The International Accounting Standards Board (IASB) has approved proposals from its interpretations committee to make two amendments to International Accounting Standard 19, Employee Benefits (IAS 19).

The move came during a 22 January meeting of the board in London.

Board members also voted to issue the two amendments for public comment as a single exposure draft.

The amendments cover:

  • the effect of actions by the trustees of a defined benefit (DB) pension scheme to limit a sponsor’s ability to recognise a plan surplus in its accounts; and
  • how a plan sponsor calculates current service cost and net interest costs following remeasurement of its net DB liability following a plan amendment or curtailment.

The impact of the plan surplus amendment could be most keenly felt in the UK, staff acknowledged in a meeting paper presented to the board.

Staff acknowledged that the amendment could be of interest in the UK, where trustees can enjoy “unilateral powers to buy annuities (without changing a pension promise)”.

The accounting rules for DB pension obligations under International Financial Reporting Standards (IFRS) are set out in IAS 19.

The first of the two amendments discussed by the IASB on 22 January concerns a document known as IFRIC 14, a guidance document that explains how DB sponsors should apply the so-called asset-ceiling under IAS 19.

The document was originally published in 2007 by the IFRS Interpretations Committee’s predecessor, the International Financial Reporting Interpretations Committee, or IFRIC.

At issue is paragraph 58 of IAS 19, which limits the measurement of a DB asset to the “present value of economic benefits available in the form” of refunds from the plan or reductions in future contributions to the plan.

Interacting with this requirement in IAS 19, IFRIC 14 deals with the interaction between a minimum funding requirement and the restriction in paragraph 58 on the measurement of the DB asset or liability.

When a DB plan sponsor applies IAS 19, it must first measure the DB obligation using the projected unit credit method, on the one hand, and fair value any plan assets on the other.

This calculation will produce either a DB asset or liability at the balance sheet date.

Where a plan is in surplus, the sponsor recognises the lower of any surplus and the IAS 19 asset ceiling – that is, the economic benefits available to the sponsoring entity from the surplus.

However, a constituent has asked the committee to consider whether preparers should take account of events that might disrupt the plan unfolding in line with the IAS 19 assumptions when they apply IFRIC 14.

An example would be the trustees of a DB scheme whose future actions could reduce the ability of a sponsor to recognise an asset.

For example, the trustees of a plan might have the power to augment members’ benefits or wind up the plan and purchase annuities.

The committee previously discussed the issue during its March, May, July and September meetings last year.

As for the impact of the proposed amendment, staff noted in their meeting paper that if a plan is closed to accrual of future benefits, “the impact of this issue could be significant”.

This is because, staff continued, the “economic benefits from reductions in future contributions are not available (i.e. economic benefits are available only from a refund of a surplus)”.

Outreach conducted by staff on the likely impact of the changes has “implied that this issue could have significant impacts on some cases and that diversity in practice exists”.

Separately during the meeting, the IASB also tentatively agreed with the recommendation from the IFRS IC to amend IAS 19 to clarify the treatment of plan amendments, curtailments and settlements.

The board confirmed DB sponsors should determine current service cost and the net interest for the remaining period after a plan remeasurement has occurred using the assumptions arising in the remeasurement.

In addition, the board agreed that a sponsor should base the calculation of the net interest charge for the rest of the reporting period on the remeasured net defined benefit liability or asset.

It also clarified the treatment of current service cost arising either before or after a remeasurement.

The board said service cost arising in the current reporting period before a plan remeasurement occurs remains a component of current service cost and not past service cost.

Service cost under IAS 19 is the cost borne by an employer of providing a retirement plan.

The net interest charge is calculated by multiplying the net DB asset or liability by the sponsor’s chosen discount rate.

Subject to confirming that the board and the IFRS IC have complied with formal due process requirements, the board will issue the proposed amendments in a combined exposure draft for public comment.

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