Response 1 - Aviva
Deadline for completion of this Invitation to Comment:
Monday 10 February 2025
Please submit to: [email protected]
Introduction
The objective of this Invitation to Comment is to obtain input from stakeholders on the UKEB Draft Comment Letter (DCL) on the Exposure Draft (ED) Provisions – Targeted Improvements published by the International Accounting Standards Board (IASB) on 12 November 2024. The IASB comment period ends on 12 March 2025.
UK endorsement and adoption process
The UK Endorsement Board (UKEB) is responsible for endorsement and adoption of IFRS for use in the UK and therefore is the UK's National Standard Setter for IFRS. The UKEB also leads the UK's engagement with the IFRS Foundation (Foundation) on the development of new standards, amendments, and interpretations. This letter is intended to contribute to the IASB's due process. The views expressed by the UKEB in this letter are separate from, and will not necessarily affect the conclusions in, any endorsement and adoption assessment on new or amended International Accounting Standards undertaken by the UKEB.
Who should respond to this Invitation to Comment?
Stakeholders with an interest in the quality of accounts prepared in accordance with international accounting standards.
How to respond to this Invitation to Comment
Please download this document, answer any questions on which you would like to provide views, and return it together with the 'Your Details' form to [email protected] by close of business Monday 10 February 2025.
Brief responses providing views on individual questions are welcome, as well as comprehensive responses.
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Questions
Definition of a liability and recognition criteria
1The UKEB's DCL notes that whilst the UKEB supports the objective of clarifying the recognition criteria, we are concerned that the current proposals may create new interpretation issues. The UKEB's DCL identifies some areas where further consideration might be needed to avoid the risk of unforeseen consequences and, potentially, diversity in practice. [DCL paragraphs 4-6 and A1 – A19]
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We agree with the UKEB's position in that we are supportive of the proposal to align the definition of a liability with the conceptual framework; however, we do not agree with the proposed change in the terminology from 'outflow of resources embodying economic benefits' to ‘transfer of an economic resource' in determining if a provision exists (i.e. the present obligation criteria). The use of outflow is well understood and changing this to transfer would cause confusion for preparers of the financial statements. |
2The IASB's ED proposes amendments to the present obligation recognition criterion including the introduction of a 'no practical ability to avoid test. [ED paragraphs 14B(c), 14F and 14Q]
Do you consider the proposed test is clear and would allow consistent application across a variety of fact patterns and different reporting periods? If not, what would you recommend instead? Please provide examples of fact patterns that might need further consideration, for which the likely impact of the proposals is expected to be material.
| Yes | No | |
|---|---|---|
| X | We believe the 'no practical ability to avoid' test used in the present obligation recognition criterion is appropriately clarified in the ED, by explaining that the mechanism imposing such a responsibility could be legal or constructive. |
3The IASB's ED proposes amendments to the present obligation recognition criterion including the introduction of a ‘transfer' condition into IAS 37. [ED paragraphs 141 – 14L] The proposals make an explicit distinction between a transfer and an 'exchange' transaction.
Do you consider the proposed requirements are clear and would allow consistent application across a variety of fact patterns? If not, what would you recommend instead? Please provide examples of fact patterns that might need further consideration, for which the likely impact of the proposals is expected to be material.
| Yes | No | |
|---|---|---|
| X | As per our response to Q1, we do not agree with the proposed change in the terminology from ‘outflow of resources embodying economic benefits' to 'transfer of an economic resource' in determining if a provision exists. If the IASB proceeds with the change to use the term transfer, we recommend further investigation into areas such as decommissioning provisions (where there is a requirement to capitalise the costs of the provision under IAS 16) and levies where the distinction between a transfer or an exchange is less clear. |
4The IASB's ED proposes the introduction of a 'past-event' condition. [ED paragraphs 14M – 14R] As part of this, the ED also proposes specific guidance for obligations to transfer an economic resource only if the entity takes two (or more) separate actions [ED paragraph 14Q].
Do you consider the underlying principle behind the identification of the relevant 'action(s)', and the distinction between actions and measurement bases, is clear and would facilitate consistent application across a variety of fact patterns? If not, what would you recommend instead? Please provide examples of fact patterns that might need further consideration, for which the likely impact of the proposals is expected to be material.
| Yes | No | |
|---|---|---|
| X | We agree with the UKEB that the guidance for obligations to transfer an economic resource only if the entity takes two (or more) separate actions should be clarified, as the term 'action' is not defined in the ED. |
5The IASB's proposes limited editorial amendments to the section in IAS 37 'Application of the recognition and measurement rules – Restructuring'. The UKEB DCL [paragraphs 6(d) and A20] considers such guidance could be perceived as confusing or inconsistent with other proposals in the ED and recommends it is presented using the new structure for the assessment proposed in the ED (i.e. disaggregating by obligation, transfer and past-event).
