12 May 2010
Sir David Tweedie
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Sir David:

re: Comments on Exposure Draft“Measurement of Liabilities in IAS 37”
The Corporate Accounting Committee (CAC) of the Securities Analysts Associationof Japan (SAAJ) is pleased to comment on the exposure draft, “Measurement ofLiabilities in IAS 37”, put out by the International Accounting Standards Board (theBoard). The SAAJ is a not-for-profit organization providing investment education andexamination programs for securities analysts. Its certified members exceed 23,000. The
CAC is a standing committee of the SAAJ composed of 14 members, most of whom areusers including equity and credit analysts, and portfolio managers, while a few others
are academicians and public accountants.

Expected Value ModelIn the first place, the CAC wishes to comment on the use of expected value in themeasurement of liabilities. Although comments are not invited on this point, the CAC
dares to express its opinion on this important subject. In particular, the CAC believes
expressing views on the matter is necessary so that it can responsibly contribute to theformation of an international consensus, especially since it missed commenting on the2005 Exposure Draft.
Opinions are divided, but a majority of members are against the sole use of theexpected value model. While the model would be effective for those liabilities that often
occur such as loan losses of a diversified portfolio, usefulness of the model is questioned
for a liability that doesn’t often occur and with huge differences in loss amounts, such asa litigation liability. For example, consider a litigation liability comprising a 10CU loss
with 95% probability and a 100CU loss with 5% probability. The CAC thinks
recognizing a 10CU provision with a note disclosing a potential maximum loss of 100CU
much more useful information than the expected loss of 14.5CU.
Minority members think the expected value model better reflects economic realities,
but they echo the majority that detailed disclosure, including assumptions of expected1

value calculation and the mode, is necessary.
Following are the CAC’s opinions on specific issues.

Question 1 – Overall requirements
The proposed measurement requirements are set out in paragraphs 36A–36F.
Paragraphs BC2–BC11 of the Basis for Conclusions explain the Board’s reasons forthese proposals.
Do you support the requirements proposed in paragraphs 36A–36F? If not, withwhich paragraphs do you disagree, and why?
The CAC’s opinions on paragraphs 36A-36F are divided. Most members who do notsupport 36A-36F cited the same problems as mentioned regarding

the sole use ofexpected value. Some are concerned that the definition of “the amount it would
rationally pay” is not detailed enough for practical application. One member opined thatalthough Question 1 is titled “Overall requirements”, re-exposing a portion of the 2005
Exposure Draft is not appropriate from the viewpoint of due process, considering theeconomic changes and widespread use of IFRS after initial exposure, and that therefore
the “overall” Exposure Draft should have been re-exposed.
Members who support 36A-36F think these paragraphs are clear enough as to what
liabilities to measure and how to measure them.

Question 2 – Obligations fulfilled by undertaking a service
Some obligations within the scope of IAS 37 will be fulfilled by undertaking aservice at a future date. Paragraph B8 of Appendix B specifies how entities shouldmeasure the future outflows required to fulfil such obligations. It proposes thatthe relevant outflows are the amounts that the entity would rationally pay acontractor at the future date to undertake the service on its behalf.
Paragraphs BC19–BC22 of the Basis for Conclusions explain the Board’s rationale
for this proposal.
Do you support the proposal in paragraph B8? If not, why not?
The CAC does not support the proposal in paragraph B8(b). The margin for theservice the entity undertakes would never generate cash. When a market doesn’t exist,
proper calculation of margin is difficult. Without a market, entities may arbitrarily
manipulate the margin. The model proposes recognizing profit when the obligation isperformed, which is misleading rather than providing additional information for2

financial statement users. The proposal may be intended as fair value measurement of
the obligation on the balance sheet, but the information value of the balance sheet will
not be enhanced by the proposal. Corporate accounting should not allow the entity torecognize internally generated profit just as recognition of internally generated goodwill
is not being allowed.

Risk Adjustments (B15-B17)
The majority of the CAC think risk adjustment necessary when expected value isused. For example, assume an obligation comprising a 99CU loss with 50% probability
and a 101CU loss with 50% probability and another obligation of a 1CU loss and 199CU
loss each with 50% probability. Applying the expected value of 100CU to bothobligations may mislead investors. When the latter obligation is isolated and therefore
cannot be treated under the law of large numbers, certain adjustment is inevitable.
Detailed guidance should be provided so that adjustment will not be arbitrary.
Some members who are against adjustment do not believe a rational method ofadjustment is possible.

If you have any questions or need further elaboration, please do not hesitate tocontact Sei-Ichi Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).
Sincerely yours,

Keiko Kitamura
Chair
Corporate Accounting Committee3