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Definitions of contingent assets and contingent liabilities

The Board discussed the treatment of contingent assets and contingent liabilities. The staff pointed out that the notion of contingency differed between the US standard FAS 5 and IAS 37. However, they concluded that the difference would not lead to a different accounting result in practice and therefore staff proposed not to change the definition in IAS 37.

Some Board members did not accept the staff view. They perceived the IAS definition to be conceptually flawed and thought that, if the FASB definition was conceptually superior to the IAS 37 definition, IAS 37 should be amended, even as part of a project on business combinations. By a 12 to 1 majority, the Board decided to change the definition in IAS 37 and to make it consistent with the FASB definition.

As regards contingent assets the Board briefly touched on the issue but did not reach a decision on whether to copy the FASB definition. Several Board members proposed not to clean up all the persisting inefficiencies within the Business Combinations project but to deal with them as part other projects.

Recognition and measurement issues related to acquired assets and assumed liabilities in a business combinations

The Board has previously agreed that acquired assets and liabilities should be measured at their fair values. The staff proposed to apply a three stage hierarchy as follows:

1. If there is an observable market transaction, the amount of cash exchanged for the same or similar item should be used.

2. If market values are not available, an enterprise should use an estimation technique (such as present value, option pricing models, or appraisals) using market-based assumptions with the objective of determining the item's fair value.

3. If neither market values nor market-based assumptions for estimating a value are available, management should use the same estimation techniques as above incorporating information that was not contrary to market-based assumptions.

The Board discussed the measurement hierarchy in length. Several Board members mentioned that the terms 'market' and 'fair value' were not precise enough and would need clarification:

• Which market should be considered when determining a market price (e.g. wholesale/retail; geography)?
• Does fair value include transaction costs?
• Is fair value meant to be an entry or an exit price?

The Board decided by a 10 to 3 majority to pursue the hierarchy principle further. The Board members dissenting were concerned about the practicability of the third stage of measurement. They perceived the principle to be neither precise enough in order to be workable nor leaving room for other measurement attributes such as current replacement costs. The Board directed the staff to explore possibilities of rephrasing the third principle to accommodate the concerns.