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We have no further comments. |
Measurement – Expenditure required to settle an obligation
6The UKEB's DCL agrees with the proposed clarification of the costs an entity includes in estimating the future expenditure required to settle an obligation. However, it also recommends further consideration on how the proposed amendment would be applied to certain obligations not settled by the provision of goods or services, such as legal claims. [DCL paragraphs 7 and A21 – A22]
Do you agree with this position? Please explain why or why not.
If you do not agree with the IASB proposal, please provide examples of:
- costs that you consider would be captured by the proposed amendments but in your view should not be part of the measurement of a provision; and/or
- costs that would not be captured by the proposed amendments but you consider should be part of the measurement of a provision.
| Yes | No | |
|---|---|---|
| X | We have no further comments. |
Measurement – Discount rates
7On balance, the UKEB's DCL supports the proposed amendment to discount the future expenditure required to settle an obligation at a rate (or rates) that reflect(s) the time value of money (represented by a risk-free rate) and the risk surrounding the amount or timing of the expenditure required to settle the obligation, excluding non-performance risk. The DCL also supports the proposed related disclosure requirements. [DCL paragraphs 8 and A23 – A25]
The UKEB's DCL also notes that the IASB proposal would create a disconnect with the measurement principle specified in IAS 37 paragraph 37 and recommends the IASB considers clarifying that the proposed amendment is an exception to the measurement principle as envisaged in paragraph 6.92 of the Conceptual Framework for Financial Reporting [DCL paragraph A24]
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We are supportive of the proposal, but we agree that further consideration is required to prevent the day 2 gain or loss resulting from the discount rate used for business combinations being inclusive of non-performance risk. |
Transition requirements
8The UKEB's DCL agrees with the proposed transition requirements but recommends the IASB considers requiring the exceptions to retrospective application to be applied at the same date (i.e. date of initial application or transition date). [DCL paragraphs A26 – A28]
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We agree with the UKEB's position and we believe that the transition date should be used consistently for both exceptions to ensure costs included in the measurement of a provision are comparable with prior periods. |
Disclosure requirements for subsidiaries without public accountability
9The UKEB's DCL supports the proposed consequential amendments to IFRS 19 Subsidiaries without Public Accountability: Disclosures. [DCL paragraph A29]
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We have no further comments. |
Guidance on implementing IAS 37
10The UKEB's DCL supports the proposed amendments to the decision tree in Section B and to the illustrative examples in the Guidance on implementing IAS 37. However, the DCL also highlights some perceived inconsistencies and makes some recommendations. In addition, it recommends the IASB to consider whether the examples should be transferred to the main body of the standard, as application guidance that is an integral part of the standard [DCL paragraphs 6(c) and A30 - A33]
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We believe the decision tree in the Guidance on implementing IAS 37, as it is currently drafted, is unhelpful. Part B2 of the decision tree requires entities to disclose a contingent liability if the entity is either (i) uncertain whether it has an obligation or (ii) if a transfer of economic resources is required. It does not consider the past-event condition. We believe this is inconsistent with IAS 37 paragraph 16 which only requires disclosure of a contingent liability if there is a more than remote probability that a present obligation to transfer an economic resource exists as a result of a past event. |
Consequential amendments to other IFRS Accounting Standards
11The UKEB's DCL recommends the IASB considers whether an exception to the measurement principle in IFRS 3 Business Combinations is needed for provisions in scope of IAS 37. [DCL paragraph A34]
Do you agree with this position? Please explain why or why not.
| Yes | No | |
|---|---|---|
| X | We have no further comments. |
Other comments
12Have you identified any factors the IASB should consider in assessing the time needed to prepare for the amendments proposed in the IASB's Exposure Draft? If so, please describe them below.
| N/A |
13Do you have any comments on the potential costs and benefits likely to arise from the proposed targeted improvements to IAS 37?
| We have no further comments. |
14Have you identified any potential unintended consequences likely to arise from the application of the proposed amendments to IAS 37? If so, please provide further information.
| Yes | No | |
|---|---|---|
| X | Click or tap here to enter text. |
15Do you have any other comments on the IASB's Exposure Draft or the UKEB's DCL you would like to share?
| Yes | No | |
|---|---|---|
| X | Click or tap here to enter text. |
Thank you for completing this Invitation to Comment
Please submit this document by Monday 10 February 2025 to [email protected]
Footnotes
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