Verband der Industrie- und Dienstleistungskonzerne in der Schweiz
Fédération des groupes industriels et de services en Suisse
Federation of Industrial and Service Groups in Switzerland
18 May 2010
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Exposure Draft Measurement of Liabilities in IAS 37 - Proposed Amendments to IAS 37
Dear Sir / Madam,
SwissHoldings, the Swiss Federation of Industrial and Services Groups in Switzerland,
represents 47 Swiss groups, including most of the country’s major industrial and commercial
enterprises. We very much welcome the opportunity to comment on the above-mentioned
Exposure Draft. Our response below has been prepared in conjunction with our member
companies. We outline some general comments below and answer the specific questions of the
ED in the annexe.
GENERAL COMMENTS
In our comment letter of October 28, 2005 about the ED on proposed amendments to IAS 37, we
have pointed out that the ED was in contradiction with paragraphs 50 and 83 of the Framework
about the probability recognition criterion. We also said that that those amendments of the
original ED should have been first discussed and analysed in the context of the Framework
project. Even though the measurement and recognition part of the revised Framework has not
been published, we consider that the revised ED on the objective of financial reporting already
gives a cash flow approach. We also believe that the current Framework defines a liability as an
outflow of resources. Therefore we are disappointed that the ED continues to focus on an
approach based on expected value and probabilities and still dismisses the probability
recognition criteria thus being in contradiction with the current and future Frameworks.
Moreover we also do not consider that the changes compared to the original ED have made it
more understandable for the users and more practicable for the preparers.
We take note of the April 7 staff paper on recognising liabilities from lawsuits in the light of
considerable doubts expressed by constituents about the appropriateness of the ED on this topic.
We are, however, confused about the intended status of this paper since, in view of the
disclaimers attached to this staff paper, it is not clear to what extent, if at all, this will be
incorporated in any amendments to IAS 37. We therefore strongly recommend that the Board
reconsiders the issue of single obligations as stated in our answer to question 1. Actually, we are
not aware of any particular concerns from users of financial statements for a new approach
concerning the measurement of non-financial liabilities and we believe that the project was
originally supposed to achieve convergence with US GAAP. Instead the ED introduces an
inappropriate measurement objective focusing on an expected probability based value of a
liability that is close to fair value. It also introduces the notion of a margin on the settlement of the
Postfach 402, 3000 Bern 7
Tel. +41 (0)31 356 68 68
sh@swissholdings.ch
Nägeligasse 13, 3011 Bern
Fax +41 (0)31 352 32 55
www.swissholdings.ch
SwissHoldings
2
entity's own liabilities that does not represent a cash outflow. We consider that the approach
taken in the ED would result in recognising non-financial liabilities that do not have predictive
value because they would have little relationship with the future cash flows that an entity would
incur to discharge its liabilities.
We consider that such important changes should not have been addressed by a mere reexposure of the measurement part of the standard but by a full re-exposure because recognition
and measurement are closely interlinked. We thus fully support the two dissenting Board
members who refer to the opposition of many constituents to the 2005 ED and say that the
current ED should have been fully re-exposed because measurement and recognition criteria are
closely related (paragraph AV7).
Finally our letter also comments on other issues regarding the working draft of February 19,
2010. We are concerned that the requirements of the draft concerning restructuring costs
contradict the definition of a constructive obligation and that clarification is required concerning
environmental liabilities.
Yours sincerely,
SwissHoldings
Federation of Industrial and Service Groups in Switzerland
Dr. Gottlieb A. Keller
Current Chair of SwissHoldings,
(General Counsel Roche Holding AG)
cc
Annexe
SH Board
Dr. Peter Baumgartner
Chair Executive Committee
SwissHoldings
3
ANNEXE
ANSWERS TO SPECIFIC QUESTIONS IN INVITATION TO COMMENT
Question 1 – Overall requirements
Do you support the requirements proposed in paragraphs 36A–36F? If not, with
which paragraphs do you disagree, and why?
