Issue 1: This proposed Statement would not apply to

Pfizer Inc.
235 East 42nd Street
New York, New York 10017
May 6, 2010
Sir David Tweedie
Chairman, International Accounting Standards Board
30 Cannon Street, London EC4M 6XH
United Kingdom
Subject: Exposure Draft: Measurement of Liabilities in IAS 37
Dear Sir David,
Pfizer welcomes the opportunity to comment on the Exposure Draft Measurement of
Liabilities in IAS 37 (the ED). Pfizer discovers, develops, manufactures and markets
human and animal biologic and small molecule medicines and vaccines, as well as
nutritional products and many of the world’s best-known consumer products. In 2009,
our total revenues and total assets approximated $50 billion and $213 billion,
respectively. Pfizer supports the efforts of the IASB to improve standards of financial
accounting and reporting and achieve international convergence.
Our comments are summarized below:
Potential Roadblock to Convergence with U.S. Generally Accepted Accounting
In its Work Plan for the Consideration of Incorporating International Financial
Reporting Standards Into the Financial Reporting Systems for U.S. Issuers,
(published in the Federal Register on March 2, 2010), the SEC specifically stated
that the path to global accounting standards “requires careful consideration of the
impact of litigation contingency accounting and disclosure requirements under IFRS
on issuers and investors.”
We do not believe that the proposed amendments to IAS 37 adequately address the
concerns of U.S. preparers for both recognition and measurement issues. As such,
we recommend that the project be deferred until the issues can be jointly addressed
by the IASB and the FASB. We note that the IASB Staff paper is helpful in
explaining the thinking of the Board, however, we believe that it is limited in its
usefulness due to the express notification that it cannot be relied upon in applying
IFRS. Since it deals with the recognition issue, we believe that, at a minimum, the
language should be incorporated into the final IAS 37 so that it can be used in
applying IFRS. We believe that if the language around recognition warrants a Staff
paper during the exposure period then the text of the proposed standard should be
modified for application to be effective. Irrespective of this, we foresee operational
issues with the current language due to the uncertainty that a present obligation
exists given the lack of information available around certain litigation for
management to reach a reasonable conclusion.
Prioritization of IASB Efforts
The accounting for provisions, contingent liabilities and contingent assets is neither a
“short-term convergence topic” nor a “major joint topic” in the 2006 Memorandum of
Understanding between the FASB and the IASB (reaffirmed in 2009). Given the
renewed urgency of convergence matters and constrained resources for both
standard-setters and preparers, we urge the IASB to defer this controversial
undertaking and to concentrate its efforts on achieving the goals of the 2006 MOU.
Evidence of the Need for Re-Exposure, if not Deferral
The recognition and measurement issues associated with contingent liabilities are
complex, controversial and of significant consequence to preparers and users. The
extent of that controversy may be best measured by the FASB’s effort in 2008 to
address this very topic with its Proposed Statement, Disclosure of Certain Loss
Contingencies—an amendment of FASB Statements No. 5 and 141(R). The FASB
received 242 comments letters on the topic, from a broad constituency and, of that
group, over 90% either disagreed with the proposed statement or proposed
significant revisions.
Respondent Type
Financial Institution
Rating Agency
Industry Organization
Law Firm
Accounting Firm
In addition to the critical input received as part of this 2008 project, the FASB also
responded to significant preparer concern about the accounting for contingent
liabilities assumed in a business combination and, in 2009, modified its requirements
by amending an existing standard.
Finally, in addition to the turmoil in the U.S. with respect to the accounting for
contingencies, we are concerned that the 2005 conclusions of the IASB and the
potential consequences of those conclusions may have diminished in the minds of
constituents. Five years is a significant time lapse in this dynamic accounting and
economic environment.
As such, we are concerned about the IASB concluding on an amended 2005
exposure draft absent a formal re-exposure of the entire proposed amendment. But
more importantly, as stated above, our recommendation is to defer the project in its
Incompatibility with the IASB Framework
The IASB Framework defines a liability as a “probable” outflow of resources that can
be “measured reliably.” While we recognize that any recognition and measurement
standards applied to contingent liabilities will be subject to criticism, we believe that
this proposed amendment to IAS 37 is a significant departure from the Framework.
We believe that the probability criterion is well-understood, prudent, operational and
decision-useful. We also believe that the probability criterion greatly enhances the
Framework’s call for reliable measurement, something not well-achieved by the
proposed standard, we fear, particularly when applied to legal contingencies.
Certain Elements of the Exposure Draft
Paragraph 36A defines the measurement criterion as the amount that an entity
would “rationally pay” to be relieved of the present obligation. But, in paragraph
36B, the ED specifies exactly what that rational amount would be - - “the lowest
of” a set of choices. We believe that there are a number of broad considerations
as to how an entity would approach a singular liability and, therefore, we do not
support the prescriptions in paragraph 36B. We understand that the guidance in
Appendix B calls for making an unbiased estimate of the probability of each
outcome. However, our experience is that this is quite an onerous process, and
perhaps unrealistic, in any but the most simplistic of litigation cases, despite the
assertion in paragraph 23 that only in extremely rare cases would an entity not
be able to identify a range of possible outcomes and determine a measure which
is sufficiently reliable.
Even a “simple” case can involve hundreds of interdependent variables.
