• Agenda decision discussed at May 2006 Board Meeting
• Agenda decision agreed at July 2006 Board Meeting
• Discussed at October 2006 Board Meeting
• Discussed at November 2006 Board Meeting
• Discussed at December 2006 Board Meeting
• Discussed at February 2007 Board Meeting
• Working Group Formed March 2007
• Discussed at March 2007 Board Meeting
• Discussed at April 2007 IASB Meeting
• Discussed at May 2007 Board Meeting
• Discussed at June 2007 IASB Meeting
• Discussed at July 2007 IASB Meeting
• Discussed at September 2007 IASB Meeting
• Discussed at October 2007 IASB Meeting
• Discussed at December 2007 IASB Meeting
• Discussed at February 2008 IASB meeting
• Discussed at March 2008 IASB Meeting
• Discussion Paper published 27 March 2008. Comment deadline 26 September 2008.
• Discussed at November 2008 IASB Meeting
• Discussed at January 2009 IASB Meeting
• Discussed at February 2009 IASB Meeting
• Discussed at March 2009 IASB Meeting
• Discussed at April 2009 IASB Meeting
• Discussed at May 2009 IASB Meeting
• Discussed at July 2009 IASB Meeting
• Discussed at August 2009 Special IASB Meeting
• Discussed at September 2009 IASB Meeting
• Discussed at October 2009 IASB Meeting
• Discussed at November 2009 IASB Meeting
• Discussed at December 2009 IASB Meeting
• Discussed at January 2010 IASB Meeting
• Discussed at February 2010 IASB Meeting
• 29 April 2010 – Exposure Draft Defined Benefit Plans published. Click for More Information
• Discussed at September 2010 IASB Meeting (jump to notes below)
• Discussed by the Employee Benefits Working Group on 27 September 2010 (jump to notes below)
• Discussed at October 2010 IASB Meeting (jump to notes below)
• Discussed at November 2010 IASB Meeting (jump to notes below)
• Discussed at December 2010 IASB Meeting (jump to notes below)
• Discussed at January 2011 IASB Meeting (jump to notes below)
• Discussed at 1-2 February 2011 Special IASB Meeting (jump to notes below)
• Discussed at February 2011 IASB Meeting (jump to notes below)
• Discussed at March 2011 IASB Meeting (jump to notes below)
• 2 June 2011 – Near Final Draft of amendments to IAS 19 published. Click for More Information
• 16 June 2011 – Amended IAS 19 published. Click for More Information

Timetable

• Click for IASB Project Timetable

IASB Project Insights

• A quick overview of this project is available on our IASB Project Insights page

Discussion at May 2006 IASB Meeting

The Board considered a proposal from the staff to consult the SAC and the IASC Foundation Trustees on adding a project to its agenda on pensions. The draft proposal was not available to observers.

The Board was asked for their preliminary views on which of the following possible project plans should be prepared and presented to SAC and the IASC Foundation:

• Option A. A long-term project, with targeted set of amendments to pensions, which in the first phase would be constrained by what the Board could finalise within a four-year period. It was explained that this would be the timeframe because of the due process, but also because this would open up for a finalisation of this part of the project within the timeframe of most of today's Board members.

• Option B. A limited-scope project, very similar to phase 1 of the project the FASB has addressed. Phase 1 of the FASB project is however limited, as it only addresses accounting in the balance sheet, while the income statement would remain untouched. The FASB currently expects to have its project finished by the end of 2006.

The discussion highlighted that Board members had more appetite for option A as an approach. However, the Board pointed out that if they were to take on a project, constituents must be informed that the project will address all issues on pensions, and that would end up in a new standard. The project would then be split into different phases where the Board would pick some issues that would be dealt specifically in during the first phase.

The Board decided that the staff should write a proposal for a long-term project. This proposal, which would be addressed for SAC and the IASC Foundation for an approval to be taken on the Boards agenda, should also include what the Board think should be dealt with within the different phases of the project.

Discussion at July 2006 IASB Meeting

The Board considered a formal proposal to add two projects to the Board's technical agenda. The staff noted that the proposal had already been discussed with the SAC and the Trustees, as required by the Board's Due Process Handbook. The two projects would represent:

• (a) a targeted series of improvements to IAS 19, to be completed within a four-year period; and
• (b) a comprehensive review and revision of the existing pension accounting model, to e undertaken in conjunction with the FASB.

The Four-year Project

The basic pension accounting model would remain unchanged.

The Board would focus on removing the 'add-ons' to the basic model, in particular the smoothing and deferral mechanisms, such as the corridor, the assumed rate of return on plan assets, and the recognition of gains and losses. The Board would reconsider the definitions of defined benefit and defined contribution plans, with special attention being given to cash-balance plans. In addition, the Board would consider providing additional guidance on settlements and curtailments and consider presentation of amounts related to post-employment benefits in the financial statements. The staff expressed reservations as to whether the Board could reasonably address settlements and curtailments in the time allotted and noted that this would be the first candidate for removal if the project timetable came under strain.

Comprehensive project

The comprehensive project was already underway at the FASB. The project plan would ensure that the IASB was (during the four-year project) kept up-to-date with developments, such that any differences of opinion could be identified quickly. The Board agreed unanimously to add the post-employment benefits project to its technical agenda. They also agreed with the approach, although it was evident that several Board members were sanguine about the four-year plan.

Working group

The Board agreed that it would be advisable to appoint a working group to assist it with the four-year project. Presentation matters would be referred to the existing Financial Statement Presentation Working Group. Thus, the new working group would need pension experts, actuaries, etc.

Discussion at the October 2006 IASB Meeting

No decisions were taken during this session.

Among the key issues that the Board will address in its project on employee benefits are:

• accounting for 'intermediate risk plans' (an 'intermediary risk plan' is a pension plan where the risks are shared between the employer and the employee); and
• the definition of defined contribution and defined benefit plans.

At the October meeting the Board held an educational session that covered how different pension schemes attribute risk between the employer and employee, and the measurement issues that are created. The session was split in two parts. Tim Reay from Hewitt (UK) briefed the Board on types of risks in intermediate plans and also presented findings from a research study on intermediate plans. Geert De Ridder from Deloitte (Belgium) held the second session, which focused on measurement problems in accounting for defined benefit plans when the risks are shared as in intermediary risk plans.

The Board debated the discontinuity in measurement that may arise between 'pure' defined contribution plans and defined contribution plans with a minimum guarantee. (Belgian law requires defined contribution plans to have minimum guaranteed rates of return). This plan would be classified as a defined benefit plan under IAS 19, which would create measurement differences if service costs deviate from contributions during the plan.

Discussion at the November 2006 IASB Meeting

In July 2006 the Board decided to form a working group on Employee Benefits which would help the IASB by providing practical input on ideas, concepts and proposals developed by the IASB.

At its November meeting the Board discussed two papers that consider revisions to IAS 19 that are intended to provide short term improvements to the standards. These papers and the recommendations would be discussed with the working group in due course.

The intention of this session was for the Board to give preliminary views on what the staff should explore in a future Discussion Paper.

Recognition of changes in defined benefit pension plans

Actuarial gains and losses

The Board discussed whether actuarial gains and losses from changes in actuarial assumptions should be recognised in full in the period in which they occur. This deals only with the issue of recognition, not where to recognise the gains and losses.

The Board agreed that all actuarial gains and losses should be recognised immediately when they occur, and that no gains and losses should be deferred.

Past service cost

Next the Board discussed whether unvested past service costs should be recognised immediately (vested past service costs are already expensed immediately according to IAS 19).

All Board members supported the proposal to require all past service costs, including unvested service costs, to be recognised immediately.

Presentation of changes in defined benefit pension plans

The previous paper presented to the Board considered whether changes in defined benefit plans should be recognised immediately or not, while the second paper considered how these gains and losses should be presented when recognised. The Board discussed whether gains and losses on the following items should be recognised directly in profit and loss when they rise.

• Service costs (past and present)
• Interest cost
• Return on plan assets
• Actuarial gains and losses

Three different alternatives were presented to the Board:

• The staff recommendation that all components should be recognised directly in profit and loss.
• A second alternative which would recognise all components, other than changes in fair value of plan assets, in profit and loss. Changes in fair value of plan assets would be recognised in other recognised income and expense.
• A third alternative that would only require past and present service cost to be recognised in profit and loss.

As a preliminary view the majority of Board members indicated that all components should be recognised directly in profit and loss when they rise.

However, from the perspective of a the Discussion Paper, Board members said that if it was going to present alternatives (such as the alternatives above) they would have to be worked through in such a way that they are alternatives that the Board would consider if respondents were negative to the Board's initial proposal (ie that they not just are alternatives to give alternatives).

The Board decided that the staff should explore further the alternatives set out by the staff, and that the Board at a later meeting would decide whether to include these as alternatives in a Discussion Paper.

Discussion at the December 2006 IASB Meeting

Cash balance and similar plans

The staff introduced three possible approaches the Board might take in determining the most appropriate accounting treatment for cash balance and similar plans:

• The approach in Draft IFRIC Interpretation D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions
• An embedded derivative approach
• A deconstruction approach

Several Board members noted that the reason that the IFRIC could not conclude on D9 was because they were constrained by the Standard as written. These Board members saw the issue as one with a very clear cut: if the sponsor guarantees the asset side of the transaction, it has written a derivative. If the sponsor guarantees anything to do with salary, benefits, or service, the plan is a defined benefit plan.

The staff was concerned about plans with a guaranteed return on assets. For example, if a plan contains a benefit promise of ten per cent of salary plus a guaranteed return of four per cent, the staff suggested this was a mix of defined contribution (ten percent of salary) and defined benefit (the guaranteed four per cent return).

Board members disagreed. In their view, the plan is still a defined contribution plan. If the plan earns more than four per cent and this is not available to the plan participants, the plan has current income in profit or loss; if the plan earns less than four percent, it has a current loss.

The Board agreed that the staff should explore splitting asset risk from salary-service-benefit risk, and that anything not captured by asset risk should be accounted for in accordance with IAS 19.

Discussion at the February 2007 IASB Meeting

Cash Balance and similar plans: Definition of benefit promises

The Board had an inconclusive discussion about how to account for cash balance plans in the context of the current requirements of IAS 19. The staff recommended that IAS 19 be amended to identify three categories of benefit promise:

• defined contribution,
• defined benefit and
• asset-based promises. An asset-based promise would be one whose amount changes in response to the change in an asset or index, other than assets or indices that yield fixed increases.

Several Board members were unhappy with the staff proposal, which some thought added more complexity to IAS 19, making it 'almost Byzantine'. Board members proposed an alternative approach that would bifurcate an asset-based pension promise into the contribution and the guarantee/derivative promise. Put another way, everything that is related to salaries and service would be accounted for under IAS 19; any guarantee with respect to returns during the accumulation phase would be accounted for under IAS 39.

The Board discussed the alternatives, noting that there are strong similarities between asset-based promises and both some types of insurance contracts and deposits. The staff agreed that they were not in a position to comment on the model proposed during the meeting and would bring this issue back at a subsequent meeting.

Recognition of changes in defined benefit pension obligations

The Board agreed that the forthcoming Discussion Paper on employee benefits should present the presentation proposals in the context of IAS 1 – that is, possible presentation changes that might result form the financial statement presentation project would be ignored for the purposes of the employee benefits DP.

Presentation issues

The Board's preliminary view is that all changes in post-employment benefit obligations and in the value of plan assets should be presented in profit or loss in the period in which they are incurred.

The Board discussed a staff proposal that the forthcoming Discussion Paper should present at least one alternative. One alternative proposed by the staff (Alternative 2 in the Observer Notes) was withdrawn at the meeting. The Board discussed two other proposals:

• Only service costs would be presented in profit or loss; all other changes in the benefit obligation and plan assets would be presented as components of income outside profit or loss.
• Report price variances (including changes in the discount rate applied to the closing balance of the pension obligation and changes in the fair value of plan assets) in income but outside profit or loss; all other recognised changes in the pension obligation would be recognised in profit or loss.

Some Board members were opposed to presenting any alternative to the Board's preliminary view. Others disagreed, noting that eliminating all smoothing mechanisms would be controversial. In addition, other Board members noted that a consistent message received in their work on financial statement presentation was that users want a presentation that distinguishes how the business is financed (or funded) from all other activity.

The Board developed an alternative that is a hybrid of the two proposals above. Under this approach, all changes in the post-employment benefit obligations and in the value of plan assets would be reported in comprehensive income. All actuarial gains and losses, other than those arising from changes in the discount rate, would be reported in profit or loss. Actuarial gains and losses arising from the change in the discount rate and returns on plan assets would be reported in comprehensive income outside profit or loss. This alternative will be included in the forthcoming discussion paper.

March 2007: Working Group Formed

In March 2007, the IASB formed an Employee Benefits Working Group to provide expert advice in its project on post-employment benefits. Working group members include people with extensive practical experience in the operation, management, valuation, financial reporting, auditing or regulation of a variety of post-employment benefit arrangements. The members and official observers are listed below. Click for Press Release (PDF 88k).

Discussion at the March 2007 IASB Meeting

The Board discussed how to address the financial statement presentation of gains and losses arising on defined benefit plans in the Discussion Paper (DP).

The Board unanimously decided without much discussion that the preliminary view for the DP is that all gains and losses on defined benefit post-employment plans should be recognised in comprehensive income. It appears unlikely that this view is going to be revised.

The Board then discussed three approaches regarding the presentation of these gains and losses in the statement of recognised income and expense including alternatives that would display some components outside net income but in other recognised income/expense.

Approach 1: All in profit or loss

This approach reflects the Board's preliminary view at the February 2007 meeting that all changes in post-employment benefit obligations and in the value of plan assets should be presented in profit or loss in the period in which they incur.

Approach 2: Financing approach

This approach presents the costs of service in profit or loss. All other costs are reported as consequences of deferring payment of employee remunerations and financing that deferred payment. Accordingly:

• Service costs, and the gains and losses associated with them are recognised in profit or loss. Thus, service costs, and actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate would be recognised in profit or loss.
• All other changes are recognised outside profit or loss. This includes interest cost, changes in the discount rate and all changes in plan assets.

Approach 3: Remeasurement approach

This approach presents only those changes arising from changes in financial assumptions outside profit or loss. Accordingly, profit or loss would include service cost, interest cost, actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate, dividends received on plan assets, and interest earned on plan assets (using the current rate inherent in the fair value).

The three approaches can be illustrated as follows:

Approach 1 was reaffirmed as the preferred view by a majority of Board members. However, some Board members acknowledged that many constituents would not like the approach and 'that the world is not yet ready for it'.

No final decision was made but it was decided to include all three approaches in the DP. The approaches should then be discussed at a future meeting considering the responses received

Discussion at the April 2007 IASB Meeting

Cash Balance and similar plans: Treatment of benefits with fixed and inflationary increases

The Board had a lengthy and wide-ranging discussion about the classification of benefit promises into the three categories: defined contribution, defined benefit and asset-based promises.

As a result the Board reaffirmed that a defined contribution promise is one for which the entity has no further obligation in respect of current and prior periods once the defined contributions have been paid into a separate fund. Alternatively, if the entity is still subject to risks regarding past services the promise is a defined benefit promise.

There seemed to be a consensus that any guarantee promise with respect to returns included in the defined benefit or defined contribution promise should be carved out and accounted for under IAS 39.

The question whether the kind of guarantee can influence the categorisation into defined benefit or defined contribution promise was raised but postponed for discussion at a future meeting.

Settlements and curtailments

Presentation of gains or losses

The Board discussed the presentation of gains and losses on settlements and curtailments under the three approaches presented in the March 2007 meeting. These are:

• Approach 1: All gains and losses recognised in profit or loss
• Approach 2: Financing costs recognised outside profit or loss
• Approach 3: Changes arising from changes in financial assumptions recognised outside profit or loss

The Board reaffirmed that approach 1 is the preferred view. According to the nature of this approach also gains and losses on settlements and curtailments would be shown in profit or loss.

By a majority of 10 votes the following decisions were made with regard to approaches 2 and 3:

• Gains and losses on curtailments represent service costs and are therefore to be shown in profit or loss under both approaches.
• Gains and losses on settlements (after having remeasured the obligation in accordance with paragraph 110 of IAS 19) should be shown outside profit or loss as they represent finance costs (approach 2) and changes in financial assumptions (approach 3) respectively.

