As we addressed here, the IASB has issued Provisions – Targeted Improvements, an exposure draft of proposed amendments to IAS 37.

You’ll recall that a provision is “a liability of uncertain timing or amount” and under IAS 37 in its current form is recognized when an entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The exposure draft proposes setting out that the “present obligation” criterion comprises three conditions: an obligation condition (the entity has an obligation); a transfer condition (the nature of the entity’s obligation is to transfer an economic resource); and a past-event condition (the entity’s obligation is a present obligation that exists as a result of a past event). This seems likely to provide a much-enhanced basis for analyzing unfamiliar and complex fact patterns.

One of the most contentious aspects of IAS 37 in recent years was the way it spawned IFRIC interpretation 21 Levies. This caused some entities to change their accounting for liabilities like property taxes, to recognize the liability in a single amount rather than rateably throughout the year, as they’d been doing forever. As I wrote here at the time:

• IFRIC 21 blunders into one of the most irritating and reputationally damaging traps of standard-setting: it reopens a whole category of established practices that everyone was happy with, and that there was no rational need to reexamine. In Canada, in particular, it affects the accounting for property taxes…But then there’s a problem, as laid out in a recent meeting report of the IFRS Discussion Group: “the relevant Canadian municipal legislation is often somewhat ambiguous as to what the triggering event is for property taxes and at what point they become unavoidable. The legislation also varies from place to place within Canada…”

As the basis for conclusions to the current exposure draft puts it:

• IFRIC 21 has been widely criticized by investors, preparers and auditors of financial statements, and national standard-setters. It results in entities recognizing some recurring periodic levies as expenses at a single point in time late in the period for which they are charged, or even after the end of that period. Stakeholders have expressed concern about this outcome because, in their view, the substance of a recurring levy is that the entity is paying to operate over a period, and this substance would be more faithfully represented if entities recognized the expense systematically over that period. Stakeholders have also noted that the requirements in IFRIC 21 are inconsistent with requirements in IFRS Accounting Standards for other types of costs that are triggered only when an entity takes the last of two or more specific actions—for example, requirements in IFRS 2 Share-based Payment and IAS 19 Employee Benefits.

The good news is that the exposure draft proposes getting rid of IFRIC 21 and replacing it in part with expanded explanation in the body of the standard, clarifying among other things that “In (a situation where) an entity has an obligation to transfer an economic resource only if a measure of its activity in a period (the assessment period) exceeds a specific threshold… the action that meets the past event condition is the activity that contributes to the total activity on which the amount of the transfer is assessed. At any date within the assessment period, the present obligation is a portion of the total expected obligation for the assessment period.” This would be supplemented by illustrative examples which address the accounting for levies more systematically, with reference to the expanded concept of a present obligation. But the inevitably related not-so-good news is that affected companies will have to go through the whole thing again:

• The proposed requirements would change the timing of recognition of some provisions. The timing would change for a transfer of economic resources that is required only if an entity takes two or more separate actions. Currently, an entity applying paragraph 19 of IAS 37, as interpreted by IFRIC 21, is regarded as having met the past-event condition only when it has taken the last of the required actions, thus triggering the transfer. In contrast, an entity applying the proposed requirements would be regarded as having met the past-event condition as soon as it had taken any of the actions and if it had no practical ability to avoid the remaining actions. Assuming the other recognition criteria are met, the latter entity might recognize a provision earlier and might accrue that provision progressively instead of recognizing it at a point in time. The aim of the proposed requirements is to provide more useful information to investors…

Somewhat recalling the observations made here recently in the context of IFRS 18, it seems unfortunate that some companies will have to reexamine accounting determinations made relatively recently, the outcome of which has little or no benefit to the organization itself (it doesn’t seem that there’s much need to retract my earlier use of “blunder” in relation to IFRIC 21). Still, that may be the necessary price of putting the accounting in this area on a firmer basis for the future…

The opinions expressed are solely those of the author.