We support neither paragraphs 36A-36F nor the introduction of risk that the actual outflows differ
as stated in paragraph B1 (b) and in other requirements of the appendix B. As said in our general
comments, once an entity has determined that it has an obligation, the Board has removed the
probability recognition criterion and has replaced it by the recognition of all non-financial liabilities
based on an expected value approach determined by probabilities. In paragraph BC15 (a) the
Board contend that "the objective is to measure the liability at the end of the reporting period and
to depict the uncertainties at that date, not to predict the entity’s future outflows". Then in lit. (b) of
the same paragraph, the Board asserts that "estimates of expected values are not necessarily
less reliable than estimates of the most likely outcome". We disagree with these assertions from
a conceptual and practical standpoint.
Paragraph 49 (b) of the Framework defines a liability as "a present obligation of the entity arising
from past events, the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits". Interestingly the Board states in paragraph BC15 (c)
that in "extremely rare, situations […] the proposed new standard will continue to allow […]
liabilities to be recognised only if they can be measured reliably". This statement demonstrates
the contradiction of the approach chosen by the Board. Since a liability has to be presented as an
outflow of resources in accordance with the Framework, we consider that an entity cannot be
required to measure its non-financial liabilities in accordance with a model that includes a
weighted average of risks of occurrence in all circumstances. We believe that the Board is
confusing payment, i.e., “rationally pay” as said in paragraph 36A with expected outflows based
on probabilities, which could even be interpreted as fair value. A probability based method is only
appropriate for the measurement of liabilities related to large populations of risks such as
warranty liabilities but it is inappropriate for liabilities arising from litigations and other single items
for which the liability is simply the present value of what an entity is going to pay. An expected
value based on the weighting of probabilities just represents a pseudo-scientific accuracy that
would result in a liability that the entity would never pay. Contrary to paragraph BC 15 (a) quoted
above, we do not consider that the users require a value that represents the uncertainties at the
balance sheet date but the economic resources which are expected to flow out of the entity when
it discharges its liability.
Even though the definition of a liability has not yet been debated in the revised Framework, the
ED on the objective of financial reporting published in May 2008 states that financial reporting
should provide information about economic resources (assets) and claims on those resources
(liabilities) that is "useful to capital providers for assessing an entity's ability to generate net cash
inflows" (paragraph OB15). We do not consider that liabilities determined on the basis of
weighting probabilities meet the cash flow approach of the new Framework (except in the case of
warranties).
Actually we believe that the Board is acknowledging that it is not possible to measure liabilities at
their expected values in all circumstances and what they are describing as "extremely rare
situations" in paragraph B15 (c) are in fact the situation of many lawsuits. We also see from a
June 2009 staff paper that this whole issue was appropriately addressed although we strongly
disagree with the staff recommendation that the circumstances where the outcome of an
obligation accepted by an entity arising from legal and similar cases cannot be reliably measured
will be “extremely rare”.
SwissHoldings
4
As outlined in the staff paper we recommend that guidance should be given as to when a liability
cannot be reliably measured and the cash flows reasonably predicted. Such situations should
include:



the proceedings are unprecedented
the range of possible outcomes is large
the distribution of possible outcomes is skewed and has a very long tail.
Due to the above the “extremely rare” phrasing should be amended to something like “There may
be circumstances where the liability cannot be reliably measured and therefore it is inappropriate
to record a liability. In such cases appropriate disclosures should be made of the facts and
circumstances.”
As regards the practical aspects, we consider that once a liability has met the probability
recognition threshold, management should certainly consider the possible outcomes in order to
measure the liability but management should only consider these outcomes in order to determine
what the most probable outcome would be. Management indeed acts rationally as stated in
paragraphs 36A and 36B, but it would not necessarily cancel or transfer an obligation at a lower
price. The requirement of paragraph 36C, which states that an entity "might be unable to cancel
or transfer an obligation for a lower amount" could cause unproductive discussions with the
auditors when an entity could cancel or transfer at a lower price but does not want to do this, for
example when an entity could cancel a decommissioning obligation itself at a lower price but
wants to outsource it at a higher price on grounds of reputation risk. The ED requirement of the
lower price is typically an anti-abuse clause, which would have the perverse effect not to reflect
what the entity would ultimately pay to discharge its obligation.
The ED consequently needs a complete rework. Paragraph 36A should be rewritten by saying
that where a liability can be reliably measured it should be measured on the basis of the most
probable outflows of cash at the balance sheet date. Paragraphs 36B to 36D should be deleted
and the guidance in the appendix B should be rewritten accordingly to remove the use of each
possible outcome and probabilities e.g. paragraph B3 (a) and B3 (d).