Curtailments and negative past service costs

The Board discussed an issue referred by the IFRIC, namely, whether plan amendments that reduce benefits are curtailments or negative past service costs.

The staff recommended amending IAS 19 Employee Benefits such that the notion of negative past service costs is eliminated. Those amendments would treat plan amendments that improve benefits as giving rise to service costs (past or current). All plan amendments that reduce benefits would be curtailments. The proposed amendments were omitted from the observer notes.

Some Board members disagreed with the staff proposal and pointed out that the amendments of IAS 19 should focus on the distinction of future and past service cost – that is, that curtailments are reductions in future service cost and that the concept of past service cost relates to positive and negative amendments of past service cost. One Board member mentioned that in practice there are amendments to plans that result in negative past service costs but are not curtailments.

This issue was pushed back to the staff.

However, the Board unanimously agreed to address this issue as part of the Annual Improvement Process 2006-2007.

Discussion at the May 2007 IASB Meeting

Definitions of defined benefit promises

Based on the comments made at the meeting in April the staff presented the following revised proposed definitions and measurement features of the three benefit promises:

• A defined contribution benefit promise obliges the employer to pay specified contributions to a separate entity (a fund). Payment by the employer of those specified contributions extinguishes the obligation. These benefit promises are accounted for in accordance with current IAS 19 requirements for defined contribution plans.
• A defined return promise (formerly described as 'asset-based') is comprised of a contribution requirement and a promised return on those contributions.

The contribution requirement obliges the employer to pay specified actual or notional contributions to an actual or notional fund. Payment by the employer of those specified contributions extinguishes that obligation.

The promised return component obliges the employer to provide a defined return on the specified contributions. That defined return is linked to the change in an asset or index.

The employer's liability for the contribution requirement is measured as the sum of the accumulated unpaid contributions. The employer's liability for the promised return component is measured as the fair value of the promised return less any plan assets available to satisfy that liability.

All other benefit promises are defined benefit. Typically, defined benefit promises change in line with service or salary or include demographic risks to the employer while the benefit is in payment. These benefit promises are measured in accordance with the current IAS 19 requirements for defined benefit plans.

The Board generally agreed to the proposal. Suggestions to improve the wording will be provided to the staff offline. The following issues were discussed in detail:

• Definition of defined return promises: 'notional fund'

  The Board agreed to clarify that 'notional' means that contributions to the fund are deferred; the fund itself is not notional.

• Measurement of the components of defined return promises

  Some Board members raised the question whether the contribution component should also be measured at fair value, that is, taking into consideration the credit risk of the entity for notional contributions. The majority of Board members expressed the view that this component is a 'defined contribution piece' and should be measured in accordance with current IAS 19 requirements for defined contribution plans.

Finally, the Board unanimously agreed to the staff proposal that plan assets and the promised return component should be measured at fair value while the contribution component should not.

Promises with guaranteed fixed returns compared to salary-related promises

The Board decided that salary-related promises that can be expressed wholly in terms of contributions based on current salary should be treated as defined return. Salary-related promises that cannot be so expressed should be classified as defined benefit.

Accordingly:

• benefit promises with guaranteed fixed returns are classified as defined return,
• current salary and full career average benefit promises are classified as defined return,
• other salary-related promises, when the benefit earned in previous years is affected by future salary increases, are classified as defined benefit.

Curtailments and negative past service cost

The Board continued its deliberations on an issue referred by the IFRIC, namely, whether plan amendments that reduce benefits are curtailments or negative past service costs.

The Board decided with a majority of 10 votes that paragraph 98(e) of IAS 19 Employee Benefits should be interpreted in a way that if a plan amendment results in reduction in benefits for past and future service, the reduction relating to future service is a curtailment (not past service cost) while the reduction relating to past service is negative past service cost.

One Board member noted that it would be desirable to eliminate the need to allocate the reduction in defined benefit obligations between past and future service but that this would go beyond a clarification of IAS 19.

Additionally, the Board unanimously decided to replace the term 'material" by 'significant' in paragraph 111(a) and 111(b) of IAS 19 and to delete the third sentence in paragraph 111 of IAS 19 ('An event is material enough...') as it was considered to be redundant.

The staff was asked to draft an amendment to be included in the annual improvement process.

Discussion at the June 2007 IASB Meeting

Benefit allocation for defined return promises

At its May 2007 meeting, the Board decided that benefit promises should be categorised as defined benefit, defined return, or defined contribution. The Board tentatively decided that a defined return promise had two components:

• (a) A contribution component that obliges the employer to make specified contributions. Those contributions may be funded or unfunded.
• (b) A promised return component that obliges the employer to provide a specified return based on the contribution component. The specified return may be an actual return on contributions or a hypothetical return on notional contributions.

It may be a fixed return, or it may refer to specified assets or an index.

The Board had also decided that the contribution component is measured as the sum of the accumulated unpaid contributions, while the promised return component is measured as the fair value of the promised return less any plan assets available to satisfy that liability. The staff paper recommended continuing to treat unvested benefits under a defined return promise as giving rise to a liability in phase I of the project. This question should only be addressed fundamentally in phase II.

The contribution component of the benefit promise would be allocated to periods of service in line with the benefit formula, even if the benefit formula specifies a materially higher level of contributions in later years. When asked by the Board, the staff clarified that this approach differs from the treatment in the present IAS 19 relating to 'backloaded' defined benefit promises, where the benefits are spread on a straight-line basis. Under the envisaged approach, where benefits are 'skewed' to later service periods, a liability would be recognised in line with the benefit formula. If, for example, the benefit formula stipulated that contribution would be made in twenty years time for 5 per cent of the employee's salary for each of the 20 years of service, a liability would only be recognised in year 20.

One Board member suggested that for defined return promises, the approach in IAS 37 would justify such an approach conceptually. The Board was in agreement that the 'straight-lining' approach relating to 'backloaded' defined benefit promises was an anti-abuse feature built into IAS 19 to prevent entities from not recognising (potentially material) defined benefit obligations in the early years. As such a feature was not part of the accounting for defined contribution plans, the existence or non-existence of a vesting period would lead to different results in the accounting for defined contribution and define benefit promises. The staff argued in favour of preserving the present accounting approach during phase I of the post-employment benefit project but perhaps change it in phase II. After a lengthy discussion, the chairman called for a hands-up vote. Only one Board member indicated disagreement.

Benefit allocation for defined benefit promises

IAS 19 requires that the benefit in defined benefit plans is attributed to periods of service in accordance with the benefit formula, unless the benefit formula would result in a materially higher level of benefit allocated to future years. In that case the benefit is allocated on a straight line basis. In the deliberations leading to IFRIC D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions, the IFRIC considered whether expected increases in salary should be taken into account in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years. The staff paper recommended that the Board asked the IFRIC to develop a separate Interpretation on whether, for defined benefit promises, expected increases in salary should be taken into account in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years.

For defined return plans, as outlined above, the Board tentatively agreed not to straight-line backloaded plans but allocate benefits in accordance with the benefit formula. In the interest of sticking to the timeline of phase I, the Board asked whether or not this issue could be dealt with again by the IFRIC, but agreed not to proceed with this issue in phase I and to tentatively recommend to IFRIC not to deal with it either, despite noting the inconsistency between the approach taken for defined return promises and not proceeding to analyse a possible alternative accounting for backloaded for defined benefit promises. One Board member indicated he might be able to provide the staff with an example which could perhaps help solving the issue.

Measurement of the contribution liability

At the May meeting, the Board concluded that defined return promises are comprised of two components: a contribution requirement and a promised return on those contributions. The Board tentatively agreed that the measurement of the balance sheet liability in respect of each component would be as follows:

• (a) contribution requirement – the amount of any unpaid contributions
• (b) promised return – the fair value of the guaranteed return less any plan assets available to satisfy that liability

However, one Board member pointed out that measurement of the two components is inconsistent because it makes no allowance for the time value of money for the contribution requirement but makes an allowance for the time value of money for the promised return on those contributions.

The Board discussed and rejected the possibility of measuring the contribution requirement at fair value. But the staff thinks that discussion did not fully consider the effect of the time value of money on contributions that will not be paid for a long period of time, for example notional contributions to an unfunded plan. By contrast contributions in a defined contribution promise must generally be paid relatively soon after the period to which they relate. As a consequence, the staff had identified two options for taking the time value of money into account:

• (a) specify a discount rate to be used, or
• (b) require measurement of the contribution at fair value.

While the staff acknowledged that option (a) would avoid potentially lengthy debates on what the appropriate discount rate should be, it recommended to the Board measuring both the contribution requirement and the promised return at fair value.

While fair valuing the promised return component was generally accepted, as it constitutes a financial instrument, there was a lengthy discussion between the staff and the Board about the examples in the staff paper on the measurement of the contribution requirement. One Board member argued that requiring fair value measurement of the contribution requirement would lead to unnecessary complexity. Another Board Member remarked that he did not think taking the time value of money into account was really necessary. However, another Board member maintained that while fair valuing the contribution requirement was not required, as otherwise the Board would have to change paragraphs 52 and 53 of IAS 19, taking the time value of money into account could be achieved by discounting the contribution requirement by the discount rate required by IAS 19 for the measurement of defined benefit promises. No decisions were taken on this matter.

Inflation

Based on the proposed classification of employee benefit promises into defined contribution, defined return and defined benefit promises, the staff had been asked to clarify the classification of benefit promises linked to inflation. The staff recommended that:

• (a) Benefit promises with a promised return on contributions is are linked to wage inflation are classified as defined benefit.
• (b) Benefit promises with a promised return on contributions that is linked to assets or indices, eg. consumer price inflation, are classified as defined return.

The staff had drawn up the following illustrative example:

Plan A: For each year of service, the employee will receive a lump sum benefit equal to 5% of revalued salary. The revalued salary is the salary, in the year in which it is earned, increased in line with the increase in the national average earnings index over the period to retirement.

The staff argued that such a plan should be classified as defined benefit because:

• such a benefit promise is, in substance, a salary-related defined benefit promise, even if the salary to which it is related is national average earnings not the employee's actual salary.
• constituents have not raised problems in measuring benefit promises linked to wage inflation indices using the projected unit credit method in IAS 19.
• classifying these promises as defined return would result in a significant change in the accounting for many salary-related benefit promises. In particular, a defined return classification would require the employer to fair value a salary-related promise.

In the ensuing discussion, two Board members openly disagreed with the staff conclusions, arguing that such plans should be treated as defined return promises. The rest of the Board seemed to be of the same opinion. No decisions were taken on this matter.

Components of the defined return cost

The staff recommended that the change in the liability for the DR promise be disaggregated as follows:

• service cost being the initial recognition of the liability for the contributions payable for the year plus the initial fair value of the promised return on those contributions
• fair value gain/loss arising on the subsequent remeasurement of the liabilities.

1. market factors (such as risk-free interest rates),
2. cash receipts and payments,
3. changes in credit quality,
4. the passage of time,
5. demographic experience and
6. estimation methods or valuation models.

However, the staff argued that further disaggregation of the change in fair value of the liability into separate components would add unnecessary complexity without the benefit of providing additional decision-useful information, as had been shown by research during other projects. The Board by and large agreed with this conclusion although no formal vote was taken.

Discussion at the July 2007 IASB Meeting

Feedback from Employee Benefits Working Group Meeting

The first meeting of the Employee Benefits Working Group was on 5 June 2007. The staff informed the Board of the discussions by the Working Group, which had considered the following topics:

1. the Phase 2 project;
2. elimination of deferred recognition for defined benefit promises;
3. presentation alternatives, including three approaches previously discussed by the Board;
4. definitions of benefit promises; and
5. the classification of promises with fixed returns.

Topics 2 and 3 were discussed by the Board.

Unvested past service cost - elimination of deferred recognition for defined benefit promises

The staff asked the Board to confirm that in Phase 1, unvested past service cost would be recognised immediately in the period the amendment occurs. There were no objections by the Board.

Presentation of defined benefit costs

The Working Group had discussed the three approaches previously discussed by the Board, favouring approach 3. However, the Board was asked to modify approach three for inclusion in the planned discussion paper so that the following items would be recognised in profit or loss:

• a. service cost;
• b. interest cost;
• c. actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate; and
• d. imputed interest income on plan assets determined using the discount rate determined by reference to market yields at the balance sheet date on high quality corporate bonds.

• e. Actuarial gains and losses arising from changes in the discount rate; and
• f. changes in the fair value of plan assets other than those in (d)

There was widespread reluctance by the Board to accept a modified approach three as favoured by some user representatives on the Working Group. The idea of recognising imputed interest based on high quality corporate bonds met with particularly stiff opposition, as many Board members seemed to want to eliminate the use of expected returns on plan assets altogether. One Board member, when asked if he preferred the original approach 3 over the proposed modification, said 'this is like asking me if I prefer to live or die.' There seemed to be general agreement with the chairman's analysis that the discussion paper should contain all three approaches in their original form and that the problems with using each approach should be outlined.

Cash balance and similar plans – Definitions of benefit promises

The staff asked the Board to finalise definitions of the three categories of post-employment benefits that had been discussed during this project and at previous Board meetings:

• defined benefit;
• defined contribution; and
• defined return benefit promises.

The staff had proposed the following revised definitions:

• defined contribution promise: a post-employment benefit promise that obliges the employer to pay specified contributions to a separate entity (a fund). Payment by the employer of those specified contributions extinguishes the obligation.
• defined return promise: a post-employment benefit promise, which may be funded or unfunded, that obliges the employer to pay a benefit comprised of:
  • a contribution requirement based on current salary; and
  • a promised return on the specified contributions that is linked to the change in an asset or index.
• defined benefit promise: a post-employment benefit promise that is neither defined contribution nor defined return.

Other Board members criticised the notion that for a plan to qualify as a defined contribution promise, it would have to be funded. Board members noted that in some jurisdictions many defined contribution schemes were unfunded. However, leaving the plan unfunded would introduce a guaranteed return element into the lump-sum (or fixed amount) payment promise, even though that return might be zero per cent, the staff argued. The Board asked the staff to clarify the wording on the importance of the timing of funding for the distinction between defined contribution and defined return promises. The staff agreed to do so. The staff also highlighted that any plan in which the contribution could be expressed in terms of current salary (such as genuine current salary and career average plans) would be classified as defined return promises.

Finally Board members asked if it was possible to collapse defined contribution and defined return promises into a single category. The staff argued that one would have to be very careful with the wording of such a broader category, so as to reassure entities currently making defined contribution promises that nothing would change for them. The chairman asked the staff to revise the definitions, collapsing defined return and defined contribution promises into a single category (which would not be called defined contribution so as to emphasise that there had been a change of definition) and defined benefit promises. In particular, the staff was asked to clarify the wording on funding to emphasise that promised returns related to actual and notional contributions.

Cash Balance and similar plans - Benefit promises with 'higher of' options

The Board discussed staff proposals on how to account for benefit promises that have maximum or minimum limits placed on them (also called 'higher of' options). Under current proposals, such promises would not be classified as either defined contribution or defined return and as such would be accounted for as a defined benefit plan using the projected unit credit method, thus ignoring the value of the 'higher of' option.

The staff had proposed to bifurcate such plans into a defined benefit element to be accounted for under IAS 19 and a 'higher of' option element to be accounted for at fair value. Changes in the liability in respect of the 'higher of' option would be disaggregated into a service cost element equal to the initial recognition of the 'higher of' liability and a fair value gain/loss element equal to the subsequent remeasurement of that liability. Both elements would be presented in profit or loss.

One Board member pointed out that in his home jurisdiction, such plans would be accounted for as two plans: A defined benefit plan accounted for as such and a separate 'higher of' plan measured at the incremental value of the 'higher of' promise. The staff agreed to investigate the accounting of such plans to see whether there was any merit to adopting a similar approach under IFRSs.

The Board discussed the valuation method for 'higher of' options. There was disagreement whether such options should be measured at fair value and what fair value meant in this context. It was suggested that entities should estimate the sum of the present value of future cash flows associated with the option, making assumptions about their potential volatility. No decisions were taken.

