19 May 2010
Joan Brown
Project Manager
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Submitted via the “Open to Comment” page at www.iasb.org
IASB Exposure Draft ED/2010/1: Measurement of Liabilities in IAS 37
Dear Joan
Further to our recent meeting, I am writing on behalf of AFME (the Association for
Financial Markets in Europe) to set out our formal response to the IASB’s 5 January
Exposure Draft ED/2010/01: Measurement of Liabilities in IAS 37 (the “ED”). AFME
is, as you know, the principal UK trade association for firms active in investment banking
and securities trading; it was established on 1 November 2009 as a result of the merger of
LIBA (the London Investment Banking Association) and the European Branch of SIFMA
(the US-based Securities Industry and Financial Markets Association), and thus
represents the shared interests of a broad range of participants in the wholesale financial
markets. We welcome the opportunity to comment on this ED, and are grateful for the
additional time provided by the extension of the comment period to 19 May and also,
particularly, for our very helpful discussion with you on 5 May.
Before addressing the detailed questions raised in the ED, we would like to express our
concerns over the IASB’s approach to consultation on the full standard. We are
disappointed that the Board does not intend to re-expose a full ED of the proposed
Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets (the
“2005 ED”), and believe there are several important factors that would justify such full
re-exposure:
 A number of jurisdictions have adopted IFRS since 2005, and stakeholders in these
jurisdictions should have the opportunity to comment on the full proposal.
 The level of concern expressed by respondents to the 2005 ED, and the
interdependency of the recognition and measurement requirements, suggest a clear
need for further debate on all aspects of the proposals.
Association for Financial Markets in Europe
St. Michael’s House, 1 George Yard, London EC3V 9DH T: +44 (0)20 7743 9300 F: +44 (0)20 7743 9301 www.afme.eu
Company Registration No: 6996678
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Company Registration No: 6996678 Registered Office: 6 Frederick's Place, London, EC2R 8BT
 There remains a significant level of confusion over the core concepts of the new
standard, particularly over the removal of the probability criterion for recognition.
While the 19 February publication of the working draft of the new IFRS, the 3 March
live webcast, and the 7 April Staff Paper: Recognising liabilities from lawsuits, have
together addressed some of this confusion, we believe full re-exposure of the proposed
standard would provide a better opportunity for respondents to comprehend and
comment on the proposals in their entirety. At a minimum, we would like the
interpretations and conclusions expressed in the webcast and in the Staff Paper to be
incorporated into the final standard through application guidance and/or through
examples.
 There is a lack of clarity regarding the transitional requirements, particularly with
respect to their interaction with the revenue recognition, insurance and leasing
projects. Whilst the exceptions in the ED go some way to addressing this, there is still
uncertainty regarding, for example, the treatment of issued guarantees in the
intervening period before the insurance project is completed. There is similar
confusion over the treatment of financial guarantees held following the removal of
contingent assets from the proposed standard, as well as significant overlap with the
leasing project and the treatment of onerous leases.
We therefore disagree with the IASB’s consultation approach to the limited scope ED
and believe full re-exposure of the proposed standard, at a time when the proposals could
be considered alongside related projects, would be highly preferable.
Our responses to the questions raised on pages 7 and 8 of the ED are set out below. We
have also included in an Appendix a small number of comments on the IASB’s 19
February working draft of the new standard, which we hope you will find helpful.
Question 1 – Overall requirements
The proposed measurement paragraphs 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?
In general, we do not agree with paragraphs 36A-F that the ‘rational’ choice for an entity
will always be the least cost option. This presumes cost to be the only factor in decisionmaking, when in reality consideration of other factors such as reputation and customer
relationships, may lead an entity to accept a higher cost alternative. While the Standard
should require the use of the least cost option as a rebuttable presumption, it should allow
for the consideration of management intent to use a higher cost alternative if that aligns
the measurement with how the liability is ultimately expected to be settled.
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We also have concerns with the guidance in Appendix B relating to the application of
these paragraphs.
Expected value approach
In our (LIBA) response1 to the 2005 ED we, along with many other respondents,
expressed concerns over the relevance and reliability of the proposed expected value
approach (these objections are reflected in paragraph BC13 of the current ED). Whilst
we note that the IASB disagrees with these views, we still believe the expected value
approach may result in less relevant and thus less decision-useful information for the
user, and we have confirmed this through our own discussions with users.
Accordingly, for single liabilities in particular, this statistical approach continues to
present issues of cost, reliability and practicality.
