It's been 3 years since I last blogged about FAS 5 and how pampered we've been in the U.S. with our measely terminology of probable, reasonably possible and remote all these years. IAS 37 has 27 levels of likelihood.
A posting earlier this summer on the Deloitte web site explains some of these issues in greater detail.
FAS 5 has provided guidance on contingent liabilities for the past 35 years. For companies choosing to follow IFRS in their financial reporting, IAS 37 will mean significant changes in reporting contingent liabilities.
FAS 5 requires financial statement disclosure of contingent liabilities that are both probable and reasonaby estimable. Similarly, under IAS 37, contingent liabilities are disclosable if a company has a present obligation arising from past events and it is more likely than not that a payment will be required and the amount can be reliably estimated. Though FAS 5 and IAS 37 are similar up to this point, there are significant differences from this point.
Under IAS 37, for example, almost any degree of likelihood creates an estimable amount, even though the range of outcomes may be significant. And even if it's impossible to determine the range, the contingent liability should still be disclosed.
Companies thinking of adopting IFRS should review carefully the ways in which IAS 37 may impact their financial statements. The contingency disclosures could be much different than under FAS 5.