Vested benefits payable at the date when an employee leaves the entity

At the Board's June meeting, a Board member raised the question of whether, for defined return promises, an additional liability should be recognised if:

• vested benefits are payable at the date when an employee leaves the entity; and
• the amount payable is greater than the amount that would otherwise be recognised in the balance sheet for those benefits.

For defined return benefits, this is likely to occur when the rate of return promised to the employee is less than the discount rate used to determine the present value of the contribution requirement. The staff had recommended the IASB should not require an additional liability to reflect the amount that an employer would have to pay an employee leaving service before retirement, even though this might be considered inconsistent with the requirements of paragraph 49 of IAS 39, which states:

The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.

However, the staff had argued that such an approach should not be applied in Phase 1 of this project as it would result in different accounting for benefits depending on whether such benefits are vested or unvested and as no additional liability is required for other post-employment benefits.

Some Board members asked the staff to clarify the language in the agenda paper. Moreover, it was suggested that staff should consider whether or not such 'walk away payments' would constitute a liability under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. One Board Member demanded that the staff should undertake further research as to how widespread the problem was in practice. The staff agreed. The chairman proposed going along with the staff's present approach and discuss the issue again at a later stage. Even though no formal vote was taken, there seemed to be agreement among the

Board members to move forward as proposed.

Components of a defined return promise and their measurement

The Board had defined a defined return promise as having two components, comprising:

• a contribution requirement based on current salary; and
• a promised return on the specified contributions that is linked to the change in an asset or index.

In terms of measurement, the staff had recommended that the contribution requirement should include both paid and unpaid contributions, with any payments being recognised as plan assets. The contribution element would be measured based on the specified contributions and using the IAS 19 discount rate, while the return element would be measured at fair value, assuming that benefits for past service would not change. The liability for benefits in payment should be measured using the projected unit credit method discounted at the IAS 19 discount rate.

Distinction between contribution and return element

Board members were not united in their assessment of the staff's analysis that to ensure the liability for the contribution requirement is always complete, whatever the funding level, was to consider the plan liabilities and plan assets separately. Some Board members disagreed over whether a difference between the contributions paid and the promised return constituted a contribution liability or a return liability, although the staff seemed to suggest that they regarded such differences as part a return liability.

Performance risk

The Board discussed the staff's proposals on how to account for performance risk, i.e. the risk that the entity defaults on its obligation reflected both the credit risk of the entity and the possibility that the entity will choose not to meet its obligation. It had been argued that it might sometimes be difficult to distinguish credit risk from other elements of performance risk. Moreover, whether fair value reflects performance risk is an unresolved question in IFRSs. As a consequence, the staff had abandoned its earlier proposal to measure all components of defined return promises at fair value, arguing instead that the contribution element should be measured as outlined above.

The Board discussed the two elements of performance risk outlined by the staff. There was a debate about whether the notion that fair value included the probability of default (credit risk), while excluding the propensity of entities to force employees into accepting lower benefit levels. It was suggested that the staff should undertake more research in respect of whether it was always possible to distinguish credit risk from the risk that entities choose not to meet their obligations.

Benefits in payment

The Board discussed the staff proposal to stop treating the components of defined return promises separately once the plan had reached its payout phase and use the projected unit credit method instead. Even though the staff acknowledged that having three different measurement attributes for defined return plans was not ideal, this was nevertheless necessary to emphasise that there was no essential difference between defined return and defined benefit plans in terms of cash flows during the payout phase.

Where a defined benefit promise and a defined return promise had identical payout streams, the staff had recommended 'resetting' the defined return promise to the same final amount as the defined benefit plan. A defined return promise measured at CU 2,000 on the date of retirement that offered identical payouts compared with a defined return promise valued at CU 2,500 would thus be remeasured CU 2,500. Both plans would then be measured using the projected unit credit method and the IAS 19 discount rate throughout the payout phase. Board members disagreed over whether this was conceptually superior to the opposite method. Due to the limited time available, the chairman decided to postpone a decision on the matter.

Discussion at the September 2007 IASB Meeting

Cash balance and similar plans - Definitions of defined promises

At the July meeting the Board discussed the definitions for three categories of benefit promises - defined benefit (DB), defined contribution (DC) and defined return (DR). The Board suggested some changes to the proposed definitions. In particular, the Board noted that DC promises are a subset of DR promises and asked whether these two categories could be combined. Furthermore, one Board member questioned the rationale for using the DB category as the residual category instead of the DR category.

At this meeting, the Board discussed the following three issues: the clarified definition of DR promises, the combination of DC and DR promises and the classification of the residual category.

Clarification of the definition of defined return promises

The objective of the amended definition for DR promises was to clarify the following matters:

• the classification of the post-employment benefit promises is made by reference to the way the benefit is accumulated. The way in which the liability for post-employment benefit promises is settled does not affect the definition.
• the contribution requirement must be independent of future salary increases.
• the benefit promise classification should focus on whether or not it can be expressed independently of future salaries. The same benefit promise may be described as current salary (independent of future salaries) or career average (dependent on future salaries).
• the benefit promises of fixed amounts to be paid at future date are DR.
• the employer's liability for any negative returns on contributions paid is included in the promised return component.
• some benefit promises may include a combination of any two or more types of promised returns.

The proposed amended definition of a DR promise is 'a post-employment benefit accumulated through a contribution amount which, for any given period, can be expressed independently of the salary that will be earned after the end of that period.

For some DR promises the entity may have an obligation for the promised return on the contribution amount. The promised return is a guaranteed fixed return, the change in the value of an asset, or group of assets, the change in value of an index, or any combination of these'.

The above definition for DR leads the Board into a lengthy debate about the characteristics and features of DC, DR and DB plans. The Board was reminded that the objective of DR category was to capture schemes where specified contributions (independent on future salaries) paid by the employer and there is a promised return on assets. The Board finally decided to proceed with the proposed definitions and to clarify in the discussion paper what the Board tried to capture in order to obtain the respondents view on the subject. The Board considered that they have given their 'best shot' on these definitions.

Combining defined contribution and defined return promises

At the July meeting, the Board asked the staff to consider whether DR and DC promises should be combined into one category. The only difference is that, for DC promise, the entity has no further obligation once the contributions are paid, whereas for DR promise, the entity has an obligation for a promised return. Therefore, the DC promises are simply a special case of DR promises.

The Board acknowledged that sometimes it is difficult to distinguish between the two. Some DC promises allow the employer to delay payment of contributions to the plan for a specified period. The employer will have an obligation for the delayed contributions and, possibly, the promised return on those contributions. This could lead to have some promises categorised as DC if the contributions have been paid or DR if they have not yet been paid.

The Board decided to combine DC and DR promises as DR promises. Otherwise, either benefit promises could have their categorisation changed depending on when the employer pays the contributions, or an arbitrary rule that sets the period of time within which the contributions must be paid. Furthermore, the Board acknowledged that in some situations it is difficult to distinguish between DC and DR plans, and therefore if both schemes are captured under the same category, DR, this simplify the issue as the underlying accounting principles would be the same.

The residual category

The Board decided that the residual category should remain DB. The Board noted that there is a residual collection of benefit premises which have not yet been considered (e.g. post-retirement medical plans). Furthermore the scope of this Phase I is limited to the work that can be done in a four year period and any changes should be limited to the troublesome plans that are clearly identified.

Measurement of the liability for defined return promise

Based on previous decisions made by the Board, the staff has identified different approaches for accounting for the contribution requirement and premised return in a DR promise. The staff proposed that the employer's liability should be measured at fair value.

There was some disagreement among the Board members regarding whether or not the proposed measurement should effectively be called fair value. The Board view was that the contribution requirement and the promised return that are being measured are based on the assumption that there is no change in the benefit promise. Therefore, the Board directed the staff to a 'building blocks' approach for the measurement of this DR promise and considered that this should be the basis for the discussion paper. These building blocks should explain the key principles in the measurement of the DR promise.

Measurement of benefits in the payout and deferment phases

In most post-employment benefit arrangements, the promises made to employees could be viewed as having three distinct phases: accumulation phase, deferment phase and payout phase. During the accumulation phase, the measurement of benefits will differ between DR and DB schemes.

A question is whether the measurement should change once we entered into the deferment or payout phase, as this could lead to the recognition of a gain or loss on the plan liabilities on retirement because of the change in measurement attribute. The Board has a lengthy debate on the subject and their preliminary view was that no gain or loss should be recognised once we entered into the deferment or payout phase. This is consistent with the current IAS 19 accounting for DB where PUC method is used during the accumulation and deferment/payout phase. The Board could not really conclude on the subject and therefore decided to bring this back at the next meeting.

Discussion at the October 2007 Board Meeting

Discussion paper issues relating to defined benefit promises

At the September meeting the Board noted that post-employment benefit promises have three phases:

• An accumulation phase during which the employee renders service in exchange for the promise of remuneration in the future. This phase ends when the employee ceases employment.
• A deferment phase, which occurs after the employee has completed employment but before the benefit payment has started (eg during a pension deferment period or a sickness waiting period).
• A payout phase during which the employer's liability to the employee for previously deferred remuneration is settled.

The two questions raised at that meeting were:

• Which phase or phases should determine the classification of the benefit promise?
• How should the benefit promise in each phase be measured?

After discussion, the Board agreed on the following pragmatic cut-off for the definition of benefit promises in the project:

• the definition of benefit promises should refer to the accumulation phase only. In particular, longevity risk should not affect the classification, but would be factored into the measurement of the obligation; and
• the liability for a benefit promise should be measured according to its definition whether the employee is the accumulation, deferment, or payout phase.

Discussion at the December 2007 IASB Meeting

The Board discussed several issues raised by Board members on the first pre-ballot draft of Preliminary Views on Amendments to IAS 19 Employee Benefits (internal discussion document that was not publicly available).

Classification of promises that include a fixed return

The staff noted that in the current version of the discussion document current salary promises and career average promises including those with fixed returns are classified as contribution-based while other salary related promises (for example, final salary promises) are classified as defined benefit. The staff informed the Board that some Board members and other constituents had raised the concern that promises of a fixed return on contributions are defined benefit promises in nature. Accordingly, including them in the contribution-based category would change the measurement for these defined benefit promises and would extend the scope of Phase I unnecessarily.

Other Board members argued that promises with a fixed return and promises linked to an index (such as inflation) are similar in nature and treating them differently would result in a new discrepancy.

There seemed to be a consensus that this could be one of the most contentious issues in the discussion paper. The Board reaffirmed its tentative decision that the scope of contribution-based promises should include promises with a guaranteed fixed return. However, the staff was directed to make this issue 'crystal clear' in the discussion paper and to seek input from constituents by asking specific questions.

Classification of promises of a regular fixed amount after retirement

Following the decision for promises with a guaranteed fixed return the Board decided that promises of a regular fixed amount after retirement should also be classified as contribution-based promises.

Classification of promises that IAS 19 classifies as defined contribution

The staff informed the Board that one Board member raised the concern that such a classification would effectively change the accounting for traditional defined contribution promises and that such a change would be outside the scope of this project.

The majority of Board members was of the view that the accounting for typical (plain vanilla) former defined contribution promises would not be changed. Therefore, the Board re-affirmed its decision that defined contribution promises are a subset of contribution-based promises.

Disaggregation and presentation of changes in contribution-based promises

The current version of the discussion paper includes preliminary views that:

• Changes in the value of the liability for a contribution-based promise should be disaggregated into a service cost component and other value changes.
• All changes in the value of the liability for a contribution-based promise and all changes in any plan assets should be presented in profit or loss.

The Board acknowledged that decisions about disaggregation and presentation of contribution-based promises were not discussed in detail during the previous sessions.

The Board therefore decided to redraft the pre-ballot draft (i) to be less definite about the Board's preliminary view on disaggregation and presentation for contribution-based promises and (ii) to explain the differences in presentation between contribution-based and defined benefit promises that result from those preliminary views. In addition, the Board agreed to seek input from constituents regarding potential practical difficulties to disaggregate changes and what level of disaggregation would be useful.

Presentation of defined benefit costs

The chapter on presentation of the components of defined benefit costs includes the following approaches:

Approach 1

All changes in the defined benefit obligation and in the value of plan assets are presented in profit or loss in the period in which they are incurred.

Approach 2

The costs of service are presented in profit or loss. All other costs are reported as consequences of deferring payment of employee remuneration.

Approach 3

The changes that arise from remeasurements relating to financial assumptions are presented outside profit or loss. Remeasurements relating to financial assumptions arise from changes in the discount rate and in the value of the plan assets. Changes in the amount of post-employment benefit cost other than those arising from remeasurement of financial assumptions, for instance, the costs of service, interest cost and interest income, would be recognised in profit or loss.

Approach 3 requires the identification of interest income on plan assets and, accordingly, requires disaggregation of changes in the fair value of the plan assets.

The Board reaffirmed its decisions that all three approaches should be presented in the discussion paper and to explicitly state that the expected return on plan assets should not be used to identify the interest income amount.

The staff was asked to redraft the pre-ballot draft reflecting the decisions made at this meeting. No Board member indicated an intention to object to the discussion paper.

Discussion at the February 2008 IASB Meeting

As a consequence of discussions on the second pre-ballot draft of the IASB's intended Discussion Paper Preliminary Views on Amendments to IAS 19 Employee Benefits in January 2008, the staff had recommended clarifying what was meant by the Board's preliminary view that the measurement of contribution-based promises should not include the possibility that an entity might reduce the benefits provided; express no preliminary view on credit risk; and ask a question in the Invitation to Comment on whether and how credit risk should be taken into account, as well as to change term used to describe the measurement of contribution-based promises to 'fair value assuming the benefit promise does not change'.

Some Board members thought that the measurement of contribution-based promises should take into account the possibility that an entity might not be able to make the payments necessary to satisfy the liability, while the possibility that an entity might reduce benefits for past service in the future should be ignored: only when there was an actual agreement to reduce benefits should this be taken into account. There was also disagreement with the staff view that no preliminary view on credit risk should be expressed. Some Board members were of the view that a view should be expressed, but that the question what 'credit risk' comprises should be dealt with in the project on fair value measurement and that a reference to this should be included in the discussion paper. The Board discussed the meaning and elements of credit risk that would be included in the measurement, in particular whether the term referred to the credit risk of the entity or of the individual liability. After some discussion, there seemed to be a consensus that the risk of an entity not being able to make payments in the future should be included in the measurement and that contribution-based promises should be measured at 'fair value assuming the benefit promise does not change'.

Scope of Phase I - EFRAG Discussion Paper The Financial Reporting of Pensions

In January 2008, EFRAG had published a Discussion Paper The Financial Reporting of Pensions to 'take a fresh look at – and stimulate discussion on – the principles that might be reflected in future accounting standards on pension benefits that are related to pensions'. The staff proposed the IASB acknowledge the EFRAG effort in the introductory chapter of its own forthcoming Discussion Paper and to ask whether there were additional issues which constituents think should be addressed by the Board in Phase I (of its post-employment benefits project). The Board briefly discussed the staff proposal. One Board member said that, while the EFRAG paper was narrower in scope (focusing on pensions only), its discussion of the underlying principles was much broader than Phase I of the IASB's project. As a consequence, asking for additional issues to be dealt with in Phase I entails the danger of prolonging the entire project. The chairman made it clear that the emphasis of the IASB paper should be on short-term issues and that any reference to additional issues should be to those which could be resolved in the short term. The Board agreed.

Discussion at the March 2008 IASB Meeting

The Board voted formally to add this project to its agenda.

The Board held a very brief discussion of a sweep issues arising on the forthcoming Discussion Paper of Preliminary Views on Amendments to IAS 19 Employee Benefits.

The Board agreed to amend the definition of contribution-based promises such that it is clear that the features of a contribution-based benefit promise is that it is independent of both longevity risk and demographic risk. The exact wording was to be agreed out of session.

The Discussion Paper is expected to be published on 27 March 2008.

