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Liabilities

Date recorded:

The purpose of this session was to explore the appropriate measurement techniques for liabilities with uncertain outcomes - specifically the use of the expected cash flow method. The staff believed this discussion was necessary because the Boards have recently reached different conclusions about the use of expected cash flows in accounting for liabilities with uncertain outcomes. For example, the accounting for uncertain tax positions under FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes is a different approach as compared to the approach discussed by the IASB. Also, the FASB's preliminary view on calculating the lease term based on a best estimate is a different approach as compared to the approach discussed by the IASB.

The IASB staff did not ask for and the Boards did not make any decisions at this meeting. The ultimate goal is to develop a common approach to dealing with uncertainty in recognition and measurement.

The IASB staff began the discussion with a brief history and discussion of the expected cash flow method, or more broadly, the use of an expected outcomes method. Further they discussed the objective of measurement ('predictive' as demonstrated in FASB Statement No. 5 Accounting for Contingencies vs. 'current state' as demonstrated in IAS 37) and whether that objective would be constrained by other factors (such as decisions taken in other standards or restrictions to limit abuse). The staff recognised that while both Boards incorporate the use of expected cash flows in accounting measurements (FASB Concepts Statement No. 7 Using Cash Flow Information and Present Value in Accounting Measurements and IAS 37) the Boards have reached different conclusions regarding the use of this method when measuring liabilities with uncertain outcomes.

The IASB staff presented three questions on the topic and their related recommendations:

  • 1. Should we incorporate expected outcomes into recognition decisions and measurements, or should the technique be reserved for measurement? Staff Recommendation - Expected outcome approaches are a measurement tool to be used after the decisions about recognition.
  • 2. Should we strive for measurement that is consistent with recognition criteria? Staff Recommendation - Decisions on measurement should be independent of decisions about recognition.
  • 3. Are expected outcome approaches limited to applications of fair value? Staff Recommendation - Measurements under conditions of uncertainty should always take account of the range of possible outcomes and their relative probabilities. That is, the measurements should always incorporate expected outcome techniques.

Members of both Boards praised the work laid out in the agenda paper on the topic of measurement and felt that the recommendations were a good theoretical starting point. However, the FASB members had reservations regarding the recommendation that measurements of uncertainty should always take into account the range of possible outcomes and their relative probabilities. They noted that there are often instances of impracticability in the application of an expected outcomes method, whether related to lack of information or US-specific institutional limitations (for example, the legal profession).

Further, certain FASB members were reluctant to adjust measurement for an unlikely possibility on one extreme end of a range of possible outcomes. One area that both Boards agreed on was the need for adequate and transparent disclosures to ensure that users could understand the methodology and assumptions utilized to determine amounts recorded for liabilities with uncertain outcomes.

The IASB plans to discuss at a future meeting questions related to measurement including focusing on what should be done when there are outliers in a range of possibilities.

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