Project Director Michelle Sansom gives an overview of the main proposals and outlines the ASB's views on these proposals

The IASB has in January issued an exposure draft (ED) that re-exposes the measurement of liabilities in IAS 37 from the proposals set out in the exposure draft issued June 2005 when it proposed to amend IAS 37 'Provisions, Contingent Assets and Contingent Liabilities' (June 2005 ED). The ED can be accessed from the IASB's website at http://www.iasb.org/News/Press+Releases/IASB+re-exposes+proposals+on+measuring+liabilities.htm.

Overview of proposals

The ED proposes that an entity measures a liability at the amount that it would rationally pay to be relieved of the present obligation. This is the lowest of:

1. the present value of the resources required to fulfil the obligation;
2. the amount that the entity would have to pay to cancel the obligation; and
3. the amount that the entity would have to pay to transfer the obligation to a third party.

Where an entity is unable to transfer or cancel an obligation it measures the liability at the present value of the resources required to fulfil the obligation. This amount is made up of:

1. expected cash outflows;
2. the time value of money; and
3. the risk that the actual outflows of resources might ultimately differ from those expected.

The expected cash outflows are calculated by:

1. identifying each possible outcome;
2. making an unbiased estimate of the amount and timing of the outflows of resources for that outcome;
3. determining the present value of these outflows;
4. making an unbiased estimate of the probability of each outcome.

The estimate of the outflows of resources incorporates, in an unbiased way, all available information about the timing and probability of the relevant future outflows and should be consistent with observable market prices.

The relevant future outflows are those that affect the amount that the entity would rationally pay to be relieved of the present obligation. For obligations that are fulfilled by making payments to the counterparty the relevant outflows include payments to the counterparty and associated costs. For obligations that will be fulfilled by undertaking a service the relevant future outflows are the amounts that the entity would rationally pay a contractor at the future date to undertake the service on its behalf.

In the circumstances that there is a market for the service the relevant future outflow is the price that the entity estimates a contractor would charge at the future date to undertake the service. In the circumstance that there is no market for the service then the relevant future outflows is the amount that the entity would charge another party at the future date to undertake the service - this amount includes a margin for profit. The discount rate to be applied is the current market assessment of the time value of money and risks that are specific to the liability.

An entity is also required to consider risk and make an adjustment for the risk that the actual outflows of resources might ultimately differ from those expected. The risk adjustment is said to be a measure of the amount the entity would rationally pay in excess of the expected present value of the outflows to be relieved of this risk.

An entity is required to adjust the carrying amount of a liability at the end of each reporting period to the amount that the entity would rationally pay to be relieved of the present obligation at that date.

ASB review of the proposals

The ASB considered an update to the project at its meeting in November 2009. It expressed concerns about the proposal that future outflows should incorporate a margin. The ASB is unclear why the IASB is proposing to alter the current requirements which are based on costs.

The ASB will be considering how to respond formally to the ED in the coming months. The IASB deadline for comments is 12 April 2010.