Notwithstanding the merits of the case, even with in-depth knowledge of a case
ready for trial, the outcome of a single lawsuit can vary depending on the timing
of the case, the jurisdiction or venue, the temperament and/or experience of the
judge assigned, the decision as to who will render the verdict (a judge or a jury),
the amount of press coverage, the political environment, the impact of previous
outcomes of similar disputes, the qualities and characteristics of the plaintiff(s),
etc. All of the above is complex in the early stages of the litigation as well as
when more variables are introduced.
Further, we are concerned about valuations in that they can be highly prejudicial
because, if subject to disclosure or discovery, those amounts will be treated as a
“floor” amount by the other party, leaving the preparer with little ability to
maneuver or negotiate below that amount. Accounting should never result in
setting potential settlement values but the proposal will absolutely subject U.S.
defendants to such results.
Paragraph 36F requires that the accretion of a discounted liability be recognized
as a borrowing cost. We generally find that users of financial statements do not
recognize these types of costs as “borrowing costs.” We do not support such a
classification approach, but rather, prefer the FASB’s approach to accretion of
asset retirement obligations; that is, that “accretion expense shall be classified
as an operating item in the statement of income.” (410-20-45)
Paragraph 45 disclosures regarding “classes of liabilities” is not as helpful as it
was likely intended to be as 1) one or two pieces of litigation within a class will
likely eclipse the balance of litigation in the class thereby de facto exposing the
company’s recorded amounts and 2) the recording of reserves is discoverable
evidence in such legal proceedings and often serves as a basis for a starting
point (floor) in discussions, which is clearly prejudicial.
Paragraph 50 provides for disclosure in the case where a liability cannot be
reliably measured and Paragraph 51 provides for disclosure in the case where a
liability is judged not to exist in situations of uncertainty. While we appreciate
such provisions, we request that the IASB to acknowledge another category of
contingency - - one where the potential liability, although asserted, cannot be
judged to exist or not exist for lack of information.
In the pharmaceutical industry, we are particularly vulnerable to this scenario in
what is known as “mass tort” litigation. In these situations, we may be notified by
an attorney alleging that s/he represents hundreds of claimants and hundreds of
claims, about which we may know nothing or very little for extensive periods of
time. Over the course of several years, we may not have access to the details or
substance of individual claims, may not know the jurisdiction in which the claims
will be brought, and may not even know the amount of damages actually sought.
In addition, we may not even be able to conclude that the person was harmed by
our product which would determine a present obligation. For example, if a group
of plaintiffs took our product for a period of time and also consumed a generic
(bioequivalent) product prior to the alleged harm, reasonable people could
disagree as to which product, if either, triggered the litigant’s claim. Another
example is where plaintiffs allege harm for a disease such as certain cancers,
whereby scientific evidence indicates that it can be triggered by multiple factors
rather than a direct link to ingesting our product.
In these situations, while the allegations of liability may be significant and public,
we simply may not have enough information even to assess the existence of a
liability much less its measurement. While we think the Staff paper is indicating
that management could conclude that the cases don’t have merit on the basis of
the inability to make a realistic assessment, it is not very clear and could mislead
a reader.
Paragraph 55 provides a prejudicial exemption and we agree with such an
exemption. However, we note that the IASB expects the use of this exemption
would be “extremely rare.” We do not share that view. While a company may be
subject to many allegations and litigations, we do not find it unusual that a
singular dispute or two will dwarf the others. We think that the prejudicial
exemption should be provided without its use being characterized as “extremely
rare.” For clarification, we interpret “extremely rare” as almost never, however, in
the pharmaceutical industry which has U.S. litigation surrounding mass torts,
governmental investigations, differing outcomes of similar events depending on
jurisdictions or judges, our experience is that the need for a prejudicial
exemption is more frequent than “extremely rare”. We are not aware what data
the IASB utilized to determine that “extremely rare” is appropriate, however, if the
IASB is using “extremely rare” to not mean within an industry or for a company
but rather, very loosely as in the global totality of all litigation, than perhaps that
language would be appropriate. We believe that auditors would not use that
interpretation, but rather would have it mean extremely rare to each company.
Anecdotally, we observe that, for many companies, a single dispute can easily
overshadow other litigation and we expect that we would be able to make
reasonable inferences about amounts provided for those disputes, even if only
general quantitative disclosures were provided. Again, our observations are not
scientific, but we request that the IASB make public its study leading to the
“extremely rare” assertion or we request that such a study be performed.
Otherwise, we request that the limiting language be dropped.
Paragraph B12 permits the incorporation of certain future events, such as
technological advances. We think this provision could further impair the
reliability of the measurement and would likely introduce significant diversity in
practice based on whose crystal ball is being used to predict such events. We
also see that this provision could be prone to abuse with companies recognizing
future events which are unlikely but are favorable to their calculations. We would
suggest that only future events which are supportable by tangible, observable
evidence be considered. This additional qualification would also make the
provision more auditable and enforceable.
Appendix B defines the present value of the resources required to fulfill the
obligation as including some type of profit margin element, even if the entity will
be using its own internal resources to satisfy the obligation. This approach
would result in income being recognized at a later date, even though no
economic event has occurred. We believe that it is more representationally
faithful that any internal-sourcing benefit be included in the initial measurement,
not in the subsequent settlement. The alternate approach also improves the
ability of users to anticipate cash outflows, which is another important element of
the IASB Framework.
We appreciate your consideration of these comments. We would be happy to discuss
these matters further or to meet with you if it would be helpful.
Loretta V. Cangialosi
Senior Vice President and Controller
Frank D’Amelio
Senior Vice President and Chief Financial Officer