAS 37 might be 'incompatible with the legal environment in the US because preparers would be compelled to reveal potentially damaging information about their litigation.' Some Board members noted that while there is a 'prejudicial' exemption for disclosure, there is none for recognition and that items recognised in the financial statements are subject to 'discovery' under US legal procedure.
Board members noted that the problems identified exist in IAS 37 at present and that the Board should not delay the finalisation of the standard for this potential issue. Board members did not want to move towards existing US GAAP in this area. If, as part of a transition to IFRS, operational issues with respect to the application of this standard were identified, these could be raised with the IASB in the normal manner.
The Board agreed that the standard should not include any measurement requirements for reimbursement rights. However, it should state explicitly that the assumptions used to measure a reimbursement right should be consistent with those used to measure the related liability.
There was some discussion about whether IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds should be amended to remove the 'lower of the amount of the decommissioning obligation recognised and the reimbursement right' in paragraph 9. A majority of the Board favoured removing the asset ceiling test from IFRIC 5.
Disclosure of possible obligations
The Board discussed the circumstances in which an entity should disclose information about 'possible obligations' (that is, those for which there is uncertainty about whether an obligation exists, but for which based on current information, management has concluded that the recognition criteria are not met and no liability has been recognised).
The Board agreed that there should be disclosure of possible obligations (subject to materiality) whenever the possibility of the outflow of economic resources is other than remote.
The Board agreed that in such circumstances, an entity would disclose:
- a description of the circumstances;
- an indication of the financial effects;
- an indication of uncertainties relating to the amounts or timing of any outflow of economic benefits; and
- the possibility of any reimbursement.
The staff presented a 'refined analysis' of the attributes of stand-ready obligations and the circumstances in which they might arise. Board members were generally content with the revised analysis and supported its use in the drafting of the standard and related application guidance. In particular, some Board members thought it was very helpful to them in distinguishing stand-ready obligations and 'incurred but not reported' obligations. The Board agreed that the staff paper reflected correctly the Board's conclusions.