We are particularly concerned by the requirements in paragraphs B7(b) and B8(b) to
include all internal costs and profit margins in the measurement of liabilities within the
scope of the ED. Internal costs attributable to the obligation, such as costs of an in-house
legal department, are typically not incremental, and are thus likely to have been incurred
regardless of the outcome of the liability. Inclusion of profit margins results in
recognition of an immediate charge to earnings that will ultimately benefit future
earnings as the obligation is fulfilled. Both outcomes under the proposed measurement
approach result in the shifting of expenses and income between different reporting
periods and do not seem to achieve any substantive benefit to users of financial
statements or to the overall measurement objective for liabilities.
Risk adjustment
We are confused as to why a risk adjustment, as set out in paragraphs B15-17, is
considered necessary when it appears that the probability weighting and discount factor
used in the expected present value approach already addresses uncertainty in the range of
possible outcomes.
We believe the inclusion of this additional measurement of uncertainty further reduces
the reliability and relevance of the measurement of the liability. The consequence of this
is that the value of the liability recognised may bear even less resemblance to the amount
for which the obligation will eventually be settled.
The ED does not provide sufficient guidance on how such a risk adjustment is to be
calculated and will therefore lead to diversity in practice. The inclusion of this risk
adjustment will increase the subjectivity and decrease transparency of measurement and
thus is unlikely to contribute to increased comparability, contrary to the objective set out
in paragraphs BC3-4. The inherent uncertainty in measuring liabilities in the scope of the
ED, especially single liabilities, would be better explained to users through disclosure
than through the inclusion of a risk adjustment of this kind.
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See our letter of 4 November 2005 on the proposed amendments to IFRS 3, IAS 37 and IAS 27
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For the above reasons we do not believe the IASB has adequately addressed concerns
over the expected present value approach, and has therefore not demonstrated that this
approach is appropriate for the measurement of liabilities within the scope of the draft
standard when measured against the criteria of decision usefulness, comparability and
cost effectiveness.
Question 2 – Obligation 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.
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?
We do not support the proposal in paragraph B8 for the reasons set out in paragraphs
AV2-4 of the Alternative Views section of the ED, and particularly because of the
concern over inclusion of a profit margin that was set out in our response to Question 1
above.
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?
Consistent with our response to Questions 1 and 2 above, we do not support the inclusion
of a profit margin in the relevant outflows in the case where an entity will undertake the
service itself. It is unclear why the IASB believes that a different methodology should
exist for contracts falling under IAS 18 or IFRS 4 from that which is applied to contracts
under the proposed standard.
If the proposals were amended to remove the profit margin, and thus have consistent
treatment between the proposed standard, IAS 18 and IFRS 4, then no exception would
be necessary. If the proposals are not amended, we agree with the exception on the basis
that this avoids a change in accounting practice in the short term that could potentially be
reversed when the new standards replacing IAS 18 and IFRS 4 are issued.
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I hope the above comments are helpful. We would of course be pleased to discuss any
points which you may find unclear, or where you believe AFME members might be able
to assist in other ways.
With kind regards
Yours sincerely
Ian Harrison
Managing Director
Direct phone: 020 7743 9349
Email: ian.harrison@afme.eu
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Appendix
AFME Comments on the IASB Working Draft
We would like to draw to your attention some apparent inconsistencies in the working
draft of the final standard which was published on the IASB website on 19 February:
 Paragraph 49 of the working draft requires that disclosures be provided by class of
liability. However, paragraph 55 requires that the entity provides a description of “the
dispute” (emphasis added), suggesting that disclosure should be on a case by case
basis.
The ability to provide the seriously prejudicial disclosures by class is particularly
important given the change in recognition rules. Under the existing IAS 37 an entity
might recognise a liability because management believe it is probable that the entity
will settle a claim out of court even though they also believe they could successfully
defend the claim – so recognition of a liability is not an admission of guilt, rather it
reflects the practical approach to litigation claims. Under the draft standard, a liability
will only be recognised if management believe that the counterparty has a valid claim
and thus recognition of the liability is a clearer message that the entity expects to fail
in its defence. Any disclosure specific to the claim is therefore likely to be even more
sensitive.
We therefore believe that the final standard should clarify that the seriously prejudicial
exemption can be applied to a class of liabilities, and not just to individual liabilities,
so as to avoid drawing undue attention to a specific case and disclosing information
which could be seriously prejudicial.
 The working draft states (on p.29) that Example 20 from the 2005 ED remains
applicable. Based on our understanding of the new recognition requirements and the
facts presented in the example, it is unlikely that the entity would recognise a liability
since “the directors are of the opinion that the claim can be successfully resisted” and
there is no information to suggest that the directors have made known any intention to
settle the claim. We believe this example should be revised to reflect the fact that the
entity would not recognise a liability and would therefore use the seriously prejudicial
exemption to avoid providing disclosures under paragraph 51.
iwh
19/5/10
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