March 2008: Discussion Paper on employee benefits

On 27 March 2008, the IASB published for comment a Discussion Paper (DP) Preliminary Views on Amendments to IAS 19 Employee Benefits. The DP represents the first step in a comprehensive project on the accounting for post-employment benefit promises. This step is limited in scope to the following issues:

• The deferred recognition of some gains and losses arising from defined benefit plans (currently IAS 19 allows multiple options for deferring recognition)
• Presentation of defined benefit liabilities
• Accounting for benefits that are based on contributions and a promised return
• Accounting for benefit promises with a 'higher of' option

Therefore, the DP focuses on improvements to IAS 19. In the longer term, the IASB intends to work with the US FASB towards a common standard on post-employment benefit promises. Because that project will take many years to complete, the Board concluded that short-term improvements are needed to provide users with better information about post-employment obligations. The Board intends to review the responses to this paper, modify or confirm its preliminary views, and then develop an exposure draft of amendments to IAS 19 for public comment.

The Board does not express a preliminary view on the presentation of the components of post-employment benefit cost in comprehensive income (within or outside of profit and loss). Instead, several alternatives are discussed and comments invited.

The DP is being published by the IASB. However, it will also be considered for publication by the US Financial Accounting Standards Board for comment by its constituents. The IASB requests responses to the DP by 26 September 2008. Click for Press Release (PDF 55k). The IASB's goal is to issue a revised IAS 19 by 2011.

September 2008: Our views on IASB's employee benefits discussion paper

On 26 September 2008, Deloitte submitted a Letter of Comment (PDF 174k) on the IASB Discussion Paper Preliminary Views on Amendments to IAS 19 Employee Benefits. In general, we express serious concerns that the proposals go beyond the changes that should be introduced via a short-term project. An excerpt from our letter is presented below. Past comment letters are Here.

Discussion at the November 2008 IASB Meeting

Initial discussion of responses to discussion paper

The IASB staff introduced a high-level summary of comments it had received on the IAS 19 discussion paper. The main issues identified in the comment letters were summarised in the Agenda Paper. The Board concentrated its discussion on two broad areas:

• the definition and scope issue related to contribution-based promises, and
• how pension items would be presented in the financial statements.

Contribution-based promises

The staff noted that most respondents were critical about the Board's proposals for contribution-based promises. Some stated that the proposals were more problematic than the current requirements. In particular:

• The scope of contribution-based promises, as defined in the discussion paper, was too wide and suggested that the Board should restrict the scope to promises that are 'problematic' to account for using IAS 19.
• The measurement proposed represented a fundamental change in measurement for many post-employment benefit plans. It would be preferable, and possible, to deal with the 'troublesome promises' within the existing framework of IAS 19.

A Board member queried whether those constituents who raised these issues were the same as those who favoured retaining the corridor and expected returns approaches. The staff subsequently stated that there was not a strong correlation between the two groups.

The staff noted that they were surprised by the level of concern about contribution-based promises and the estimates in some jurisdictions that many (or most) defined benefit plans would be reclassified as contribution-based promises. The staff was not convinced that this was the intention of the Board. The staff also admitted that there were more problems 'patrolling the boundary' between defined benefit and contribution-based promises and with their measurement than they had appreciated.

Financial statement presentation

The staff also noted that most respondents supported the Board's preliminary view that all changes in the defined benefit obligation and in plan assets should be recognised in the period in which they occur (that is, that smoothing mechanisms should be deleted from IAS 19). However, there were diverse views on financial statement presentation.

Board members, speaking of conversations and formal meetings with constituents, suggested that there was a high degree of acceptance among constituents that the deferral mechanisms in IAS 19 were no longer defensible and should be removed; however the price of removal was that financial statement presentation needed to be addressed as a matter of urgency.

The staff noted that, when the discussion paper was being drafted, the IAS 19 team had been directed by the Board not to address financial statement presentation matters. Subsequently, the Board (together with the FASB) had issued their Discussion Paper and Preliminary Views on Financial Statement Presentation in October 2008, and that there was now greater scope for cooperation between the two teams. In particular, at the December 2008 Board Meeting, staff from both projects will be present when the Board discusses presentation issues related to the IAS 19 discussion paper.

The Board discussed some of the tension points in the financial statement presentation project that comments received on the IAS 19 discussion paper had highlighted. In particular, the 'cohesiveness principle' in the financial statement presentation discussion paper might be seen by some as preventing disaggregating pension expense between the service element (operations) and the financing charge on the balance sheet obligation (financing). Other Board members disagreed and thought that disaggregation would be an accounting policy choice. Others saw an opportunity to discuss disaggregation in financial statements more generally.

The staff noted that the discussion would help them to determine what could be done within the time available to complete this phase of the IAS 19 project.

Next steps

In December 2008 the Board will discuss:

• the scope of an exposure draft to be developed from the discussion paper; and
• the comments on the recognition and presentation of defined benefit promises.

Discussion at the January 2009 IASB Meeting

Project scope and timing

The staff presented papers outlining a proposed scope on the future work that arises from the DP Amendments to IAS 19. Staff proposed to split the project in three parts and prioritise the items in order of importance. Each project section would result in a separate exposure draft. The proposed split was:

• Recognition, presentation and related disclosures
• Contribution-based promises
• Comprehensive review of disclosures

Board members were not convinced that the proposed approach would be appropriate and wanted to know the key risks that led to the proposed schedule. Some Board members preferred a more comprehensive approach.

The Board agreed to reduce the three step approach to a two step approach:

• Recognition, presentation, and related disclosures and minor issues
• Accounting for contribution-based promises

The minor issues encompass:

• Additional guidance on the discount rate
• Multi-employer exemption
• Attribution to periods of service when benefits are back end loaded
• Accounting for plans with risk sharing or conditional indexation features
• Definition of short and long term employee benefits
• Tax relating to pension costs

Presentation of changes in defined benefit obligations and in plan assets

The staff presented its proposals on the following three questions:

1. Should the Board specify how the components of pension cost should be disaggregated?
2. Should any components of post-employment benefit cost be presented in other comprehensive income rather than profit and loss? If so, which?
3. Should the Board require such disaggregated components to be displayed on the face of the performance statements when material?

The Board agreed with the staff recommendation that pension cost should be disaggregated into employment, financing, and remeasurement components.

The Board discussed at length whether all components of pension cost should be recognised in profit or loss. Some Board members acknowledged that this will not be well received by some constituents and that the case for profit or loss recognition was weakened by the fact that the measurement model in IAS 19 was flawed. The chairman took a vote, and the Board agreed that all components should be recognised in profit or loss.

The staff recommended to the Board not to mandate disaggregation of the changes in the pensions obligation in the performance statements. The Board decided, however, to require this disaggregation. The agenda papers contained an example on how such disaggregation might be presented. It was found that the proposed presentation would require amendments to IAS 1. The staff was directed to consider the example again and bring back a new example at a future Board meeting.

Proposed amendment to IFRIC 14

The staff presented a proposed amendment to IFRIC 14 to clarify the accounting where an entity makes voluntary prepaid contributions and there is a minimum funding requirement. The staff recommended an approach that would treat the prepayment as partially recoverable. However, many Board members felt that the whole of the prepayment is recoverable and, hence, full recognition of the prepayment was appropriate. The chairman took the vote and the Board agreed. The amendment is to be exposed in due course.

January 2009: Employee benefits working group meeting notes

The IASB's Employee Benefits Working Group met in London on 26 January 2009. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

Discussion at the February 2009 IASB Meeting

Project timetable

The staff presented the most recent proposed project timetable for this phase of the post-employment benefits project. The plan provides for an exposure draft to be published in November 2009 with a 120-day comment period and a final IFRS in the first half of 2011.

Defining the remeasurement component

The staff reminded the Board that in January 2009, it had decided that the change in a post-employment benefit obligation should be disaggregated into employment, financing, and remeasurement components. At this meeting the Board decided that it should specify what was included in the remeasurement component.

The Board agreed also that the current service cost component of the IAS 19 pension cost should be presented on a separate line within profit and loss.

Thereafter, achieving consensus was more difficult. The Board appeared to be confused about what the staff was proposing and how it was consistent or inconsistent with the principles of the current project. The staff proposed that the Board require that interest income be calculated on an expected rate of return. Several Board members disagreed with this suggestion, or at least with how the staff had expressed it. Some of these Board members could accept the method if the expected rate of return was based on the actual assets in the pension plan. One Board member thought that the 'remeasurement' component of the pension assets was a matter of fact – there were no assumptions such as those that are inherent in estimating the benefit obligation. Assets went up or down in value. Disaggregating that movement in to classes of assets (government bonds, corporate bonds, quoted equity, non-quoted equity, real estate, etc) was more likely to provide useful information to users than the expected rate of return. Not all Board members agreed with this analysis.

In an attempt to close the debate, the Chairman asked the Board whether the interest cost component should include a notional cost or return on the pension surplus or deficit (the 'net pension position'). The Board voted (by a significant majority) that interest cost should be reported separately from remeasurements and should not include any return on plan assets.

In addition, the Board agreed that the change in plan assets and the change in the actuarial gain or loss on the defined benefit obligation should be in the remeasurement component.

A Board member noted that this decision would have the effect of reporting the total change in the pension fund through profit or loss, a position that alarmed him.

The Board did not have time to discuss the presentation of past service cost, the effects of settlements and curtailments, and the effect of the asset ceiling, although one Board member noted that (in a 'no deferral' world) the distinction between current service cost, past service costs, and settlements/curtailments had no effect.

Discussion at the March 2009 IASB Meeting

At this session the staff sought input from the Board on the following topics:

• Presenting the remeasurement component
• Classification of the effects of settlements, curtailments, and the effect of the asset ceiling
• Additional guidance on the discount rate
• Multi-employer exemption
• Attribution to periods of service
• Plans with risk sharing
• Definition of short and long term
• Tax relating to pension costs

Presenting the remeasurement component

The Board has decided at previous meetings to recognise all changes in the defined benefit obligation in profit or loss; to split up the change into employment, financing, and remeasurement components; and to define the remeasurement component.

The staff proposed:

• To allow entities to present the remeasurement component as one line item or to disaggregate the remeasurement component and present its disaggregated components in separate line items in the income statement
• To prohibit entities from disaggregating the actual return on plan assets in the statement of comprehensive income
• To amend IAS 1 to allow entities presenting a subtotal that would be profit before income taxes and specified remeasurement components (that is, remeasurements could be presented net of tax)

The staff also provided the Board with possible examples how the proposals could be used in the statement of comprehensive income.

The proposals lead to a considerable amount of confusion and discussion amongst Board members – not only on the remeasurement component, but on all aspects of the disaggregation. Some Board members felt that previous decisions would have to be revisited.

Others were not clear what the remeasurement represents. Many were concerned over the proposal to allow a net of tax presentation for the remeasurement component. Board members also highlighted that the proposals would interact with the outcome of the financial statement presentation project.

The chairman proposed four further approaches to resolve the issue and address some of the concerns of Board members, which would have to be applied mandatorily:

• 1. One line item only
• 2. Pensions must be separated into two line items
  • a. Service cost
  • b. All other changes
• 3. Pensions must be separated into three line items
  • a. Service cost
  • b. Interest cost on the obligation
  • c. All other changes
• 4. Pensions must be separated into three line items
  • a. Service cost
  • b. Interest cost on the obligation and expected return or imputed interest on plan assets
  • c. All other changes

The Board also agreed by majority vote to allow a net of tax presentation of the 'all other changes' component, acknowledging that this requires rules for the tax allocation. Staff noted that the upcoming ED on Income Taxes would address some of the issues surrounding tax allocation.

Classification of the effects of settlements, curtailments, and the effect of the asset ceiling

The Board was asked to decide on where the effects of settlements, curtailments, and the asset ceiling should be classified (employment, financing, remeasurement).

The staff recommended that the effects of settlements should be classified into remeasurement component. The Board agreed.

The staff recommended that the effects of curtailments should be classified into the employment component. The Board agreed.

The staff recommended that the effects of the asset ceiling should be classified into the remeasurement component. The Board agreed.

Additional guidance on the discount rate

Staff introduced the topic by noting that constituents requested more guidance on determining the discount rate, particularly when bonds can be considered high quality and when a market is considered deep.

Some Board members had specific questions on technicalities when determining the discount rate. There was a general feeling that addressing the discount rate could only be done if the Board was to address measurement of defined benefit obligations – which is not in the scope of this phase of the pensions project.

The staff proposed the following:

1. Not to investigate changing the discount rate
2. Not to amend IAS 19 to allow use of an unobservable rate.
3. To amend IAS 19 to provide more guidance on how to determine whether a deep markets exists
4. Not to include guidance on determining whether a corporate bond index is high quality

The chairman asked the staff to seek input from constituents (in particular, actuaries) on the appropriate discount rate that could be used when the Board in the future revisits measurement of defined benefit obligations.

Multi-employer exemption

The staff proposed to provide preparers with a blanket exemption for multi-employer plans. This would result in such plans classified as defined contribution. However, this exemption would be accompanied by additional disclosures. Staff noted they believed that defined benefit accounting cannot be applied in a useful manner to such plans.

Board members were concerned over the abuse potential of a blanket exemption.

The Board in the end disagreed with the staff recommendation.

Attribution to periods of service

The staff asked the Board whether expected future salary increases should be taken into account in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years. Board members saw no difference in the benefit formula leading to materially higher levels of benefit in later years or the salary projection – both would impact the absolute amount.

The staff recommended that IAS 19 should be clarified to state that salary increases in the future should be included when assessing the requirements in IAS 19.67.

Plans with risk sharing

The staff asked the Board whether to clarify the accounting requirements for plans with risk sharing or conditional indexation features.

Staff recommended that the wording in IAS 19 is amended to make clear that such features should be reflected in the measurement of the obligation. The Board agreed.

Definition of short- and long-term

The Board confirmed its view that the distinguishing feature between long- and short-term benefit is the entity's expectation when a benefit becomes due to be settled. The paragraphs in the Basis for Conclusions will be amended to remove the wording that caused confusion.

Tax relating to pension costs

The staff explained that constituents asked for clarification on how to reflect taxes payable by a plan itself should be reflected as part of the actuarial assumptions or as part of the return on plan assets. Some constituents believed that the wording in IAS 19 requires an entity to include it in the return on plan assets. Staff proposed that both treatments were acceptable as long as the tax is not double counted or not reflected at all.

Some Board members were confused about the type of tax staff was talking about. Other Board members were concerned over the accounting for administrative costs the staff mentioned as an analogy. The staff was asked to bring the issue of administrative costs back at a future meeting.

On the tax issue the Board agreed with the staff recommendation.

Discussion at the April 2009 IASB Meeting

Recognition of changes in defined benefit obligation and in plan assets

The Board agreed that entities should recognise all changes in the value of plan assets and the change in the post-employment benefit obligation in the financial statements in the period in which they occur. The staff noted that the Board's tentative decision that the remeasurement component of pension cost should be presented separately in the income statement net of tax effects might alleviate some concerns about volatility because it allows entities to draw a subtotal of profit before tax and pension remeasurement.

The Board also agreed entities should recognise unvested past service cost in the period of a plan amendment. A Board member was concerned that the treatment of unvested amounts should be consistent between post-employment benefits and IFRS 2. However, this view was not generally accepted.

Administration costs

The Board had a vigorous debate on the accounting treatment of administration costs related to a pension plan.

The Board disagreed with a staff recommendation that they remove the definition of 'return on plan assets'; instead, they agreed to amend that definition. Several Board members were concerned that costs of administering a pension plan were included in the defined benefit obligation at all: they were expenses – they have nothing to do with the benefit promise.

Ultimately, the Board agreed (by majority) that IAS 19 should be amended to require administrative costs to be included in the defined benefit obligation unless (a) they relate to the management of plan assets and (b) the benefit promise does not depend on the return on those plan assets.

Alternative Views

Board members were asked whether they intended to present an Alternative View in the Exposure Draft. Messrs Cooper, Kalavacherla, Yamada, and (potentially) Engstrom indicated that they would be presenting an Alternative View.

April 2009: Employee Benefits Working Group Meeting Notes

The IASB's Employee Benefits Working Group met in London on 28 April 2009. Click here for the Preliminary and Unofficial Notes (PDF 57k) taken by Deloitte observers at the meeting.

Discussion at the May 2009 IASB Meeting

Project timetable

The staff noted that the forthcoming exposure draft was unlikely to be completed until July 2009 (this was contrary to the optimistic assessment in the Board paper).

