The International Financial Reporting Standards Interpretations Committee has voted through an amendment to its asset-ceiling guidance.

The committee, responsible for interpreting the requirements of IFRSs such as International Accounting Standard 19 (IAS19), Employee Benefits, reached the decision during its 16 September meeting in London.

Advisors who spoke with IPE cautiously welcomed the committee’s proposals, which affects how plan sponsors account for defined benefit (DB) pension obligations.

The experts said changes to the treatment of the IAS19 asset ceiling now appear to be less controversial than they had at first feared.

Charles Rodgers, a consultant actuary with Towers Watson, said: “The concerns around companies in the UK, and possibly elsewhere, taking a multi-billion-pound hit have reduced. The scope [of the changes] is more narrowly focused.”


He continued: “As a result, the likely impact, in the aggregate, is much smaller than people might have feared.”

Rodgers warned, however, that there might be plan sponsors who have interpreted IFRIC 14 in a particular way who could yet discover they are no longer entitled to an unconditional right to a plan surplus.

“For those entities, this could be an issue,” said the Towers Watson expert.

The IFRS approach to pensions accounting is set out in IAS19.

In 2007, the IFRS IC’s predecessor issued IFRIC 14, which interprets the requirements of the pensions standard.

Paragraph 58 of IAS19 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.

And IFRIC14 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 IAS19, 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 IAS19 asset ceiling – that is, the economic benefits available to the sponsoring entity from the surplus.

More recently, 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 IAS19 assumptions when they apply IFRIC14.

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 and July meetings this year.

Based on those discussions, advisers, among them Aon Hewitt in the UK, warned that the potential impact of any changes to IFRIC14 could adversely affect plan sponsors.

Accounting specialist Simon Robinson told IPE: “The approach the IFRS IC appears to be taking now is focused on two quite narrow issues. If they proceed down this route, I expect any changes they make to IFRIC 14 will have virtually no effect.

“My concern earlier this year, based on its discussions, was that the committee could be on the verge of making some far-reaching changes to IFRIC 14. That fear appears to have receded somewhat now we have seen the likely drafting.”

The Aon Hewitt actuary said it was “quite rare” in the UK, the apparent focus of the committee’s discussions, for trustees to have a unilateral power – a super power – to augment member benefits or wind-up the plan by buying annuities with an insurer.

Instead, he said, the committee “seems to be drawing a distinction between a buyout of a plan and a buy-in, which is where the trustees buy the same annuity policy but in their names not the members’ names”.

Robinson continued: “In the case of a buy-in, we expect the committee’s amendments to confirm that is treated as an investment decision like any other investment decision by a sponsor.”

Committee staff noted during the 16 September discussion: “Trustees’ unilateral power to buy annuities is different from the power to wind up a plan and is not enough to affect the asset ceiling by itself.”

The committee’s technical chief, Michael Stewart, said during the meeting: “Where you are enhancing the benefits, you are changing the pension promise, and that’s how I would distinguish between the two. When you are buying annuities, you are not changing the pension promise.”

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