Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Tel: 408-765-8080
Fax: 408-765-8871
May 18, 2010
Sir David Tweedie
Chairman
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Re: Exposure Draft ED/2010/1 Measurement of Liabilities in IAS 37
Dear Sir David:
Intel is pleased to respond to your request for comment on the Exposure Draft,
Measurement of Liabilities in IAS 37. We support the IASB’s objectives to improve and
align the recording of liabilities across IFRSs and to support global convergence of
financial reporting standards. We believe that these objectives are achievable through the
IASB’s convergence efforts with the FASB. A separate project outside of these
convergence efforts will result in disparity within IFRS and increase divergence with US
GAAP, as discussed below. We also provide more detailed responses to the questions
posed in the Exposure Draft in the Appendix.
We support the Board’s effort to improve and align the recording of liabilities across
IFRS’s. While we respect that the Board does not want to receive comments on the
recognition of a liability under the proposed new IFRS, the issuance of a new IFRS based
upon the current working draft of the standard will create divergence within IFRSs. The
proposed IFRS removes the criterion that an outflow of resources be probable. This
revised criteria for recognizing a liability is not consistent with the IASB Framework’s
definition of a liability. The Framework defines a liability as a present obligation which
is expected to result in an outflow of economic resources. We believe that to align the
recording of liabilities across IFRSs, the recognition of a liability should be based on the
IASB Framework. The Framework sets forth the objectives and conceptual foundation
of financial accounting that is the basis for the development of financial accounting and
reporting standards. Any fundamental change in the recognition of a liability should be
addressed as part of the IASB Conceptual Framework project, which is a joint project
with the FASB, rather than though an amendment to IAS 37 Provision, Contingent
Liabilities and Contingent Assets.
We also support the Board’s objective of global convergence of financial reporting
standards.
The guidance in the proposed standard is aimed at eliminating timing
differences between IAS 37 and US GAAP on when entities recognize restructuring
costs. While the proposed standard does align the recognition of restructuring costs
between IFRS and US GAAP, it will create new differences. For example, the
recognition of a liability or contingent liability under US GAAP occurs when it is deemed
probable or expected and one or more future events will confirm the fact of a loss and the
amount of loss can be measured reliably. The consequence of removing the assessment
of whether it is probable that an outflow of resources will result is a loss of symmetry
between recognition under IFRS and US GAAP. The proposed guidance will also create
significant divergence in how liabilities are measured. The Exposure Draft proposes
that measurement should be the amount that the entity would rationally pay to be relieved
of the liability. Under this guidance, this amount would normally be an estimate of the
present value of the resources required to fulfill the liability. Under US GAAP,
settlement price or even fair value are not objectives of the measurement of liabilities.
Recognition under US GAAP is based on management’s estimate. This divergence in
measuring liabilities between IFRS and US GAAP could create significant differences in
how companies measure liabilities under IFRS and US GAAP. To ensure that the Board
meets its objective of global convergence, we recommend that the Board make changes
to the accounting for liabilities through convergence projects as part of the IASB and
FASB Memorandum of Understanding rather than within individual improvement
projects.
In summary, we encourage the Board’s objective to improve and align the recording of
liabilities across IFRSs and to support global convergence of financial reporting
standards. We believe that these objectives are best accomplished through convergence
projects between the IASB and FASB, including the current Conceptual Framework
project that aims to create a sound foundation for future accounting standards that are
internally consistent and internationally converged.
Thank you for your consideration of the points outlined in this letter. If you have any
questions regarding our responses, please contact me at (408) 765-5545, or Liesl Nebel,
Accounting Policy Controller, at (971) 215-1214.
Sincerely,
Leslie Culbertson
Vice President, Director of Corporate Finance
Appendix
Response to Questions
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?
We believe shifting measurement from an entity’s best estimate of the amount required to
settle the obligation to the amount that that the entity would rationally pay at the end of
the reporting period to be relieved of the present obligation may result in financial
statements that are neither representationally faithful nor relevant.
In making investment and credit decisions, information must be a faithful representation
of the actual event. To faithfully represent an economic event, an estimate must be based
on the appropriate inputs, and each input must reflect the best available information. We
believe the proposed measurement principal does not meet the objective of faithful
representation because measuring a liability at the amount an entity would pay to be
relieved of the liability may not reflect the substance of the economic event. Considering
all possible outcomes, the expected outflows or resources, and the risk that the actual
outflows may differ from expected will result in the measurement of a liability that is
different from management’s best estimate of the expected outcome. Management’s best
estimate represents the actual resources an entity expects to pay, which we believe
reflects a more reliable measure of the expected future outflow of resources.
Measurement of liabilities, as proposed by the Board, also raises concerns over the
disclosure of uncertain liabilities. We are concerned about disclosing an amount
associated with a lawsuit that is not based on our best estimate of the expected outcome.
The Board believes an entity’s estimate of the expected value of a litigation liability is
less revealing than the entity’s estimate of the most likely outcome. However, if the
expected value of a litigation liability exceeds the entity’s best estimate and this amount
is required to be disclosed, we think this would provide an unnecessary benefit to the
other party in the litigation.
As mentioned in the main body of the letter, we recommend that the Board not make any
changes to how liabilities are recognized, measured or disclosed through this stand-alone
project. Rather, the accounting for liabilities should be addressed through convergence
projects as part of the IASB and FASB Memorandum of Understanding rather than by
eliminating differences within individual improvement projects.
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 fulfill 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?
When fulfilling an obligation by undertaking a service, we do not support the Board’s
proposal that measurement of the outflows of resources be based solely on the amounts
that an entity would rationally pay a contractor at a future date to undertake the service on
its behalf. If management engages a third-party to settle the service; it would be
appropriate to calculate the liability based on the contractor costs expected to be incurred.
However, if management elects to settle the obligation internally; we believe that the only
costs that should be included in the calculation of the liability are the internal costs
expected to be incurred. We do not support recognizing the profit margin that would
result if the entity intended to settle the obligation internally.
We understand that the Board’s objective is to ensure comparability of the measurement
of liabilities amongst entities regardless of how the obligation will be fulfilled, but we
believe that the proposed measurement principal for obligations that will be fulfilled by
undertaking a service may not faithfully represent the actual substance of the economic
event. The objective of financial reporting is to provide information to investors and
creditors that assist in assessing the amounts, timing, and uncertainty of an entity’s future
cash flows. If the Board were to require an entity to include a profit margin even when
services would be provided internally, the financial statements would not provide
decision-useful information to the readers of the financial statements since the recorded
liability would not represent expected cash outflows.
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 fulfill its
contractual obligations, rather than the amounts the entity would pay a contractor to
fulfill 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?
We agree that an onerous contract arises based on a comparison of the costs the entity
expects to incur to fulfill its contractual obligation with the expected economic benefits.
We believe this view is consistent with the cost approach proposed in the Revenue
Recognition Discussion Paper. Under the cost approach, a performance obligation is
considered onerous when the expected costs to satisfy a performance obligation exceeds
its carrying amount. The cost approach rejects the notion of applying a reasonable
margin to determine an entity’s expected costs. We support the Board exception as it is
consistent with the preliminary views expressed on changes to the Revenue Recognition
project.