Disclosures – defined benefit plans

During a long and frustrating debate, the board decided:

• not to provide additional guidance on materiality (contrary to the staff recommendation);
• to replace the disclosure objectives in IAS 19 with objectives similar to those in IFRS 7 Financial Instruments: Disclosures and IFRS 4 Insurance Contracts;
• to require disclosure of information about how the defined benefit plan is managed;
• to use a principle-based approach for the disclosures on the entity's actuarial assumptions based on similar requirements in IFRS 4.

This topic was especially contentious, with Board members split on the usefulness of disclosure of items such as mortality assumptions. A Board member noted that the real issue was how to disaggregate information in a meaningful way: for example, it would be more useful to know how relevant to the workforce in question was the mortality table being used. The staff cautioned that if the Board wanted detail in one area of the actuarial assumptions, it might as well require the whole lot.

In the end, the Board agreed with the staff's proposed approach, with some modifications in how it was expressed.

• additional disclosures on the risks arising from defined benefit plans including:
  • qualitative disclosures, including risk management policies and investment strategies
  • sensitivity analysis
  • expected maturity analysis for the defined benefit obligation
  • comparison of actual versus estimated contribution.

During the discussion, several Board members objected to how the risks had been defined, in particular 'funding risk', which was essentially the same as 'liquidity risk'. The Board requested the staff not to invent new and potentially confusing labels, but rather to explain what the disclosure was intended to achieve.

Disclosure-Multi-employer plans

With little debate, the Board agreed to propose the following additional disclosures for multi-employer plans:

• (a) A description of the nature of the multi-employer plan including but not limited to:
  • (i) A description of the regulatory framework in which the plan operates.
  • (ii) A description of the funding arrangements in place including the method used to determine the participant's rate of contributions and any minimum funding requirements.
  • (iii) The extent to which the entity can be liable to the plan for other participants in the event of their insolvency.
• (b) its best estimate of the contributions it expects to pay to the plan during the next annual period. Such information may be disaggregated into (1) contributions required by funding arrangements or regulation, (2) discretionary contributions and (3) noncash contributions.
• (c) details of any agreed deficit/surplus allocation on wind-up, or the amount that is required to be paid on withdrawal.
• (d) the total and employer's proportion of the number of active members, retired members, and former members entitled to benefits.

Curtailments and settlements

The Board agreed that

• (a) the existing requirements on curtailments and settlements are removed
• (b) curtailments are included in negative past service costs, and disclosure is required of the effect of plan amendments with a narrative description of the amendments; and
• (c) a definition of 'non-routine settlements' based on the IFRIC May 2008 Update wording is added to the definitions in IAS 19 and separate disclosure of such 'non-routine settlements' is required.

Agenda paper 20C, containing staff recommendations for transitional provisions, was not discussed.

Discussion at the July 2009 IASB Meeting

Discount rate for post-employment benefit obligations

The Board agreed to amend IAS 19 paragraph 78 to remove the requirement to use a government bond rate when there is no deep market in high quality corporate bonds. Instead, the objective should be to estimate the rate for high quality corporate bonds in all cases.

The Board also agreed that additional guidance should be provided on how to estimate a high quality corporate bond rate. This would draw on the principles being developed in the Fair Value Measurement project but, until that project is finalised and an IFRS issues, no cross-references would be used. Instead, the current guidance in IAS 39 AG69-AG82 would be referenced.

Exposure Draft to be issued for 30-day comment period

The Board agreed that because this issue is of wide-spread application, it would assist preparers greatly if they could address it promptly. An amendment to IAS 19 now would help to solve a significant issue in the application of IFRS. Consequently, the Board agreed unanimously to propose the necessary amendments to IAS 19 using the 30-day comment period approach: the issue was tightly defined and the matter was urgent (as provided in the IASB Due Process Handbook, paragraph 42).

Disclosure

The Board discussed staff proposals to require disclosure of alternative measures of the defined benefit obligation; such disclosure had been suggested by some as providing useful information and mitigating some concerns surrounding the current IAS 19 requirements. The staff suggested the following as possible alternative measures that might be candidates for disclosure:

• Settlement value (including buy-out amount)
• Fair value
• Accumulated benefit obligation

After a short discussion, the Board agreed to propose that an entity disclose the accumulated benefit obligation. The Invitation to Comment would ask constituents whether other alternative measures should be provided.

The Board then reviewed the totality of the proposed disclosure package.

The Board agreed to modify the requirement (adapted from IAS 19.120A(q)) that an entity should provide its best estimate of the contributions it expects to pay to the pension plan during the next annual period, to require disaggregation into:

• contributions required by funding arrangements or regulation,
• discretionary contributions and
• noncash contributions.

The Board had a protracted debate over a suggestion by some Board members that entities should disclose a sensitivity analysis for the net position of the defined benefit asset or obligation. Board members noted that this would be challenging if the plan was heavily invested inequity instruments as opposed to debt instruments. Supporters thought that this information would be available for all entities anyway and that the incremental cost of providing the disclosure would be minimal. Others disagreed: that might be the case for single jurisdiction plans, but was less likely to be the case for multi-employer plans, insured plans and pension plans for a large multi-national group. These Board members questioned the utility of the disclosure to the users of the financial statements, especially how such disclosure would assist users to assess the future cash outflows of the sponsoring entity (as opposed to the plans). They were also very concerned about providing information about risks that do not exist from the point of view of the sponsoring entity – one Board member calling this a 'deception'.

Ultimately, the Chairman asked the staff to work with the Board members involved to see whether it was possible to reconcile the views, and to propose alternative sensitivity disclosures. These would be circulated to the Pensions Working Group for their views.

If possible, the staff will present their draft proposals later in the meeting.

Transition

The Board agreed that the exposure draft should not include specific transitional provisions. Thus, the general requirements of IAS 8 and IFRS 1 would apply. The amendments would apply retrospectively.

The Board agreed that IAS 19 paragraphs 153-156 and IFRS 1, Appendix D, paragraph D10 are redundant and should be deleted.

Discussion at the August 2009 Special IASB Meeting

Discount Rate in IAS 19: Transitional Provisions

The IASB held a meeting by teleconference to decide the transitional arrangements to be proposed for the amendment to IAS 19 with respect to the discount rate. All 15 members of the IASB were present on the call.

Basis of application

The Board agreed that the proposed amendments should be applied prospectively.

Where the adjustment should be recognised

The Board discussed whether the amount resulting from the change in accounting policy should be adjusted directly through other comprehensive income.

A Board member spoke strongly against the staff recommendation. He noted that the switch from the government bond rate to a high-quality corporate bond rate would (probably) lead to a smaller amount being deferred in the corridor and thus more items falling outside the corridor. The Board member would want to see a retrospective adjustment to the actuarial gains and losses recognised in the corridor.

Although several Board members had sympathy with this approach, a majority of the Board were willing to support the staff recommendation, more out of expedience rather than commitment.

Whether unamortised gains and losses are affected

The Board discussed what to do with unrecognised gains and losses that have accumulated up to the date of adoption. One approach would continue to carry them forward and amortise them. Another approach would reset them to zero (i.e., recognise all accumulated unrecognised actuarial gains and losses). The staff recommended that no adjustment would be necessary. A number of Board members were unhappy with the staff recommendation, but were willing to accept it, given that the forthcoming exposure draft of major amendments to IAS 19 would propose eliminating the corridor. It was noted that the example accompanying the staff recommendation was incorrect, which was unhelpful.

However, the Invitation to Comment would include the alternative proposed by a Board member and supported by a significant minority of the Board that would result in an adjustment of amounts deferred in the corridor as a result of the change in the discount rate methodology.

Date of application

The Board agreed that the proposed amendments should be applied in the normal manner for prospective accounting policy changes, that is, from the beginning of the earliest period presented. IAS 8 has an impracticability exemption, which could apply in this instance, if the necessary inputs to determine the adjustments are not available or observable.

Whether to amend IFRS 1

The Board agreed that no amendment of IFRS 1 was necessary.

Exposure period

The exposure draft will be prepared as quickly as possible – issuance expected second half of August 2009, with a comment deadline 30 September 2009.

August 2009: ED on Employee Benefits Discount Rate

On 20 August 2009, the IASB published for public comment proposals to amend the discount rate for measuring employee benefits. IAS 19 Employee Benefits requires an entity to determine the rate used to discount employee benefits with reference to market yields on high quality corporate bonds. However, when there is no deep market in corporate bonds, an entity is required to use market yields on government bonds instead. The global financial crisis has led to a widening of the spread between yields on corporate bonds and yields on government bonds. As a result, entities with similar employee benefit obligations may report them at very different amounts. To address the issue expeditiously, the IASB proposes to eliminate the requirement to use yields on government bonds. Instead, entities would estimate the yield on high quality corporate bonds. If adopted, the amendments would ensure that the comparability of financial statements is maintained across jurisdictions, regardless of whether there is a deep market for high quality corporate bonds.

In view of the urgency of the issue and the limited scope of the proposals the IASB has set a shortened period for comments on the exposure draft – comments are due by 30 September 2009. The IASB intends to permit entities to adopt the amendments that arise from this exposure draft in their December 2009 financial statements. Click for Press Release (PDF 99k).

Discussion at the September 2009 IASB Meeting

The Board discussed a timetable proposed by the IASB staff for the proposed Post Employment Benefits exposure draft. The staff suggested that, as the Board and the FASB expect to discuss the presentation of other comprehensive income at their joint meeting in October, publishing the ED in November was possible.

The Board was more cautious than the staff. Several Board members noted that there were too many 'moving parts' in projects related to the presentation of pension expense and that it was premature to commit to the publication timetable. In particular, the Board was receiving criticism about how it (and the FASB) used the 'other comprehensive income' category and whether items recognised (for whatever reason) in OCI should be reclassified through profit or loss.

The Board deferred any decision on publishing the exposure draft until the November meeting.

Board members encouraged the staff generally to develop principles that defined what was recognised in OCI versus profit or loss, but several also suggested that such principles may be elusive.

Discussion at the October 2009 IASB Meeting

IAS 19 Discount Rate

The Board received a staff analysis of comments received on its proposed amendment of IAS 19 Discount Rate for Employee Benefits (ED/2009/10). It also redeliberated its conclusions in that exposure draft (ED).

The staff noted that 100 comment letters were received; in addition, there had been correspondence with constituents since the staff papers for this meeting had been released.

The staff said that the comments were polarised: those who were in favour of the change were strongly so; those against were equally strong in their opposition. In addition, it was apparent that the exposure process had highlighted a number of areas in which the proposal would create problems of which the staff were previously unaware. The Board's proposals could lead to greater diversity in practice rather than less. As a result, the staff presented three alternatives:

• Require government bond rates to be used when it is difficult to estimate a high quality corporate bond rate, rather than when there is no deep market in high quality corporate bonds. The staff would consider further what is meant by 'difficult' if the Board decides to proceed on this option;
• Continue with the ED proposal to eliminate the requirement to use a government bond rate; or
• Keep the existing requirement to refer to a government bond rate when there is no deep market in high quality corporate bonds – in other words, stop the project.

Board members engaged in a vigorous debate. Some challenged that staff analysis as simplistic and disingenuous. Others noted that the proposed amendment illustrated the danger of forcing an entity to use a measurement input that matched neither the currency nor duration of its defined benefit obligation.

Board members expressed dissatisfaction with all three alternatives. However, ultimately there was not sufficient support among Board members to ratify the amendments. Consequently, the requirement in IAS 19 paragraph 78 to use the government bond rate in the absence of a high-quality corporate bond rate would remain in force. The issue will be included in the comprehensive Employee Benefits project.

Next steps for proposed amendments to IAS 19 relating to termination benefits

The staff reminded the Board that it had published an Exposure Draft of proposed amendments to IAS 19 addressing termination benefits in June 2005 (this was issued in conjunction with the proposed amendments to IAS 37).

The Board had considered comments received and had concluded its redeliberations in May 2008. However, the amendments had not been balloted or published pending further deliberations on IAS 37. With the conclusion of redeliberations on IAS 37, the staff asked for the Board's intentions for the IAS 19 issues.

The Board directed the staff to prepare a ballot draft of the amendments and that the amendments should be issued as soon as they are ready. No Board members indicated their intention to dissent. Ms McConnell indicated that she would likely abstain, since all redeliberations occurred prior to her appointment as an IASB member.

Timing of effective date and transition

The staff proposed that the amendments to IFRIC 14 and IAS 19 for termination benefits should be effective for annual periods beginning on or after 1 January 2013, with early application permitted.

Board members reacted angrily to this suggestion, noting that the Board had been told that constituents wanted these amendments quickly and yet the staff was proposing an effective date several years in the future, while permitting early adoption. As such, the staff were suggesting that the Board promote non-comparability. IFRIC 14 was admittedly flawed, yet the staff were reluctant to require the improved version to be implemented.

In their defence, the staff suggested that they were trying to avoid multiple changes being inflicted on constituents. However, Board members noted that this defence was predicated on the Board completing its work on post-employment benefits accounting by 2013, something that the Board might not be able to achieve.

The Board directed that the amendments be effective for annual financial reporting periods beginning on or after 1 January 2011, with early adoption permitted.

Discussion at the November 2009 IASB Meeting

Presentation

The Board discussed the presentation of pension costs. The Board was reminded that it had previously reached the following tentative decisions related to presentation:

• Recognition of all components of pension cost in the period in which they occur
• Disaggregation of the total pension cost into an employment component (service cost), a financing component (interest cost), and a remeasurement component (actuarial gains and losses on the defined benefit obligation and the total return on plan assets)
• Presentation of all of those components in profit or loss, displaying the remeasurement component separately net of related income taxes

The Board was asked to reconsider those tentative decisions and re-evaluate them in the light of the decisions made or proposed in other projects: the proposal of single statement of comprehensive income and the other comprehensive income (OCI) presentation option for equity instruments in IFRS 9.

The Board discussed the issue, with Board members expressing a wide variety of opinions. Several approaches and combinations of approaches were discussed, ranging from full recognition in profit or loss to presenting all remeasurement components in OCI with no recycling.

Finally the Board reaffirmed its decision to require full recognition of all components of pension cost in the period in which they occur.

After a considerable discussion, the Board agreed that the proposals in the forthcoming post-employment benefits exposure draft (ED) should be consistent with the proposal of a single statement of comprehensive income. Therefore, the Board agreed in principle that the employment and financing components should be presented in profit or loss and the remeasurement component in the OCI with no recycling. The Board also tentatively agreed to align the timing of this proposal with the timing of the ED on the single statement of comprehensive income.

The Board also discussed the notion of service cost and remeasurement related to service cost. The Board agreed in principle that the related remeasurement should be presented in profit or loss and not in OCI. The Board directed the staff to explore such an approach, in particular with reference of proposal of one Board member to account in profit or loss for the interest accretion on a net deficit instead of gross interest related to expected return on the assets and discount of the defined benefit obligation.

Disclosure

The Board discussed its tentative decision to require disclosure of accumulated benefit obligation (ABO) – the defined benefit obligation excluding projected growth of salaries.

The staff and some of the Board members said that such a measure is neither useful nor meaningful and that, in some jurisdictions, the methodology for calculating the ABO was not consistent.

Other Board members disagreed as they believed that providing of such information is useful. They argued that in other jurisdictions ABO is disclosed without much diversity in its calculation. They also pointed to views of some constituents that the ABO is more meaningful for measuring the pension obligation. Moreover, staff also pointed out that disclosure of ABO is required under the US GAAP.

With a bare majority of votes the Board reaffirmed its previous tentative decision to require disclosure of the ABO.

Discussion at the December 2009 IASB Meeting

Service cost

The Board considered whether changes in the estimate of service cost should be included in the remeasurement component of changes in the net defined benefit asset or liability.

Several Board members were concerned by this proposal, as it would present service costs in the profit or loss and the remeasurement component of them in other comprehensive income (OCI). Another Board member was concerned that remeasurement component of the service costs was to be presented in earnings as it would mean that the effect of the estimated changes in salaries that include effects of inflation would be presented in profit or loss whereas the effect of changes in discount rate including inflation component as well would be presented in OCI.

