PwC Comments on Tentative agenda decision: IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Inclusion of own credit risk in the discount rate

PwC does not agree with the decision to defer consideration of this issue until the IASB's project to replace the provisions standard (IAS 37), or with the reasons given for that decision. PwC is aware of some differences of view on this issue, and believes there may be limited diversity in practice today, but the Firm is concerned that the agenda decision might result in further diversity that does not exist today.

Comment letter

IFRS Interpretations Committee
1st Floor
30 Cannon Street
London
EC4M 6XH

13 December 2010

Dear Sirs

Tentative agenda decision: IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Inclusion of own credit risk in the discount rate

We are responding on behalf of PricewaterhouseCoopers to your invitation to comment on the tentative agenda decision " IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Inclusion of own credit risk in the discount rate" ("the agenda decision") published in the November 2010 edition of IFRIC Update.

Following consultation with members of the PricewaterhouseCoopers network of firms, this response summarises the views of member firms who commented on the agenda decision. 'PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

We do not agree with the decision to defer consideration of this issue until the IASB's project to replace the provisions standard, IAS 37, or with the reasons given for that decision.

We are aware of some differences of view on this issue, and we believe there may be limited diversity in practice today. We are concerned that the agenda decision might result in further diversity that does not exist today. The timing of the IASB's project to replace IAS 37 is uncertain, and it is likely that completion of this project may take some time. We are concerned that leaving this issue open on the basis of the agenda decision until the project to replace IAS 37 is completed will reduce consistency for a prolonged period, particularly among those entities adopting IFRS for the first time.

We believe that any uncertainty about the existing guidance in IAS 37, which requires that the discount rate reflects risk specific to the liability being measured, could be clarified easily and quickly through an interpretation. This would eliminate any current diversity in practice and would reduce the risk of additional diversity developing in the future.

We understand that predominant practice today is to exclude credit risk from the measurement of provisions. This is based on the argument that credit risk is specific to the entity; it is not specific to the liability. IAS 37 paragraph 43 states that ‘risk describes variability of outcome’. Risk in the context of a provision reflects uncertainty about the resources that will be required to settle or fulfil the obligation, which does not include the entity's own credit risk. We support this interpretation and we believe that the most appropriate approach is for credit risk to be excluded from the discount rate used to measure a provision.

We note the concerns expressed in the July 2009 report of the Financial Crisis Advisory Group, which recommended that ‘the Boards should reconsider the appropriateness of an entity’s recognition of gains or losses as a result of fair value changes in the entity’s own debt because of decreases or increases, respectively, in its creditworthiness’. Including an entity's own credit risk in the measurement of a provision would result in a reduction in the liability and a gain if the entity's creditworthiness decreases, despite there being no change in the obligation. Financial information prepared on this basis would not be decision-useful. We note also that the notion that own credit risk should affect profit has been rejected in several of the Board's recent proposals, including its proposals on insurance and financial instruments and the project to replace IAS 37.

We are also concerned that an adjustment to increase the discount rate when an entity's credit worthiness decreases is counter- intuitive. A decrease in creditworthiness suggests an increased risk that the obligation will not be settled or fulfilled. This suggests that the liability should be increased to reflect this risk. It is counter- intuitive for the discount rate to be increased and the liability reduced with the recognition of income in these circumstances.

If you have any questions in relation to this letter please do not hesitate to contact John Hitchins, Global Chief Accountant (+44 20 7804 2497) or Tony de Bell on (+44 20 7213 5336).

Yours faithfully

PricewaterhouseCoopers LLP