Nonfinancial liabilities amendments to IAS 37

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Non-financial liabilities amendments to IAS 37

• World Standard Setters Meeting
• London, September 2005

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Timetable today

• Introduction 10.30-11.00
• Break-out discussions 11.15-12.15
• Feedback and discussion 12.15-13.15

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IAS 37 Exposure Draft

• Issued 30 June
• Comments due 28 October
• Discussion today
• Probability recognition criterion
• Changes to measurement

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Warranty under existing IAS 37

• Scenario 1
• 1 warranty
• 45 probability of a claim
• Cost CU1000
• ?
• Claim not probable

• Scenario 2
• 1000 warranties
• 45 probability of a claim under each
• Cost CU1
• ?
• Some claims probable

• Recognition under existing IAS 37

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Accounting steps in ED
Identify liability
Recognition
Measurement
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Identifying the liability

• Analyse complex liabilities into
• conditional obligations
• unconditional obligations
• Warranty obligation
• conditional obligation to repair
• unconditional obligation to provide warranty
  coverage a stand ready obligation
• Liabilities arise from unconditional obligations

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Recognition

• Process of incorporating a liability into the
  balance sheet
• Not determining whether a liability exists
• Therefore for warranty
• consider whether unconditional obligation to
  provide warranty coverage will probably result in
  an outflow
• dont consider the probability of a claim arising

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Recognition

• Stand ready obligation is a type of service
  obligation
• Outflow of resources can be the provision of
  services - not just direct cash flows
• Outflow of resources in Scenario 2 and Scenario 1
  is probable
• Framework probability recognition criterion is
  satisfied

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Measurement

• IAS 37 Measure at best estimate of expenditure
  required to settle obligation at balance sheet
  date
• IAS 37 Best estimate is amount entity would
  rationally pay to settle the present obligation
  or transfer it to a third party at balance sheet
  date

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Measurement

• IAS 37 Measure at best estimate of expenditure
  required to settle obligation at balance sheet
  date
• IAS 37 Best estimate is amount entity would
  rationally pay to settle the present obligation
  or transfer it to a third party at balance sheet
  date

• ED Measure at amount that entity would
  rationally pay to settle the present obligation
  or to transfer it to a third party on the balance
  sheet date
• No change to measurement objective
• Change to measurement guidance for single
  obligations

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Measurement

• Under IAS 37
• Scenario 2 expected value CU450
• Scenario 1 individual most likely nil
• But expected value the same
• Would not settle or transfer on balance sheet
  date at individual most likely amount
• ED measuring at individual most likely amount
  inconsistent with measurement objective

Measure liability at the amount entity would
rationally pay to settle or transfer on the
balance sheet date
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Measurement

• Outflow in Scenario 1
• 0 or 1000
• never 450
• Is 450 wrong?
• Consider other scenarios of single warranty
• 55 of a claim
• 75 of a claim
• Current IAS 37 would measure these at the same
  amount
• Single point most likely estimate does not
  capture different uncertainties

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Risks uncertainties

• Same expected cash flow in scenarios 1 2
• But different risks
• Expected cash flow of 450 adjusted for price an
  entity would demand for bearing the risk

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Questions

• Do you agree with the analysis of the probability
  recognition criterion?
• Do you agree that single point most likely
  estimate unlikely to be consistent with
  measurement objective?
• Do you think that measurement objective in ED
  admits two different measurements?
• Do you foresee practical difficulties?