Redeliberation of the proposal to eliminate the term 'contingent liability'

The Board considered a staff analysis of comments on the proposal to eliminate the term 'contingent liability' from IAS 37. The staff noted that several concerns expressed about the proposal to eliminate the term 'contingent liability' related to other proposals included in the ED. Those concerns included omitting the probability recognition criterion, determining when a liability exists, the potential scope of stand-ready obligations, and the new analysis of liabilities into conditional and unconditional obligations. Those topics either had been, or would be, addressed separately during the Board's redeliberations.

The Board was asked to address two matters specifically:

• Whether to eliminate the term 'contingent liability'; and
• Disclosure about potentially significant risks.

There was little discussion of whether to eliminate the term 'contingent liability'. Board members noted that many of the comment letters stated that the term was 'well understood', but often one respondent's understanding was different from another's. The Board thought that, given the other amendments being made to their proposals as a result of the exposure process, the term was unnecessary and unhelpful. The Board agreed to eliminate the term.

The staff had identified a potential gap in the disclosure requirements proposed in the ED with respect to disclosure about situations when the existence of a liability is uncertain and, therefore, no liability is recognised under the criteria adopted by the Board, as contrasted with disclosure of all potentially significant risks that the entity faces at the balance sheet date.

Board members acknowledged the problem, especially with respect to litigation. They agreed that to require preparers to estimate the amount of something that did not meet the definition of a liability did not make sense. The problem was how to craft a robust definition of the kinds of uncertainties for which disclosure should be required so as to avoid boilerplate disclosure about business risks in general. While litigation was an obvious example of the kinds of 'potentially significant risks' for which disclosure was sought, there were other examples, including illegal acts, environmental laws, and copyright.

The Board did not reach decisions on this topic. They asked the staff to return with a more developed proposal.

Can recognition of a liability influence the outcome of legal proceedings?

The ED proposed that if a range of possible outcomes with respect to a liability exist, the entity would disclose information indicating the uncertainties associated with the future cash outflows that would be required to settle or transfer the liability. The Board considered concerns raised by constituents that applying those principles to a liability, when the facts and circumstances associated with the liability are the subject of a lawsuit, might adversely influence the outcome of legal proceedings.

Constituents' concerns focussed on the legal notion of 'discovery' and that the entity's analyses supporting the disclosure might be subject to discovery, potentially prejudicing their defence. Board members, especially those with corporate backgrounds, were of the opinion that internal documentation and analyses of legal claims and similar uncertain liabilities would exist. The degree to which those analyses would be subject to legal discovery would vary among legal jurisdictions. It would be impossible for the Board to write a Standard to accommodate all legal systems. If an entity was particularly concerned, they should take the necessary steps to have any assessment made the subject of attorney-client privilege.

The Board agreed not to provide any exemption from recognition of a liability on the grounds that it would prejudice the entity. In addition, the Board agreed not to provide an exemption from the disclosures proposed in paragraph 67 of the ED on the grounds of prejudice to the entity. (Paragraph 67 proposes disclosure of the amount and description of each class of recognised non-financial liability.)

Project plan

The Board discussed the public roundtables to be held in Connecticut USA (30 November 2006), London (8 December 2006) and Melbourne, Australia 20 December 2006). The roundtables would discuss the results of the Board's redeliberations, not the original proposals in the ED. In addition, although invitations to participate in the roundtables had been sent to all those who had responded to the IASB ED and the FASB's Invitation to Comment, late applications would be accommodated, subject to space.