We accept that a theoretical case can be made for the approach considered in the consultation paper.
However, the ACT believes that the principles in the current IAS are not so wrong as to warrant any change. The new approach would appear to be taking a more formal rules based stance rather than the traditional IFRS principles based approach. This change of direction is regrettable given that a principles based approach allows more flexibility to produce a result which is more relevant and certainly conveys more meaningful information to the user of the accounts.
The new approach to conditional events leads onto the need to assess the open market value of the present obligations measured on the basis of expectation. At this point the strict formality of the rule based, legal analysis approach breaks down and we enter the realm of probability and supposition. The degree of subjectivity in assessing the measure of the liability makes a nonsense of any rationale for taking a strict legal approach. Where an item or amount is very uncertain the question is whether it is better to recognise nothing rather than using probabilities to recognise some proportion of the maximum potential amount?
In practical terms the exposure draft is proposing that the accounts recognise something that is by definition likely to be somewhat arbitrary and inevitably will be the wrong amount and could be wrong by an order of magnitude. A legal claim for £10m which has a probability of success of 20% would give a valuation (in crude terms) of £2m, whereas in reality the possible outcomes are likely to be either nil or the full £10m and the most probable outcome is nil (as discussed in BC81). There is also the possibility that the matter will be settled at some intermediate amount to avoid the uncertainties of litigation.