POSITION PAPER ABI Position Paper Proposed amendments to measurement of liabilities in IAS 37 May 2010 Page 1 of 5
General remarks In general, ABI does not agree with the choice of the IASB to divide the amendments to IAS 37 into two distinct exposure drafts (ED), one related to the measurement of liabilities and the other related in to the remainder of the Accounting Standard. ABI would prefer to see a comprehensive assessment of all amendments to the standard, as the items are interrelated and interconnected and it is inappropriate to separate them into different phases and documents. It is ABI's opinion that the proposed amendments do not improve the clarity of information on the measurement of liabilities, neither do they appropriately increase the reliability and reduce the variability of the estimates, therefore we believe that the proposed amendments should be withdrawn. Page 2 of 5
Question 1 Overall requirements The proposed measurement requirements are set out in paragraphs 36A 36F. Paragraphs BC2 BC11 of the Basis for Conclusions explain the Board s reasons for these proposals. Do you support the requirements proposed in paragraphs 36A 36F? If not, with which paragraphs do you disagree, and why? ABI does not agree with the proposals to remove the current Probability of outflows requirements for the measurement of liabilities. ABI believes that, in order to measure a liability, it is preferable to continue to consider the most likely outcome instead of the probability-weighted average of all possible outcomes. The proposed measurement creates a number of problems in its application. It presumes the identification of all possible (not just probable) outcomes and their likelihood of occurrence. However this data is unknown, because the company does not have historical data for that given liability, this is especially the case for single liabilities that appear rarely or for the first time. In addition, the proposed measurement is not an appropriate way to assess liabilities that are unlikely to occur but that may, nonetheless, have a significant impact on outflows. Similarly, in opposite cases where a liability is very likely to occur, the use of a probability-weighted average, that considers all other possible scenarios, will create a less reliable evaluation on the balance sheet. In addition, ABI does not agree with the requirement to adjust the value of the liability for the risk that the actual outflows may differ from the expected outflows: there is no evidence to justify such a risk adjustment. ABI believes, therefore, that the proposed amendments do not improve the reliability of the estimates or the risk of error in the measurement of liabilities. Question 2 Obligations fulfilled by undertaking a service Some obligations within the scope of IAS 37 will be fulfilled by undertaking a service at a future date. Paragraph B8 of Appendix B specifies how entities should measure the future outflows required to fulfil such obligations. It proposes that the relevant outflows are the amounts that the entity would rationally pay a contractor at the future date to undertake the service on its behalf. Page 3 of 5
Paragraphs BC19 BC22 of the Basis for Conclusions explain the Board s rationale for this proposal. Do you support the proposal in paragraph B8? If not, why not? ABI does not support the proposal. ABI believes that it is preferable to continue to evaluate obligations to undertake future services at cost, instead of at the market value of the service as proposed. The profit margin that appears on the income statement as a result of the exercise to fulfil obligations does not generate future cash flow. Page 4 of 5
Question 3 Exception for onerous sales and insurance contracts Paragraph B9 of Appendix B proposes a limited exception for onerous contracts arising from transactions within the scope of IAS 18 Revenue or IFRS 4 Insurance Contracts. The relevant future outflows would be the costs the entity expects to incur to fulfil its contractual obligations, rather than the amounts the entity would pay a contractor to fulfil them on its behalf. Paragraphs BC23 BC27 of the Basis for Conclusions explain the reason for this exception. Do you support the exception? If not, what would you propose instead and why? ABI agrees with the proposal. As indicated in the previous response, we prefer the use of cost to measure onerous sales contracts, as it is a more appropriate indicator of the actual burden on the entity. Page 5 of 5