Question 2 – Obligations fulfilled by undertaking a service
Do you support the proposal in paragraph B8? If not, why not?
We do not support the proposal in paragraph B8. In paragraph BC21, the Board considers that
several elements argue for the inclusion of a margin in the settlement of the liabilities by the
entity itself, namely there is a market for most types of services, this achieves comparability
and reduces subjectivity and is a clear measurement objective which in certain circumstances
will result in entities making a profit on the settlement of their own liabilities. We disagree with
these arguments.
First we do not believe that there is an active market for services whose prices normally result
from negotiations between the service providers and their customers. Then, as stated in our
answer to question 1, a liability should be measured on the basis of the economic resources
that are expected to flow out when the entity discharges its liability. Settling a liability internally
or through a third party are different economic actions that should be reflected accordingly in
the accounts. The profit argument stated in paragraph BC21 (e) is not realistic because that
so-called profit is just a shift in timing (difference between the original "expected" value and
the real cash outflow of the entity). The accounts should reflect economic phenomena not "as
if situations". We entirely support the six dissenting Board members on this issue especially
concerning the fact that the profit margin does not represent the payment of a cash outflow
(paragraph AV2 (b)), the lack of guidance of what constitutes a contractor's market (paragraph
AV2 (c)) and, above all, that such a measurement method "does not help in predicting the
entity's capacity to generate cash flows in the future" (paragraph AV2 (b)).
However we would agree that risks should be considered in estimating the cash flows of
SwissHoldings
obligations fulfilled by undertaking a service as mentioned by the six dissenting Board
members in paragraphs AV5 and AV6. Such a guidance should be practical and should reflect
the way the entity intends to settle its service obligation. Hence the risk element of an own
settlement might be greater than in the case of an outsourced settlement. In any case, a
deliberate overstatement of the liability should not be permitted as stated by paragraph 37 of
the Framework.
Question 3 – Exception for onerous sales and insurance contracts
Do you support the exception? If not, what would you propose instead and why?
As said in our answers to questions 1 and 2, we disagree with the proposals of the ED.
However should the Board nevertheless implement them, then we would agree with the
exception for the onerous contracts. Actually we are surprised that the Board admits a cost
approach for the measurement of onerous contract liabilities whereas it denies the same
approach in the measurement of other obligations fulfilled by undertaking a service. We
consider that this demonstrates that the approach of using a contractor price for internal
service obligations is flawed.
ISSUES WITH THE WORKING DRAFT OF FEBRUARY 19, 2010
Restructuring costs
We disagree with the last sentence of paragraph C4 saying that "even when an entity
announces or starts to implement a restructuring plan, it does not incur an obligation for costs
that it could avoid by changing or recalling the plan". We consider that this sentence
contradicts the definition of an enforceable obligation or that of a constructive obligation as per
paragraph 12 because, by announcing a restructuring plan, an entity is either required by law
to announce a social plan or its human resources policies establish a given level of
indemnification. By announcing the plan the entity creates an expectation among the
employees to be terminated that it will pay the indemnities. Therefore, at that stage, an entity
would not recall the plan unless forced to do so by a decision of the authorities or by employee
actions. The possible occurrence of these two cases should not prohibit the recognition of a
provision but should, in our opinion, be treated as re-measurement of the liability if and when
they are known. If the Board was to decide to proceed with its decision to require a probability
assessment, then the possibility of a recall of the plan under the previously mentioned
circumstances should be considered as required by paragraph B15.
Environmental Obligations
We consider that the draft mixes environmental liabilities with decommissioning obligations,
which are two different kinds of obligations. A decommissioning obligation occurs upon the
start of a manufacturing plant or of a mining operation, while an environmental obligation may
incur at any time as result of a production incident or because of external factors. For example
an entity may be authorised to dump waste on a piece of land and then, following a change in
the legislation, or as a result of the pressure of environmental activists, the entity would have
to clean the site and would set-up an environmental liability for which it has a legal obligation
in the first case and a constructive one in the second case.
10-05-18-CL-ED-Measurement
5