After a short debate the Board decided that changes in service cost caused by changes in all assumptions should be presented in the remeasurement component in OCI. The Board also asked the staff to consider a requirement for an additional disclosure that would disaggregate effects of changes in the assumptions and their combined effects.

Interest income on plan assets

The Board rediscussed the accounting treatment of the interest income on plan assets discussed in November 2009. Most of the Board members were concerned with the staff proposal that en entity should be required to calculate and recognise in profit or loss an expected return on plan assets. Those Board members believed that it would lead to all the good news (overoptimistic expected return on plan assets and overoptimistic estimate of the pension liability) presented in profit or loss and all the bad news presented in other comprehensive income.

After a considerable discussion in which a wide variety of opinions were expressed, the majority of the Board adopted the 'net interest approach' that would require interest to be determined by applying the high quality corporate bond rate to the net defined benefit asset or liability and presented in profit or loss.

Discussion at the January 2010 IASB Meeting

Post-employment benefit disclosures

In response to a request from the Board at the December meeting, the staff presented proposed disclosure requirements on the disaggregation of information about actuarial gains and losses arising on the defined benefit obligation and to the total amount of post-employment benefit expense in the period.

The Board deliberated theses proposed disclosure requirements in context of the package of disclosure requirements to be included in the forthcoming ED. The staff explained that disclosure requirements have been incorporated from IFRS 7 and the Fair Value Measurement guidelines to address requests from the Working group and other user groups to provide more information on the risks related to pension plans.

Several Board members expressed strong disagreement with the volume of disclosures and urged for the staff to eliminate some requirements as they are not relevant to the employer's interest in a pension plan and to streamline the remaining disclosure requirements in some way.

After a long discussion as to which disclosures are core to the understanding of the risks an employer is exposed to in relation to its pensions plans, it was agreed that a sub-group of Board members will review the disclosures and identify those that are essential. The revised list of disclosure requirements will be presented at the February Board meeting.

Termination benefits

As part of the process of finalising the amendments to IAS 19 relating to termination benefits, the Board had to consider whether to amend the definition of termination benefits to include only benefits provided in exchange for termination of employment and not include benefits provided in exchange for employee service.

The staff is of the opinion that benefits that are provided in exchange for employees' future services should be regarded as post-employment benefits and not termination benefits. The Board noted that treating such benefits as post-employment benefits results in the same recognition as is required under SFAS 146, but that the labelling of the benefits would be different.

One Board member questioned whether the amendments would result in the amount of once-off severance packages being disclosed. The Board noted that the disclosure of termination benefits paid to key management personnel is an explicit requirement of IAS 24 and that no additional guidance needs to be incorporated in IAS 19.

The Board agreed with the amendment proposed by the staff and requested that clarification should be added that materiality is assessed both from the perspective of the entity and the individual employee.

The discussion then turned to the timing of the recognition of voluntary termination benefits. The Board agreed that voluntary termination benefits are not given in exchange for future service and that an entity should recognise the termination benefits when it no longer has the ability to withdraw an offer of those benefits. Where there is a timing difference between the date an entity cannot withdraw an offer and the date that employees accept the offer, measurement of the termination benefits will be based on the best estimate of the number of employees expected to accept the offer.

Discussion at the February 2010 IASB Meeting

Disclosure

The Board discussed a proposed disclosure package to accompany the forthcoming exposure draft of amendments to IAS 19 Employee Benefits.

Board members noted with approbation that the volume of disclosures was much more reasonable than previously suggested, but several continued to be concerned that repetitions and redundancies remained. It was also suggested that a limited field test should be conducted before the exposure draft is issued. A company with pension obligations in multiple jurisdictions should be asked to prepare the proposed disclosures. The goal would be to identify any aspects of the proposed disclosure package that may be difficult to understand or impracticable to implement.

The Board also asked for clarification about the extent of the interim reporting requirements suggested by the staff proposal. Although the staff responded that the forthcoming Improvements to IFRSs Standard would include improved language in IAS 34 that would clarify the general principle of 'tell users what has changed' since the last annual (or interim) report, it was clear that some Board members were not as confident as the staff that the Board's intentions would be understood.

A Board member was also concerned about the practicability of the staff's proposals with respect to sensitivity analysis, in particular that relating to the significant components of the actuarial assumptions.

The Board agreed that the staff should continue to work with the Board member project advisors to address the Board's concerns and proceed to the pre-ballot draft stage. Mr Yamada reserved his vote, indicating that he may dissent on the basis of the proposed presentation of pension expense in the statement of comprehensive income.

The Board also directed the staff to be clear in the exposure draft that the proposed exemption for pension plan assets from the disclosure requirements of the forthcoming IFRS on fair value measurement was an exemption from disclosures only (and not measurement). The staff noted this direction.

April 2010: IASB proposes to amend IAS 19 for defined benefit plans

On 29 April 2010, the IASB published for public comment an exposure draft (ED) of proposed amendments to IAS 19 Employee Benefits. The proposals would amend the accounting for defined benefit plans through which some employers provide long-term employee benefits, such as pensions and post-employment medical care. In defined benefit plans, employers bear the risk of increases in costs and of possible poor investment performance. The ED proposes improvements to the recognition, presentation, and disclosure of defined benefit plans. The ED does not address measurement of defined benefit plans or the accounting for contribution-based benefit promises.

Discussion at the September 2010 IASB Meeting

The staff presented to the Board a very broad summary of the feedback received from the extensive outreach activities conducted during the exposure period of the ED Defined Benefit Plans for which the comment period ended on 6 September 2010, to provide the Board with an overview of the main issues raised by participants. The staff explained that the summary of feedback does not include the comments from the more than 200 comment letters received on the ED.

The overall objectives and direction of the ED is well supported, however in many cases, the support has been qualified on the basis that the Board will continue its long-term project to do a comprehensive review of IAS 19 in future as respondents regard the proposals as better than the current requirements, but far from perfect and should be developed further. If the Board decides not to perform such a comprehensive review, the responses could be different. The overall criticisms against the Board’s proposals focussed on behavioural implications of the proposals, divergence from US GAAP and the cost vs. benefits of the proposals.

The respondents to the outreach activities raised concerns on the following specific proposals:

• recognition – removal of corridor;
• disaggregation and presentation;
• disclosures;
• other issues in the ED that don’t require a fundamental review of IAS 19, but would be improvements, such as administration costs, multi-employer plans, merging of other long-term benefits with post-employment benefits;
• issues not covered in the ED, such as interim reporting; and
• transition.

The staff explained that respondents expressed mixed views on the disaggregation and presentation proposals and that the views expressed can be grouped as support convergence with presentation in US GAAP, support for retaining the use of expected return on assets and option for presenting actuarial gains or losses in OCI and support for the proposals on net interest included in the ED. The Board was informed that an analysis of the comment letters received on the ED will be presented at the Board meeting in October.

The Board considered the proposed timetable for the expected timing of discussions on the issues identified in the comment letters. In terms of the proposed timetable, the Board hopes to finalise the re-deliberation of the various issues by December to be able to publish a final standard in March 2011. The Board noted that the amendments to IAS 19 relating to termination benefits have not yet been finalised due to resource constraints and that they would be published together with the amendments arising from the ED, as a complete package of amendments to IAS 19.

Discussed by the Employee Benefits Working Group on 27 September 2010

Introduction and overview

After a short introduction by one of the present Board Members, the IASB staff outlined the state of the consultation process on ED 2010/3 Defined Benefit Plans – proposed amendments to IAS 19. The Board had received around 220 comment letters during the comment period ended 6 September 2010, mostly from Europe but also from North America. Moreover, the Board had undertaken additional outreach activities during the comment period.

The staff observed that commentators were generally supportive of the objectives of the present project of short-term reform of IAS 19, yet many had indicated that their positive response was contingent upon the Board performing a comprehensive review of all aspects of pension accounting in the future and that their response would have been different should such a comprehensive review not be undertaken. Some commentators would have preferred such a comprehensive review at the present stage rather than changing IAS 19 on a piecemeal basis.

Project timetable

The staff gave a brief overview of the present state of the project and outlined the IASB's intended work plan: The Board plans to discuss the comments received on the ED at its regular meeting in October 2010, where it also intends to decide on the final project scope, the recognition of unvested past service costs as well as disaggregation of elements of pension cost and income. At its meeting in November, the Board plans to discuss and decide upon disaggregation and presentation, settlements and curtailments and the asset ceiling, disclosures as well as the proposed change to the definitions of employee benefits. Various smaller issues will then be decided at the December Board meeting, with a view to publishing the finalized standard by March 2011.

Recognition of defined benefit liabilities

The staff noted that there had been widespread support from commentators for the Board’s intention to abolish the current options for the deferred recognition of some elements of pension costs and expense (namely the so-called “corridor method”, which allows spreading the recognition of actuarial gains and losses in profit and loss over a period of time while leaving items within the “corridor” unrecognised). Some commentators would have preferred keeping the “corridor” until the more fundamental issue of measuring defined benefit liabilities was addressed as part of a comprehensive review of pension accounting.

With regard to the recognition of past service costs, commentators had shown widespread support for the IASB’s proposal to demand the immediate recognition of all past service costs in the period of the plan amendment and to disallow the deferred recognition of unvested elements.

The ED had proposed that gains and losses on routine and non-routine settlements are actuarial gains and losses and should be included in the remeasurement component, and that curtailments should be treated in the same way as plan amendments, with gains and losses presented in profit and loss. Many respondents had objected to this proposal, particularly as non-routine settlements and curtailments are similar in nature and usually happen at the same time.

Disclosures

It was pointed out by the staff that while commentators were largely supportive of the risk-oriented disclosure objectives, many were unconvinced that the extensive list of disclosure requirements in the ED would serve the purpose of achieving these objectives.

Other issues

Commentators were supportive of the integration of IFRIC 14 and various related IFRIC rejection notices into the body of the standard, yet some were demanding further clarification of certain formulations contained within IFRIC 14. On the other hand, the Board had received push-back from commentators on the treatment of taxes and administration costs, particularly in certain tax regimes. With regard to the proposed clarification of mortality expectations to be used in determining the defined benefit obligation, there was widespread agreement. Moreover, many respondents had agreed with the Board’s intention to tackle risk-sharing between employees and employers, but some demanded further clarifications on how risk should be treated. There was also widespread support for the proposed treatment of multi-employer plans, particularly in light of recent developments at the US Financial Accounting Standards Board (FASB). On the other hand the Board had received a mixed response to its proposals for changing the definitions, with many correspondents pointing out that particularly the intended combination of current “post-employment benefits” and “other long-term employee benefits” into a single category “Long-Term employee benefits” would lead to unintended consequences, especially more complex valuations and disclosure requirements for many benefits for which accounting at present has not been problematic. There was also concern that the proposed requirements for interim reporting would lead to excessive burdens on preparers. Some respondents had also expressed disquiet with the Board leaving the present requirements regarding the discount rate for defined benefit obligations under IAS 19.78 (to discount such obligations with a government bond rate in case there was no deep market for high quality corporate bonds) unchanged, which could lead to similar liabilities to be measured at different amount, a problem that could be exacerbated by the Board’s proposed “net-interest-approach”. Finally, some concerns had been raised by respondents regarding proposal to require full retrospective transition rules, which, in the view of some commentators could make adjustment of prior year figures (such as inventory or fixed asset items to which employee benefit costs had been added under IAS 2 or IAS 16) excessively difficult.

Discussions by the Working Group

The Working Group then discussed the comment letter analysis outlined by the staff. Views regarding the merits of IFRIC 14 in particular were mixed: In a number of working group members’ home jurisdictions, IFRIC 14 seems to be interpreted differently, leading to diversity in accounting practice. As a consequence, some working group members also called for clarifications by the IASB, even though it was admitted that IFRIC 14 represented an improvement on the previous situations where, in some jurisdictions, entities had applied a very conservative approach, recognizing almost no assets from pension surpluses.

Some members of the working group from the actuarial and auditing profession criticized the accounting for risk-sharing plans, particularly the distinction between defined contribution and defined benefit accounting as burdensome and asked the IASB to give further clarifications on how such plans should be accounted for. It was suggested that the IASB should add illustrative examples to the standard as to how to take account of risk-sharing features.

Disaggregation of components of defined benefit costs and income

The staff gave a more detailed overview of comments received relating to the proposed disaggregation of defined benefit cost and income components, focusing particularly on the proposed “net-interest approach”. While the overall objective of enhancing comparability of financial statements by eliminating current presentation options in IAS 19 received widespread support, commentators were concerned about the conceptual foundation of some of the ED’s proposals, especially the net-interest approach. Some commentators supported the pragmatic nature of the approach that would, in their view enhance the understandability of financial information about defined benefit plans by more appropriately taking account of the time value of money and eliminate the abuse potential contained in the expected return on plan assets. Many commentators, primarily preparers and users of financial statements, had rejected the proposals: In their view, applying a uniform interest rate (“AA-Bond rate) to defined benefit liabilities and assets alike would disconnect the accounting for plan assets from the underlying investment reality (i.e. the individual plan asset portfolio structure). It would also be inconsistent with the concept of measuring plan assets at fair value. Moreover, such commentators were concerned that the Board’s proposals could provide a disincentive to entities for investing in (higher risk but potentially higher return) equities. While most commentators had agreed that the expected return on plan assets was a subjective measure and contained a significant potential for abuse (earnings management), many respondents had asked the IASB to keep the current approach but demand more detailed disclosures about how the expected return had been determined. Some commentators had also noted a distinct lack of convergence with US GAAP, which still required the use of an expected return.

Discussions by the Working Group

The ensuing discussion focused on the proposed net-interest approach. A majority of the working group members actively involved in the debate rejected using an expected return on plan assets, which analysts in particular regarded as an excessively arbitrary measure giving entities substantial leeway in aggressive earnings management (as had happened during the financial crisis). While the working group did not seem entirely convinced of the conceptual merits of the net-interest approach, its supporters argued that it would more appropriately reflect the funding status of a defined benefit plan (i.e. a deficit would give rise to an interest expense while a surplus would lead to interest income being recognised). A minority of working group members seemed to favour the expected return as a practical expedient, agreeing with commentators that the potential for abuse could be tackled by requiring more extensive disclosures. Some of these working group members suggested dealing with the issue during the next phase of the pensions project and leave the current status quo untouched, particularly in light of current US GAAP.

Presentation of components of defined benefit costs and income in profit or loss and other comprehensive income

Feedback from commentators had been largely supportive of presenting service costs and finance costs in profit or loss, even though (as outlined above) there had been widespread criticism of the proposed net-interest approach. However, the Board had received less support for its proposal to require presentation of the interest cost / income component in financing result: Banks in particular had argued that the unwinding of the discount on a defined benefit liability was fundamentally different in economic nature from other aspects of financing.

With regard to the proposed presentation of remeasurements in other comprehensive income, the Board had received widespread support from commentators, even though some had pointed out the conceptual difficulties of determining which income / expense items should form part of profit or loss and which should be recognised in other comprehensive income. Moreover, some had pointed out that, contrary to the idea of clean-surplus-accounting and current practice under US GAAP, the ED did not contain any proposals to recycle items recognised in other comprehensive income into profit or loss in subsequent periods. It had also been noted by commentators that the proposals in the ED interacted with the IASB’s project on financial statement presentation (FSP) and some had urged the Board not to take any final decisions until the FSP projects was finalized.

Discussions by the Working Group

A majority of the working group was supportive of the Board’s approach to eliminate presentation options and favoured showing finance cost / income in financial result and remeasurements in other comprehensive income. There was very little support for recycling items previously recognised in other comprehensive income subsequently into profit or loss. Recycling, in the eyes of many working group members would lead to a decline in relevance of financial information through the inclusion of aperiodic, past income and expense items of no predictive value in an entity’s current profit or loss. In light of recycling currently being required by US GAAP, some working group members argued that the issue should be dealt with as part of the comprehensive review of employee benefit accounting in the future.

