Application of the measurement guidance to onerous contracts

The Board discussed how to resolve a conflict identified by the staff. Previously, the Board decided to clarify that entities should measure liabilities in the scope of IAS 37 by reference to the value, rather than the cost, of the outflows required to fulfil the obligation. Applying that principle, the attribute of the outflows used to measure an onerous contract (value) would be different from that used to identify the contract as onerous in the first place (cost).

After a short discussion, the Board agreed:

• (a) to create a limited exception to the proposed measurement requirements in the revised IAS 37. The exception will be restricted to onerous contracts arising from transactions in the scope of IAS 18 Revenue and IFRS 4 Insurance Contracts. It should allow entities to measure their contractual obligations to provide goods or services on the basis of the expected cost, rather than the value, of the goods or services; and
• (b) that the Board emphasises in any guidance accompanying the revised IFRS that:
  • (i) the purpose of the exception is to postpone any change in practice for measuring those contracts, pending completion of the revenue and insurance projects; and
  • (ii) when the Board issues its new revenue and insurance standards, it will either confirm the exception (possibly taking the contracts out of the scope of IAS 37) or delete it (bringing the measurement requirements for onerous sales and/or insurance contracts into line with the measurement of other liabilities in the scope of IAS 37).

Measurement guidance - wording

The staff reminded the Board that the measurement attribute for an IAS 37 liability is the amount that an entity would rationally pay at the end of the reporting period to be relieved of an obligation. The Board had decided that this amount is the lowest of:

• (a) the value the entity would gain if it did not have to fulfil the obligation;
• (b) the amount the entity would have to pay to cancel the obligation; and
• (c) the amount the entity would have to pay to transfer the obligation to a third party.

The staff noted that in drafting the proposed measurement guidance, several people had indicated that (a) was unclear. Accordingly, the staff is seeking guidance from the Board about how best to clarify the Board's intention.

Several alternatives were discussed in a wide-ranging debate. The Board eventually agreed that the amount in (a) would be expressed as:

(a) the value the entity would forego gain if it had did not have to fulfil the obligation;

The Board agreed that the staff should work on any further refinements necessary with the Board advisors. Provided the intention of the measurement guidance (namely, measuring value, not cost) did not change, the Board did not need to review the wording further.

A Board member expressed extreme frustration that the Board was about to issue guidance that demonstrated that emission rights were not a liability, and yet the same Board had given direction on 18 November to the staff to develop guidance in a different project that would say that emission rights were a liability. He thought this an unconscionable situation. The Board was thrown into slight disarray by this uncomfortable observation.

The Board seemed to agree that the application guidance accompanying the IAS 37 revision would include an example demonstrating that emission rights were not a liability under the revised proposals. If the Emission Rights project continues to go in the direction indicated by the Board on 18 November (that emission rights give rise to an obligation), this would be subject to the usual due process. Although Board members accepted this approach, it was clear that several, including the Board member who raised the issue, were uncomfortable.

The Chairman asked Board members whether the discussion had undermined support for the Board's conclusions in the proposed revision of IAS 37. The Board confirmed that 9 Board members supported the revisions, just sufficient to issue an IFRS.