Targeted improvement to IAS 37

These proposed improvements cover the following topics: 

• the present obligation recognition criterion; 
• the costs to include when measuring a provision; and 
• the discount rate requirements (when the effect of the time value of money is material). 

At its September meeting, the IASB returned to this project and tentatively decided: 

• to retain the proposal to require an entity to discount a provision at a rate that reflects the time value of money – represented by a risk-free rate – with no adjustment for the effect of non-performance risk; 
• to add no application guidance as to how an entity determines an appropriate risk-free discount rate; 
• to clarify in IAS 37 that the best estimate of the expenditure required to settle an obligation is not reduced to reflect the effect of non-performance risk; and 
• to add no requirements on the use of real or nominal discount rates in measuring a provision. 

During this meeting, the IASB also discussed the interaction with IFRS 3 – Business combinations. The IASB tentatively decided to add to IFRS 3 an exception to the principle of initial measurement at the acquisition date fair value. This exception would apply to provisions (other than contingent liabilities) within the scope of IAS 37, such that when recognising a business combination, the acquirer would measure the provisions at the acquisition date in accordance with the measurement requirements in IAS 37, instead of at their acquisition date fair values. 

Finally, the IASB tentatively decided that an entity should disclose: 

• the discount rate(s) used in measuring a provision; and 
• the approach used to determine the rate(s).