The IASB is conducting a project to make three targeted improvements to IAS 37. One of these improvements would affect a criterion for recognising a provision in the financial statements—specifically, the requirement for an entity to have a present obligation as a result of a past event.

The staff had the following questions to the IFRS IC on the initial suggestion for possible amendments to IAS 37:

• What are overall reactions to the possible amendments to IAS 37 suggested in Agenda Paper 6A?
• Do IFRS IC members have specific comments on any aspects of the possible amendments?

In addition, the drafting suggestions in Appendix A to Agenda Paper 6A include requirements that specify when an entity has a present obligation as a result of a past event. Several of those requirements might be applicable to provisions for costs payable if a measure of an entity’s activity exceeds a specified threshold. The IASB could consider adding specific application requirements for such circumstances in IAS 37.

The staff had the following questions to the IFRS IC on “thresholds”:

• Should IAS 37 specify when an entity has a present obligation for costs that become payable if a measure of its activity exceeds a specified threshold?
• Do IFRS IC members have views on when the present obligation arises?

IFRS IC discussion

IFRS IC members generally supported updating IAS 37. They considered it would be good to include the concept in the Conceptual Framework to IAS 37 and to be consistent with IFRIC 21 Levies (which would be withdrawn if the amendments are concluded). IFRS IC members expressed their views on both the proposed amendments and proposed update to the illustrative examples (“IE”) accompanying IAS 37.

One IFRS IC member suggested that the general guidance that a provision is not recognised for costs to be incurred in the future is not clear enough in the standard. She suggested adding this important principle at the beginning of the standard to emphasise the importance of it. Another IFRS IC member said that he struggled with the fact that the proposed IAS 37:16C indicated that there is an obligation for an outflow whenever there is an unfair exchange. He cited an example that fair value of the consideration of an executory contract might decrease after the executory contract is signed. He was not convinced that everything unfavorable would result in recognising a provision for that contract. Both costs and benefits from the contract should be considered for a provision to be recognised. Another member shared the same thought and specifically pointed out that many intergroup transactions might be “unfavourable” and suggested to exclude them from the assessment under the proposed IAS 37:16C. Several IFRS IC members said there were inconsistencies among the proposed paragraphs 14, 18, 19A and 19B. They said it is important to identify the action taken that results in a present obligation, but it is not clear how to identify this in these paragraphs.

One IFRS IC member suggested adding a decision tree in IAS 37 to illustrate step by step what to consider for a provision to be recognised. The Chair and some other IFRS IC members favoured this idea and the staff said it is an insightful idea.

A few IFRS IC members suggested that more work is needed to clarify the differences between “exchange” and “transfer”. When an asset acquired meets the recognition criteria and there will be cash to pay for it, it is clearly an “exchange”. On the other hand, it is a “transfer” of resources when entities are required to pay for something that is not an asset.

IFRS IC members had some comments on proposed amendments/additions to the illustrative examples.

Illustrative Example 5: One IFRS IC member said the critical point which results in a provision would be “no practical ability to avoid an outflow of resource” instead of “the closing down of the division” and suggested to amend the example for this.

Illustrative Example 13C: One IFRS IC member had concerns about using a balance sheet position to illustrate the cumulative amount of a provision when an obligation could be time-apportioned. He was of the view that it is easier to use profit or loss items to illustrate it. However, another IFRS IC member considered it helpful to use balance sheet positions for illustrations because some charges levied on the actions of entities in certain industries are based on the liabilities position.

Illustrative Example 12: One IFRS IC member considered that the conclusion that there is no provision because there is a further condition which is outside the control for the entity is not consistent with the proposed IAS 37:14F that would require a provision to be made when the responsibility is conditional, but the entity has no practical ability to avoid it.

Illustrative Example 13E: One IFRS IC member said it is not clear whether it is “not disposing the property” or “retaining of the legal ownership” that is the past event which results in the obligation. He said it is not clear why the provision is made on 1 January 20X1 but not at the prior year end when the entity also holds the legal ownership of the property. The IFRS IC member suggested to make it clearer.

One member compared Illustrative Example 12 and Illustrative Example 13B and questioned why the conclusion is different for them given they both have double trigger circumstances. Illustrative Example 12 concluded that the entity waits until a second triggering event to make the provision while Illustrative Example 13B concluded that the provision should be made because the second condition has not been met. It looked like the difference between the two examples is the one where the second triggering event happened two years later while the other one is happening within one year. The staff replied that there is only one triggering event in Illustrative Example 13B which is the selling in market in the current year. Therefore, they are not contradictory to each other.

Some IFRS IC members suggested that it would be helpful to add examples for interim periods when the compliance period is for one year or each year for a multi-year levy/emission obligation. There was quite a lot of debate on whether provisions should be made based on conditions accumulating over the course of the compliance period. However, one IFRS IC member said that the examples proposed already provided enough information to help users to understand what you should do at interim date. If entities are at a point part way through the compliance period, they should consider IAS 37:14B to assess whether there is a practical ability to avoid outflow of resources. Another IFRS IC member suggested expanding the reasoning in the conclusion of each illustrative example would be helpful to users to under the rationale for them.

The staff acknowledged that the project is at the initial stage and that there is still a large drafting exercise to arrive at the final text of the proposed amendments. The input by IFRS IC members are useful to try to address the common concerns raised.