Liabilities — Amendments to IAS 37

Date recorded:

The Board continued its deliberation regarding the measurement requirements and the removal of the probability recognition criterion in the Exposure Draft of Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits (the ED).

Measurement objective

At the December 2007 meeting the Board discussed concerns that the proposed measurement requirements are unclear because they refer to both the amount to settle an obligation and the amount to transfer it to a third party. No final conclusion was reached and the Board decided to further investigate this issue in small-group meetings of staff and Board members. At this meeting the Board continued its deliberations by following up the main issues that arose from these meetings.

Clarification of the measurement objective

The staff suggested amending the measurement requirement as follows:

'An entity shall measure a liability at the amount that it would rationally pay on the measurement date to settle the present obligation with the counterparty or to transfer it to a third party.'

In addition, the staff suggested explaining the measurement principle by additional guidance like:

'The amount that an entity would rationally pay to settle or transfer an obligation is the least cost amount, that is: (a) the amount that a third party would demand to assume the obligation; or (b) the amount that the counterparty would demand to settle the obligation, if there is objective evidence that this amount is lower than (a).'

There seemed to be a consensus that settlement amount and transfer amount are current exit amounts and that no choice of measurement bases is permitted.

Some Board members were concerned that the measurement requirement would not work in cases in which no market to transfer the obligation exists (liabilities for environmental damages, lawsuits etc.). These Board members expressed the view that no market-based approach would be possible, but entity-specific assumptions should be used to measure those liabilities. One Board member suggested developing separate measurement guidance for these liabilities. Other Board members noted that these cases are similar to 'level 3 valuations' in accordance with FAS 157 Fair Value Measurements and, therefore, the use of entity specific assumptions would not be prohibited. Those Board members were of the view that the third party to assume the obligation would be a hypothetical market participant who has the same level of information as the entity.

The Board had a substantial discussion on this topic. Eventually, the Board decided by majority vote to adopt the staff's suggestion in principle but to add guidance on what is meant by 'third party' in the definition of transfer amount. There seemed to be a consensus that in this context the 'third party' should be described as 'knowledgeable' meaning that the third party has 'the same information about the liability as the entity'. The staff was asked to redraft the ED accordingly and to take into consideration combining the two pieces of guidance outlined above. In addition, the guidance should be enhanced by examples.

Risk adjustment for diversifiable risks

Carrying forward the existing requirements of IAS 37, paragraph 35 of the ED proposes that, when measuring a liability, 'an entity shall include the effects of risks and uncertainties'.

The Board decided not to give further guidance on risk assessment as part of this project; for example, how to treat risks that are diversifiable and in a perfect market would not be reflected in the market price of a liability.

Probability recognition criterion

The Board discussed responses received objecting to the removal of the probability recognition criterion. The staff suggested not reinstating this criterion mainly for the following reasons:

  • The removal of the criterion would not lead to many more liabilities to be recognised.
  • Many liabilities that are surrounded by great uncertainties such as large unprecedented legal actions would be covered by the ;reliable measurement; recognition criterion.

The Board agreed with the staff and decided not to reinstate the probability recognition criterion.

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