The requirements in IAS 37 for measuring liabilities are unclear. As a result, entities use different measures, making it difficult for analysts and investors to compare their financial statements. IASB is revising it and simplifying the standard in order to achieve global converge.
The International Accounting Standards Board is undertaking a project to improve IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The main aims of the project are:
• to align the criteria in IAS 37 for recognising a liability with those in other IFRSs. At present, IAS 37 requires an obligation to be recognised as a liability only if it is probable (i.e. more likely than not) that the obligation will result in an outflow of cash or other resources from the entity. Other standards, such as IFRS 3 Business Combinations and IAS 39 FinancialInstruments: Recognition and Measurement, do not apply this ‘probability of outflows’ criterion for recognising liabilities.
• to eliminate some differences between IAS 37 and US generally accepted accounting principles (GAAP)—in particular, differences in the time at which entities recognise costs of restructuring their businesses.
• to clarify the measurement of liabilities in IAS 37. At present the measurement requirements in IAS 37 are vague. As a result, entities use different measures, making it difficult for capital providers to compare their financial statements.
Two aspects of the IAS 37 measurement requirements are particularly vague:
• the standard requires an entity to measure a liability at the ‘best estimate’ of the expenditure required to settle the present obligation. It is not clear to all what the term ‘best estimate’ means. In practice, the term is interpreted as meaning the most likely outcome, the weighted average of all possible outcomes or even the minimum or maximum amount in the range of possible outcomes.
• IAS 37 does not specify the costs that entities should include in the measurement of a liability. In practice, some entities include only incremental costs. Some include all direct costs. Some add indirect costs and overheads. Some use the prices they would pay contractors to fulfil the obligation on their behalf.
In 2005 the Board published an exposure draft of proposed amendments to IAS 37. On measurement, it proposed to remove the term ‘best estimate’ and instead focus on other guidance in IAS 37, which states that the best estimate of a liability is the amount that an entity would rationally pay to settle
Next steps: the IASB plans to post a working draft of the new IFRS on its website in February 2010. This will contain both the draft measurement guidance and near-final wording for the rest of the standard. It expects to issue the new IFRS in the third quarter of 2010.
Deadline for comment on 12 April 2010
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