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Total Number of Subscribers: 962 |
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Date: 8th February 2010 |
Compiled by: M Sathya Kumar <= /span> |
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New Clarity on
Contingent Liabilities =
In its first exposure draft of 2010, the IASB seeks to eliminate
uncertainty in the measurement of contingent liabilities. =
The International Accoun=
ting
Standards Board started off the new year by proposing new guidance on
measuring contingent liabilities related to legal settlements and the
retirement and decommissioning of factories and other major assets. The d=
raft
guidance is intended to replace what the IASB calls "vague"
measurement requirements in IAS 37, the international accounting standard
that deals with contingent assets and liabilities. The board's exposure dra=
ft,
issued on Tuesday, is a re-release of guidance first proposed in a 2005
exposure draft of amendments to IAS 37. It's one piece of a much larger
effort to replace the international financial reporting standard with a n=
ew
one. A working proposal of the new IFRS will be released in February. (Publicly held U.S. companies hav=
e good
reason to keep an eye on the IASB rulemaking process, as they may someday
file financial results using IFRS instead of U.S. generally accepted
accounting principles. The Securities and Exchange Commission is expected=
to
decide by 2011 whether U.S. companies will be required to switch to IFRS.=
) The IASB says certain
"vague" requirements in the liability-measurement section of IA=
S 37
make it difficult for investors to compare financial statements. For exam=
ple,
the rule instructs companies to measure a contingent liability by using a
"best estimate" of the outlay used to settle the obligation. But
the board notes that the term can mean different things: "the most
likely outcome, the weighted average of all possible outcomes, or even the
minimum or maximum amount in the range of possible outcomes." Another uncertainty of I=
AS
37 is that it doesn't specify the costs companies should include in the
measurement of a liability, points out the IASB. As a result, some compan=
ies
include only direct costs in the calculation, while others also factor in
incremental costs, and still others add indirect costs and overhead fees.=
In
other cases, companies use the prices they would pay contractors to fulfi=
ll
the obligation on their behalf. The draft guidance attem=
pts
to sweep away such ambiguity. For starters, it eliminates the notion of a
"best estimate." Instead, it requires companies to base their
measurement of a contingent liability on the amount they would
"rationally pay at the end of the reporting period" to relieve =
the
obligation. In most cases, that means estimating the present value of the
resources needed to fulfill the obligation, taking into account the expec=
ted
outflows of resources, the time value of money, and the risk that the act=
ual
outflows may ultimately differ from the estimate. When the outflows of
resources needed to satisfy an obligation are uncertain, companies should
calculate their expected value — "the probability-weighted ave=
rage
of the outflows for the range of possible outcomes." That calculation
needn't be complex, says the IASB. If a company has an
obligation to pay cash to settle a legal dispute, the future outlays shou=
ld
be based on the expected cash payments plus associated costs, such as leg=
al
fees. In the case of shutting down a factory, the guidance encourages
companies to use a service provider's estimate, which would be a "mo=
re
objective measure" of future outlays than internal company calculati=
ons.
"By specifying an objective (contractor prices) the standard would n=
ot
need detailed and arbitrary rules on which costs should be included,"
states the exposure draft. The exposure draft is op=
en
for public comment until April 12. Article was earlier published in the reputed Busine=
ss
magazine - CFO |
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R=
ewards
waiting for feedback at |
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