EFRAG: comments on IASB's ED Measurement of Liabilities in IAS 37
23 February 2010
EFRAG does not support the measurement model proposed in the IASB’s ED. It believes that a case has not yet been made to justify how the proposed changes are likely to improve the decision-usefulness of financial information about liabilities.
In January 2010 the IASB issued a limited re-exposure of the proposed amendment to IAS 37. The ED is meant to clarify the measurement objective for liabilities in the scope of IAS 37 and add detailed guidance on measurement.
EFRAG has some significant concerns about the proposals in the ED and does not support the measurement model proposed
The ED sets out proposals for the measurement of liabilities in the scope of IAS 37. The ED proposes to measure liabilities at the amount that a reporting entity would rationally pay at the reporting date to be relieved of the obligation. This amount would be the lowest of the present value of the resources required to fulfil the obligation and the amounts to cancel or transfer the liability. Estimates of the value to be fulfilled would take into account the probability-weighted average of the outflows for the range of possible outcomes, the time value of money and the effect of uncertainty about the timing and amount of resources.
EFRAG has some significant concerns with the proposals in the ED. Its detailed comments on the ED are set out in appendices to this letter, but to summarise:
· EFRAG believes that the measurement objective should be directed at providing decision-useful information to users of financial statements and that this would best be achieved if measurement was based on the expected outflow of resources to settle the liability;
· EFRAG is concerned about the proposed model based on expected value, paired with the removal of the “probability of outflows” recognition criterion, as in many cases it is unlikely to provide decision-useful information. Additionally, the model may prove too complex to apply especially for single liabilities, where evidence of the distribution of outcomes will often be unavailable;
· EFRAG disagrees with the proposal that the value to fulfil the obligation should include an adjustment for the risk that the actual outflows may differ from expected outflows;
· EFRAG disagrees with the proposal that the value to fulfil a service obligation should include a profit margin when the measurement is based on internal costs.
For the reasons described above, EFRAG does not support the measurement model proposed in the ED. It believes that a case has not yet been made to justify how the proposed changes are likely to improve the decision-usefulness of financial information about liabilities. Accordingly, in their view, the proposals set out in the ED fail to satisfy the IASB’s objective to improve the quality of financial reporting and for that reason should be abandoned.
© EFRAG - European Financial Reporting Advisory Group