Disclosures

The working group was treated to a staff presentation on the current status of the fair value measurement project and the Board’s disclosure objectives for items measured at fair value. The staff reiterated that many commentators to ED 2010/3 had been highly critical of the Board’s proposals for enhanced, risk-driven disclosures such as sensitivity and uncertainty analyses for significant actuarial parameters, arguing that such extensive requirements entailed the danger of actually obscuring the risks inherent in defined benefit pension plans. On the one hand, financial statements might be overburdened with information which was difficult to understand by observers without an actuarial background, while on the other hand, commentators feared that actual disclosures might be boilerplate rather than containing any decision-useful information. Many commentators had argued for more principle-based disclosure requirements. The Board had also received substantial pushback on its proposal to require the disclosure of the defined benefit obligation without taking account of future salary increases (in practice referred to as the “accumulated benefit obligation” or ABO), which many commentators did not see as a useful measure of an entity’s benefit obligation. Finally, the Board’s proposals to require disclosure of the methods and processes used for determining at the plan’s demographic assumptions and on asset-liability-matching strategies (e.g. the use of derivatives such as longevity swaps to protect against the risks of improving life expectancies of plan members) had been dismissed by many commentators.

Discussions by the Working Group

The discussions in the working group reflected the concerns raised in the comment letters. Working group members questioned the merits and quality of information provided by sensitivity analysis. Many of the underlying actuarial parameters used in measuring pension obligations were interrelated (e.g. changes in the assumptions on future salary increases would impact on future staff turnover rates while changes in mortality assumptions might impact upon retirement age assumptions) and such interrelationships would not be captured by sensitivity analyses. However, including correlation analyses or multi-variant simulations would be of little use to many users without an actuarial background. Many working group members (preparers, auditors and analysts alike) were concerned that the proposed disclosures would impose an excessive cost burden on preparers while adding little benefit to users of financial statements in assessing an entity’s ability to generate future cash flows.

Some working group members demanded that if sensitivity analyses were required at all, these should be limited to those (few) parameters actually used by management in assessing the risk inherent in its defined benefit plans. One working group member suggested requiring entities to disclose possible changes to its pension exposure resulting from either the “most conservative yet reasonable” or the “most aggressive yet reasonable” scenario, although this suggestion did not find much support among other working group members.

In addition, working group members were concerned that the proposed enhanced disclosures would be difficult to prepare within the limited timeframe often available to entities in filing their financial statements with regulators or stock exchange authorities.

Some working group members argued that funding arrangements between a company and its pension fund and how such arrangements would impact upon the entity’s future ability to generate cash flows should be disclosed, particularly where such arrangements were based on funding measures other than IAS 19. It was argued that information about how employers intend or are required to fund any pension deficit would be useful to users. Moreover, other information not currently required in the ED might be relevant, such as buy-out values for very mature or closed plans. One working group member from North America argued in favour of keeping the proposal to require disclosure of the ABO, which he did regard as a useful measure, while this was rejected by another member.

With regard to disclosures on asset-liability matching strategies, there was a mixed response: While working group members seemed to be in agreement that such disclosures about would be useful, some were concerned that such information would in practice be largely meaningless as entities would only make bland boilerplate disclosures, as currently the case with many of the narrative disclosures required by IAS 19.

The working group also discussed the potential merits of disclosures on longevity risks (such as currently suggested in a non-mandatory Disclosure Statement by the UK Accounting Standards Board) but there was little agreement as to whether or not the Statement was being applied in practice or about how useful any information provided actually was.

General Costs and benefits of the proposals in ED 2010/3

The objective of the proposed amendments is to improve the usefulness of information available to users for their assessment of the amounts, timing and uncertainty of future cash flows arising from defined benefit plans of the entity. However, the Board also considered the cost of implementing the proposed amendments and applying them on a continuous basis. The proposed amendments, if confirmed, should (in the IASB’s view) improve the ability of users to understand the financial reporting for long-term employee benefits. The Board expects that costs will depend on the complexity of an entity’s defined benefit arrangements and the options in IAS 19 that the entity currently elects to apply and believes that the benefits generated by the proposals will outweigh the costs of implementing them.

While most commentators agreed with the Board that eliminating the corridor and limiting the number of presentation options currently available would improve understandability and comparability, there was widespread concern that the proposals’ costs (particularly those relating to disclosures) would not be outweighed by its benefits. Many objected to the Board’s assessment that implementation costs would be minimal: While enhanced disclosure requirements would impose an additional burden on reporting systems, the intended elimination of the “other long-term employee benefits” category in favour of subsuming such benefits and post-employment benefits in a new category “long-term employee benefits” would lead to more benefits than currently being subject to detailed valuations and the enhanced disclosures. Moreover, commentators were anxious that more frequent valuations would be required for plan assets and benefit obligations at interim reporting dates.

Discussions by the Working Group

The discussions by the working group mirrored the concerns raised during the comment phase. The working group’s majority view seemed to be that the costs associated with implementing the IASB’s proposals would significantly outweigh their benefits. A working group member from the actuarial profession seriously questioned the meaningfulness of interim valuations, stating that he saw very little additional benefit in providing these while the associated costs would very likely be substantial. However, there seemed to be some disagreement on the actual complexity of such valuations between members of the working group.

Future work plan on employee benefits

The staff gave an overview of how the Board currently plans to carry on with the project on employee benefits: After finalization of the amended IAS 19 in 2011, the IASB intends to direct its efforts towards some of the issues raised in the Board’s Discussion Paper Preliminary Views on Amendments to IAS 19 published in March 2008, such as accounting for contribution-based promises. Moreover, both the IASB and the FASB agree that a converged standard on post-employment benefits is an ultimate goal. The IASB argues that there is a need for a comprehensive review of the accounting for employee benefits that would address issues such as measurement of the post-employment benefit obligation, recognition of the obligation based on the benefit formula and presentation of a net obligation, rather than consolidation of gross pension assets and gross liabilities in an entity’s financial statements.

Discussions by the Working Group

There was broad support from all groups represented in the working group for the IASB’s and FASB’s intentions to continue to work on employee benefit accounting. Some working group members pointed to the subject’s interaction with the current IASB project on insurance contracts and argued that the two should not be allowed to drift too far apart. Some working group members argued that any fundamental review of accounting for employee benefits should be driven by actual user needs and that any such review would have to incorporate work on the interpretation and application of IFRIC 14 which caused some divergence in practice.

After a brief summary of the working group’s discussions by the IASB staff, the chairman brought the meeting to a close.

Discussion at the October 2010 IASB Meeting

The staff summarised, in very broad terms, the comment letters and the feedback received during the comment period and outreach activities in order to provide the Board with an overview of the main issues raised by respondents. The staff explained that overall the responses to the ED have been supportive of the overall objectives of improving transparency, comparability and understandability by eliminating the options for recognition and presentation of changes in defined benefit plan assets and liabilities as well as improving the disclosures about those plans. However, in many cases the support is based on the condition that the Board perform a comprehensive review of post-employment benefit accounting in future. Some respondents did not support the limited scope of the project and suggest that effort would be better spent on proceeding directly to a comprehensive review.

Recognition

The Board was informed that a majority of respondents agreed with the proposal to eliminate the corridor approach and to recognise all changes in the defined benefit obligation and the fair value of plan assets when they occur. Those respondents disagreeing with the proposal, stated that the recognition requirements should not be changed until the problems with the measurement of the defined benefit obligation have been resolved. Others argued that the proposal would make pensions appear riskier than other economically similar liabilities that are not measured at a current value.

The staff reminded the Board that it previously acknowledged that there are some general questions that are yet to be answered about performance reporting in the financial statement presentation (FSP) project, but that the Board has previously decided to address presentation of post-employment benefits now, rather than to risk delaying progress on immediate recognition by waiting for the FSP project to be finalised.

Some Board members question whether any new arguments were put forward not to eliminate the corridor approach. The staff responded that most concerns were around volatility in the statement of financial position and that no new information has been provided to invalidate the Board’s previous discussions and decisions on the matter. The Board unanimously confirmed the decision to eliminate the corridor approach.

The Board then turned its attention to the proposals around the recognition of unvested past service cost. The staff noted that those respondents that supported the elimination of the corridor approach, also supported the proposal to recognise unvested past service cost at the time of the plan amendments. Those opposing the proposal argued that the majority of plan amendments are initiated with the intent to benefit future periods and that the proposal is therefore not consistent with the principle that employee benefit expense is recognised in the period when the employee must provide the service needed to qualify for the benefit.

Some Board members were concerned with the apparent inconsistency between IAS 19 and IFRS 2 with regards to unvested past service cost. It was pointed out that this project does not include re-examining the accounting for defined benefit plans based on a benefit formula. If the Board retains the attribution of benefits in accordance with a benefit formula, the unvested past service cost will be a liability in accordance with IAS 19. Some Board members were also concerned about the opportunities for structuring opportunities. The Board was reminded that it has previously identified this apparent inconsistency but decided to address that as part of the comprehensive project and not as part of this limited scope project. The majority of Board members voted in favour of confirming the proposals in the ED to recognise unvested past service costs when the plan amendment occurs.

By a large majority, the Board also confirmed its previous tentative decision to include in the definition of termination benefits only those benefits provided in exchange for termination of employment.

Disaggregation

The staff noted that most respondents agreed with the proposal to disaggregate defined benefit cost into a service cost, finance cost and remeasurement component. Those disagreeing with the proposal regard the determination of an appropriate disaggregation method as intrinsically linked to the accounting model and that is should be considered as part of the fundamental review of IAS 19. The staff explained that disaggregation is the step before presentation and that regardless of what the Board decides on presentation in the statement of comprehensive income, the cost should be disaggregated into separate components.

The Board unanimously confirmed the proposal that entities should disaggregate the changes in the defined benefit obligation and fair value of plan assets into the three specified components and that the service cost component should exclude gains and losses arising from changes in the estimates of assumptions used to measure the service cost.

Defining the finance cost component

The staff explained that the majority of prepares and pension funds supported the expected return approach, while the majority of actuaries, accounting professional bodies and national standard setters supported the net interest approach. Views from the accounting firms and users were mixed with no clear majority for either approach. The staff also noted that the members of the Employment Benefits Working Group were divided between the two approaches. The staff explained that the advantages and disadvantages of each approach do not clearly favour either and that the staff does not believe that the net interest approach represents a significant enough improvement to justify a change in the existing requirements of IAS 19.

Some Board members supported the staff proposal to retain the existing requirements of IAS 19 with regards to the expected return as they do not consider the existing model to be broken or the alternative to be a significant improvement. Other Board members regarded the corridor approach as an integral part of expected return. By eliminating the corridor, the expected return becomes meaningless. Another Board member noted that by recognising the expected return on risky assets in profit or loss, while the actuarial gains or losses (risk) on those assets are recognised in OCI without any recycling, is not reflecting the underlying economics of the investments.

Several other Board members were supportive of the net interest approach but were concerned about the timing of making such a significant change.

Some other Board members suggested retaining the option to recognise all changes in immediately in profit or loss. Another Board member noted that if you use expected return, there is more pressure on recycling to profit or loss. If the Board decided to retain the expected return approach, it would have to retain the option of recognise all changes immediately in profit or loss.

When put to a vote, the Board voted in favour (9 against 4) of the net interest approach as articulated in the ED. The Board will continue to deliberate the remaining issues at the next meeting.

Discussion at the November 2010 IASB Meeting

The Board continued its discussion of the proposals in the exposure draft Defined Benefit Plans (the ED). In response to the main issues raised by respondents (previously discussed at the October meetings), the staff developed recommendations for specific disclosure, presentation, and classification items. The staff presented papers (agenda reference 11A – 11H) which provided an overview of the responses to the ED proposals with staff analysis and staff recommendations on moving forward with or revising the original ED proposals. This meeting focused on 1) presentation, 2) disclosure, and 3) classification.

Cover Note (Agenda Paper 11A)

The staff began with a discussion of paper 11A by providing a high level overview of the topics to be discussed at the meeting and a summary of the information included in the other agenda papers. The staff noted that the IASB was still on track to finalise the amendments to IAS 19 by Q1 2011. A summary of the comments from respondents and the staff's recommendation are included in each of the agenda papers.

Disclosure: Approach and Objectives (Agenda Paper 11E)

The staff briefly explained the disclosure topics to be discussed and informed the Board that these topics are included in agenda items 11E through 11G. The staff explained the Board's approach in developing the proposed objectives and required disclosures in the ED (included in 11E) and moved on to discuss themes in comments received from respondents to the proposal, which are included in the agenda paper.

The staff noted that some respondents were concerned about excessive disclosure, the potential for disclosures to become boilerplate, and detailed disclosure requirements rather than a more principles-based approach. The staff noted that some respondents sought more guidance on materiality and referenced the following proposed disclosure guidance included in paragraph 70 of the Revenue from Contracts with Customers ED:

70. An entity shall consider the level of detail necessary to satisfy the disclosure requirements and how much emphasis to place on each of the various requirements. An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics.

The staff noted that having a requirement such as this might assist entities in meeting the disclosure objectives without obscuring relevant information with excessive detail. A discussion by the Board ensued. A Board member noted that a list of required items sometimes results in too much disclosure. However, a split between required and encouraged disclosures also presents issues and noted that based on an IFRIC project preparers generally don't include encouraged disclosures.

The Board then unanimously agreed with the staff proposal to confirm the disclosure objectives proposed in the ED, with consideration given to the comment on including a similar discussion to that included in paragraph 70 of the revenue ED.

Disclosure: New Disclosures (Agenda Paper 11F)

The staff discussed the information included in agenda paper 11F, starting with an overview of the objectives. The staff member highlighted certain responses from respondents that they considered in developing their recommendations and then provided and overview of their recommendation to the Board.

Question 1:

A Board member expressed concern with part (c) of the staff's proposal, which would eliminate the requirement to disclose the effect of a change to each significant actuarial assumption at the beginning of the reporting period that would have affected current service cost. She noted that this provides information to enable users to understand the variability (measurement uncertainty) of current period service cost. The staff responded that the objective of this disclosure in ED was to provide disclosure about risk, and that is why they proposed to remove this requirement from the proposed disclosures. Another Board member questioned whether there would be operational issues with entities trying to evaluate risks that are unusual and specific to the entity as included in part (a). He noted that the objective is proper, but may result in inconsistency in practice.

The Board moved to vote on the proposals in Question 1, and a majority agreed.

Question 2:

A member of the Board raised concerns about the staff's proposal to eliminate the disclosure of the process of developing demographic assumptions. He noted that disclosures on demographic assumptions are very sensitive in certain jurisdictions and many would be interested in how such assumptions are derived. Another Board member noted that disclosure of where certain mortality assumptions come from (i.e., which mortality tables) is an important disclosure, as some entities may use outdated tables in developing their assumptions. It was also noted that investors usually compare demographic assumptions to an entity's industry peers or those in the same jurisdiction. The Board members also noted that IAS 19 includes a principle that assumptions significant to the defined benefit obligation (DBO) need to be "relevant and up to date."

The Board voted unanimously to approve the proposal in Question 2 to remove the description of the process used to determine demographic assumptions.

Question 3:

The Board moved on to discuss alternative measures of the DBO. Support for disaggregation was expressed by some Board members, but concern was expressed that that it may not be clear to entities how to apply the staff's proposal. It was concluded that this proposal should be discussed by the advisory group and potentially field tested.

Question 4:

The Board unanimously voted to accept the staff's recommendations to confirm the proposal in the ED to disclose asset-liability matching strategies used by the plan.

Question 5:

With minimal discussion, the Board approved the staff's recommendation in Question 5(a) to include a narrative description of the funding policy or arrangement for the plan.

The Board had extensive discussion regarding the proposed disclosures for information about the amount, timing, and uncertainty of future cash flows. Discussion focused on use of forecast information to project the next five years of benefit payments and whether there would be operational issues related to this provision. The staff and some Board members noted that the disclosure would utilise information that is used to measure the obligation. The Board also discussed whether this disclosure was important to both funded and unfunded plans, with some advancing a view that it was not as relevant to funded plans.

The majority of the Board approved the staff's proposal to disclose the expected contribution in the next year. The Board expressed general support for the disclosure of the next 5 years of benefits payments but concluded that this be discussed at the Employee Benefit Plan Working Group (EBWG) and potentially field tested.

Disclosure: Other Disclosures (Agenda Paper 11G)

The staff briefly explained the topics for discussion for this agenda item.

