On January 5, 2010, the International Accounting Standards Board re-exposed proposals on measuring liabilities for asset decommissioning, legal disputes and similar items. This exposure draft follows a 2005 exposure draft which included amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The 2010 proposals were issued to clarify guidance in the original exposure draft. The new proposal would require an entity to measure a liability at the amount that it would rationally pay at the end of the reporting period to be relieved of the present obligation.
An important aspect of the 2010 exposure draft is that it focuses on measurement guidance, and not recognition guidance for a liability. Changes to recognition criteria were included in the 2005 exposure draft and were not re-exposed for comment.
Currently, IAS 37 states that provisions should be recognized if it is probable that an outflow of resources embodying economic benefits will be required to settle an obligation. The term probable in IAS 37 is defined as “more likely than not”. This guidance is similar to recognition criteria under US GAAP for recognizing contingent liabilities. However, probable under US GAAP is defined as “likely”, a higher threshold than required under IFRS.
The original 2005 exposure draft proposals would drop the recognition requirement that future outflows had to be “probable” before recording a provision. This means that items that meet the definition of a liability are recognized. The proposal to drop the probability threshold for recognition is a significant change to how accountants are used to evaluating when to recognize a provision for contingent liabilities.
The direction the IASB is going with this standard will result in important changes to existing guidance and create new differences between IFRS and U.S. GAAP. This project is one that the IASB believes is needed to improve the standards, but is not part of the convergence program with the U.S. Despite focused convergence efforts between the IASB and FASB, this is an example that illustrates how full convergence will be difficult to achieve.
Concerns have been expressed about the IASB’s direction on this standard and some have questioned why any changes are needed – especially given other priorities. (See Confrontation looms over accounting for legal bills, Accountancy Age, April 1, 2010.) The IASB recently extended its comment period to May 19, but is targeting issuance of an amended standard in the second quarter of this year.
Do you believe that the changes being proposed by the IASB for liability recognition and measurement are improvements?