Liability definition and ‘present obligation’ recognition criterion (Agenda Paper 22)

The IASB is developing proposals to make three targeted improvements to IAS 37. This agenda paper covered the first of such improvements, related to the amendment of the liability definition and the requirements and guidance supporting the present obligation recognition criterion, applying concepts added to the Conceptual Framework in 2018.

The purpose of the meeting was to give IASB members an opportunity to comment on and ask questions about the staff’s suggestions. IASB members were not asked to make any decisions at this meeting.

Staff suggestions for possible amendments

The staff suggested five main categories of improvements:

• Updates to the definition of a liability and the wording of the present obligation criterion. These changes would eliminate an out-of-date definition from IFRS Accounting Standards, without effects on the application of IAS 37
• Changes to some requirements supporting the present obligation recognition criterion—specifically, changes to requirements affecting the timing of recognition of provisions for obligations (typically levies) that depend on two or more actions of the entity. Changing those requirements would change the way all entities apply them
• Clarification of other requirements supporting the present obligation recognition criterion—for example, to distinguish more clearly the two criteria for a present obligation, and to provide more guidance on the meaning of ‘can be enforced by law’. Clarifying these requirements could reduce diversity in practice, changing the way some entities apply them
• Improved explanations of the rationale for some requirements and for the conclusions in some illustrative examples. Improved explanations could help stakeholders better understand the principles underlying the requirements and conclusions
• Absorption of IFRIC Interpretations and IFRS Interpretations Committee agenda decisions

Appendix A and Appendix B to the paper illustrated the drafting implications of the possible amendments to IAS 37 and the illustrative examples accompanying IAS 37.

The staff asked the IASB members if they have comments on or questions about the initial staff suggestions.

Next steps

The staff plan to start consulting with stakeholders after the collection of IASB members comments.

IASB discussion

IASB members generally agreed with the work performed by the staff about the proposed improvements to IAS 37.

During the meeting, IASB members suggested:

• On the general aspects of the proposed improvements, to further focus on the concept of thresholds that could lead to an obligation, to the distinction between legal enforceability and economic compulsion, and to the interaction between the termination benefit to be accounted according to IAS 19 and the cross references to the requirements of IAS 37
• On the communication to the stakeholders, to further clarify the interaction between the restructuring provisions and the commitments to reduce emissions to ‘net zero’ and to evaluate the use of flowcharts to explain the provision accounting on a step-by-step basis
• On the consultation side, to continue using the illustrative examples and to remember the role of the Interpretations Committee