IFRS 3 “grey area” regarding contingent liabilities

Abstract

All South African listed companies must prepare their financial statements using International Financial Reporting Standards (IFRS). Although IFRS aims to provide a framework that can be applied to ensure comparable financial information, there are “grey areas” where judgement needs to be applied. One such area, relating to the classification of contingent liabilities (specifically pending lawsuits) in a business combination, is explored during this research. A survey was distributed to the Top 40 Johannesburg Stock Exchange (JSE) companies presenting different scenarios regarding lawsuits. The company's views on whether the specific scenario presented a possible obligation (which would not be recognised in a business combination) or a present obligation (which would be recognised) was gathered. Some statistically significant differences in opinion were noted between the companies, which could have significant implications on goodwill calculations in a business combination. The International Accounting Standards Board (IASB) have proposed changes to IAS 37 that could reduce this uncertainty and differences in interpretation, but until such time the treatment of pending lawsuits in a business combination continues to remain a grey area in IFRS.