They explained that the staff's proposed disclosure of the duration of the DBO (Question 1(a)(i)) is similar to the current UK disclosure requirement (focused on the weighted average maturity of the obligation). This measure is used to understand the profile of the cash flows and complements the disclosure of the expected benefit payments (11F Question 5). The Board expressed general support, but requested that this proposal be discussed by the EBWG, that examples of what is currently required in the UK be provided, and potentially field tested.

The Board voted unanimously to approve the staff's proposal on requiring a "stand-back" requirement (Question 1(a)(ii)) to disclose any additional information necessary to meet the disclosure objectives.

The staff moved on to discuss disaggregation of plan assets and noted that there was a good deal of pushback from respondents about the proposal in the ED. A Board member question the use of "high quality" in the staff's proposal as this notion does not exist in many jurisdictions. After additional discussion, the Board concluded that changing the language in the staff proposal to "credit quality" would work better. The Board discussed the US GAAP requirements in this area. A Board member stated that using a minimum disclosure requirement is not the proper way to reduce the amount of disclosure in this area. The benefits and negative aspects of requiring a minimum list versus a principles-based approach with examples were discussed. Several Board members expressed concern that using something similar to current US GAAP standard (ASC 718-20-50-1(d)(5)(iv)) could produce disclosures that are quite large.

The majority of the Board voted to eliminate the requirement for a minimum list of plan asset categories when disaggregating plan assets. The majority then voted that using a principles-based model with examples (similar to current US GAAP requirement) is the way to proceed. They concluded that nothing would be finalised until they discussed an updated proposal in detail and reviewed sample disclosures and possibly field tested the new proposal.

Presentation: Presenting the Components (Agenda Paper 11C)

The staff briefly discussed the information included in agenda paper 11C.

Question 1:

The Board discussed the presentation of the service cost and finance cost components in profit and loss and whether or not to prescribe where in profit and loss these items should be presented. A number of Board members expressed a view that defined benefit-related finance costs represent true finance costs and should be included as a separate cost line in the statement of profit and loss. The staff noted IAS 1 doesn't define finance cost and that entity's have interpreted the definition of finance costs differently. The Board reaffirmed that entities should be allowed to follow the principles of IAS 1 in determining how items should be classified in profit or loss.

The Board voted and the majority approved the staff's proposals to (1) present the service cost and finance cost components in profit and loss and (2) not to specify where in profit and loss they are presented.

Question 2:

The staff moved on to the presentation of the remeasurement component in other comprehensive income. A number of Board members expressed a view that the profit and loss approach (an approach currently allowed under IAS 19) should remain, with entities having the option to choose P&L or OCI treatment. Although elimination of alternatives is preferably in this case it would result in eliminating the alternative that is a better accounting solution. A Board member noted that the OCI approach has been used in UK for over 10 years, that options should not be allowed and that long term gains and losses should not be in profit and loss, as it is not a fair reflection.

The Board concluded not to approve with the staff's proposal to solely use the OCI. The majority voted that the amended standard should include an option for use of either the P&L approach or OCI approach.

Presentation: Other Issues (Agenda Paper 11D)

The staff briefly explained the topics for discussion in the agenda item.

Question 1:

The Board discussed the fact that the issue surrounding the recognition of defined benefit plan components in cost of an asset is more of an accounting question, rather than presentation question. The Board members explained that other standards that discuss capitalisation may have deficiencies, but IAS 19 is not the place to correct or make up for such deficiencies. A Board member summarised the fact that the real issue is whether these costs can be capitalised under IAS 2. However, they reiterated that this cost accounting issue should not be addressed by IAS 19 amendments.

The Board voted and the majority approved the staff's recommendation to confirm the proposal in the ED to recognise service cost, finance cost, and remeasurement components in statement of comprehensive income unless another Standard requires or permits their inclusion the cost of an asset.

Question 2:

The Board moved on to the topic of "recycling" OCI items through profit and loss. A Board member confirmed that IAS 19 prohibits recycling in all situations, and the proposal in the ED must be changed to prevent inconsistency. A Board member recommended that the staff proposal to prohibit recycling be approved, with the language being reworded to more closely aligned with IAS 19.

The Board unanimously agreed with the staff's proposal.

Question 3:

The Board then discussed the last topic on agenda paper 11D, treatment of cumulative OCI amounts within equity. A Board member questioned why there was a need to make a special case in IAS 19, and not in other standards. Another member countered by stating that this treatment already exists in IAS 19 and IAS 16. As a result, this proposal achieves consistency in the standards. Some members expressed concern about the specific language used in the staff's proposal, especially the notion of "transfer."

The Board unanimously agreed with the staff's proposal to permit, but not require the transfer of cumulative OCI amount within equity, with language reworded to be consistent with IAS 16.

Classification (Agenda Paper 11H)

Due to time constraints, the Board moved directly to the staff's questions in the agenda paper 11H. The Board unanimously agreed to retain the existing classifications of post-employment and other long-term employment benefits in IAS 19 (Question 1). The staff then briefly discussed the basis for classification of short-term employee benefits and whether the short-term classification should be based on expected settlement or entitlement (Question 2(a)). The staff then discussed the fact that classification should be revisited if the benefit no longer meets the definition of a short-term employee benefit (Question 2(b)).

The Board immediately moved to a vote and unanimously agreed with the staff's proposals.

Discussion at the December 2010 IASB Meeting

The staff presented the Board with an analysis of the responses received on the Exposure Draft Defined Benefit Plans.

Past service costs, curtailments and settlements

The staff explained that the majority of respondents to the ED supported the proposal to present gains and losses arising from curtailments in profit or loss and gains and losses arising from routine settlements in other comprehensive income. Respondents also supported the disclosure of the details of any plan amendments, curtailments and non-routine settlements. However, the majority of respondents did not support the presentation of non-routine settlements in other comprehensive income.

Curtailments

Curtailments were defined in the ED (without substantial change from current IAS 19 requirements) as:

Part (b) of the proposed curtailments definition is the same as the definition of past service cost except it applies to plan amendments that change benefits for future service.

The distinction between past service cost and curtailments is necessary in current IAS 19 because curtailments are recognised immediately, but past service cost is recognised over the vesting period. Because the Board has tentatively decided to require immediate recognition of unvested past service costs the distinction between past service cost and curtailments is no longer necessary. Therefore, past service cost will include amounts attributed to past service resulting from plan amendments to both past and future service and would be recognised immediately.

The Board considered the following approaches to part (a) of the definition of curtailments (the significant reduction in the number of employees covered by a plan):

Without much deliberation, the Board tentatively agreed not to eliminate part (a) of the definition. The Board was of the opinion that if the criteria is eliminated, there will be no guidance to differentiate between the closure of a plan to all employees (which is closer to a plan amendment) and increase in turnover (which is closer to an actuarial gain or loss).

Settlements

The staff reminded the Board that settlement gains or losses arise when an entity settles its employee benefit obligation with its employees, or a third party, for an amount that differs from the IAS 19 measurement. This gain or loss might reflect various amounts, such as a profit margin, an amendment to the benefits or differences between actuarial assumptions used by the entity and the counterparty in the settlement transaction. Respondents were of the opinion that there was an overlap between the definitions of settlements and past service costs and curtailments.

The Board acknowledged that it is not clear whether there is an overlap in the definitions (because the definitions are not defined exclusive of one another) or whether it is just difficult to distinguish the effect of a curtailment from the effect of a settlement when they occur together. However, it would be necessary for entities to be able to distinguish the gain or loss on settlement from any past service cost or gain or loss on curtailment if they are required to include amounts relating to each in different components of defined benefit cost.

The staff informed the Board that the perceived overlap could be eliminated by either requiring any past service cost or curtailment to be determined before a related settlement, or by amending the definition of a settlement to exclude past service cost and curtailments, with both approaches achieving a similar outcome.

The Board unanimously agreed to amend the definition of a settlement to exclude past service cost and curtailments, while at the same time amend the definition of non-routine settlements to exclude benefits envisaged in the terms of the plan (routine settlements).

Presentation

The Board then turned its attention to the question of in which component of defined benefit cost past service cost and the gain or loss on curtailment and settlement should be included, and considered the following three alternatives:

• Alternative A: confirm the proposals that past service cost and a gain or loss on curtailment should be included in the service cost component and a gain or loss on settlement should be included in the remeasurement component
• Alternative B: retain the requirements in IAS 19 that past service cost and any gain or loss on curtailment or non-routine settlement should be included in the service cost component and any gain or loss on routine settlement to be included in remeasurements
• Alternative C: requiring the effect of settlements, curtailment and plan amendments to be presented in the remeasurements component.

The Board was supportive of alternative B and agreed to retain the requirements in IAS 19.

Disclosure

Most respondents to the ED agreed with the disclosure of any past service cost, curtailment and non-routine settlement, however some were concerned that the proposed disclosure requirements would be excessive and should be required only if material or significant to the financial statements. The Board unanimously confirmed the disclosure requirement proposed in the ED but agreed to not require distinguishing between these items if they occur together and are presented in the same component.

Multi-employer plans

The staff informed the Board that the comments received on the ED were similar to the comments received by the FASB on its exposure draft to expand disclosures about an entity's participation in a multi-employer plan. In general respondents were concerned about the following three proposed requirements:

• the quantification of a withdrawal liability as it is typically determined using assumptions different to the IAS 19 measurement and different plans specify different allocation methods using different assumptions
• the disclosure of expected contributions for the next five years
• the requirement to disclose the entity's proportion of the total number of members of the plan.

The Board confirmed its intention to retain the requirement in IAS 19 that an entity account for its share of a defined benefit multi-employer plan in the same way as for any other defined benefit plan unless sufficient information is not available, in which case an entity accounts for the plan as if it were a defined contribution plan. The Board also agreed to amend IAS 19 to reflect that the ability to account for multi-employer plans as defined benefit plans is less common than currently implied by the words 'in some cases'.

Withdrawal liability

The Board confirmed its intention to require either quantitative or qualitative information about an entity's obligation if it decides to withdraw from a plan. Such disclosure was intended to provide users with information about the effect on the cash flows of an entity in the event of a withdrawal or wind-up of the plan. The Board acknowledged that withdrawal from a plan is not always an option and that if it was a requirement for all entities, it would be an onerous requirement. The Board therefore agreed to limit the required disclosure to qualitative information and to specify that any withdrawal liability should be recognised and measured in accordance with IAS 37.

Future contributions

The Board acknowledged that disclosing the contributions for the next five years would require an entity to forecast future levels of employee service and therefore the amount would be difficult to determine and the disclosure would also result in the disclosure of forward looking information. The Board therefore agreed to reduce the period for the disclosure of future contributions to 1 year.

Proportion of members

The Board confirmed its intention that the disclosure should focus on the objective of providing information about the effect of any surplus or deficit on the amount, timing and uncertainty of an entity's future cash flows. If an entity does not account for its participation in a multi-employer plan as a defined benefit plan, providing users with information about the entity's relative level of participation in a plan would help meet this objective. The Board confirmed the requirements proposed in the ED and agreed that the requirement on an entity's level of participation in a plan can be met either by disclosing its proportion of total members or total contributions.

Tax and administration costs

The staff reminded the Board that the ED proposed to remove the options in IAS 19 for entities to include plan administration costs either as a reduction in the return on plan assets or in the actuarial assumptions used to measure the defined benefit obligation.

With regards to taxes, the ED proposed to amend IAS 19 to clarify that the estimate of the defined benefit obligation includes the present value of taxes payable by the plan if they relate to service before the reporting date or are imposed on benefits resulting from that service, and if this is the case, those taxes should not be included as a reduction in the return on plan assets.

The staff informed the Board that there was significantly more support for the proposals regarding plan taxes than there was for the proposals regarding administration costs. Those respondents opposing the proposals for administration costs noted the interaction between these proposals and the amendments regarding the determination of finance costs. Because the ED proposed that the finance cost should be determined based on the net defined benefit asset or liability multiplied by the discount rate used to measure the defined benefit obligation, respondents noted that including any taxes and administration costs in the return on plan assets will result in those costs being presented as part of the remeasurements component.

The Board considered the following three approaches with regards to administration costs:

• Approach A: confirming the proposals in the ED
• Approach B: retaining the existing requirements of IAS 19
• Approach C: requiring administration costs to be expensed when incurred.

The Board noted that for approach A guidance would have to be provided to address the practical difficulties noted by respondents such as splitting the costs between managing assets and administering the plan and splitting the costs of administering the plan between costs that relate to current and past service and cost related to future service.

However, the Board also noted that deducting administration costs from the return on plan assets (approach B) will result in these costs being presented in the remeasurements component. .

Several Board members considered approach B the worse possible outcome and one that would lead the Board onto a slippery slope.

With regards to approach C, most Board members were supportive of the approach and felt that it would address some of the practical concerns raised by respondents as costs will not need to be split between current and past service and future service. However, this approach would represent a change to the fundamental measurement objective of IAS 19, that the defined benefit obligation should be determined based on the ultimate cost of the benefits and may require re-exposure.

The Board was in general supportive of alternative A, but acknowledged the practical difficulties of splitting the costs. One Board member noted that the Board seems to be discussing measurement issues and that the scope of the project specifically excludes measurement. The Board member suggested that the Board delay any decisions on the matter until the comprehensive review of IAS 19.

After deliberating the advantages and disadvantages of each approach, the Board agreed to consult the Employee Benefits Working Group on the impact of adopting approach C as a practical expedient, as its first choice.

As a fall-back position, the Board agreed to modify approach B to specifically exclude administration costs from the remeasurement component. This would leave entities with the existing IAS 19 requirements of either recognising administration costs as part of the service cost component or as part of the defined benefit obligation.

With regards to plan taxes, the Board agreed to confirm the proposals in the ED. Only one Board member did not vote in favour of this decision.

Mortality assumptions

The exposure draft proposed to state explicitly that the mortality assumptions used to determine the defined benefit obligation are current estimates of the expected mortality rates of plan members, both during and after employment. Although respondents were overall supportive of the proposals, some were concerned about why the Board was using 'current estimate' since such language is not used anywhere else in IAS 19 and found references to 'current' and 'expected' confusing and suggested the deletion of 'current'. Without any deliberation, the Board confirmed the proposals in the ED.

Incorporating IFRIC 14

The ED proposed to incorporate into IAS 19, without substantive change, the requirements of IFRIC 14, as amended in November 2009 and to define'minimum funding requirement' 'any enforceable requirement to fund a long-term defined benefit plan'. Respondents suggested that a fundamental review of IFRIC 14 precede the incorporation into IAS 19, indicating that there is diversity in current application of IFRIC 14 and any slight change to the words used in IFRIC 14 could be interpreted as a change in requirements. Without much deliberation, the Board agreed to withdraw the proposal to incorporate IFRIC 14.

Identification of back-end loaded plans

The Board considered responses to the proposal to consider expected future salary increases in determining whether a benefit formula allocates a materially higher level of benefit in later years. Although most respondents were supportive of the proposals, some disagreed on the basis that service in neither previous nor subsequent period changes the benefit increment earned in a specific year. They were also of the opinion that the fact that the entity compensates later periods of service at higher levels is an intrinsic part of the plans and there is no reason for smoothing cost over all periods of service - they are not intended to compensate for overall services on a straight-line basis.

One Board member questioned why the Board proposed such an amendment as this is again touching on measurement, which has been specifically excluded from the scope of the current project. Another Board member supported this view and added that the proposed amendment would have a knock-on effect on defined benefit plans. When put to a vote, only 4 Board members voted in favour of confirming the proposals in the ED. As a result, the Board agreed to withdraw the proposals.

Interim reporting

The Board considered the issues that respondents raised in relation to the remeasurement of net defined benefit liability (defined benefit obligation less plan assets) for interim reporting purpose. These issues included questions around how often the defined benefit liability should be remeasured, whether the assumptions should be updated at the interim reporting date or fixed at the beginning of the year and whether the base used to calculate net interest should be remeasured at each interim reporting date or averaged over the interim period.

Apart from clarifying the wording of IAS 19 to make clear that reporting date does not refer to interim reporting dates and to further clarify the requirements for interim reporting and the updating of assumptions, the Board agreed that no further amendments to IAS 19 are needed in this regard.

State plan and group plan disclosures

The ED proposed updating, without further reconsideration, the disclosure requirements for entities that participate in state plans or group plans to maintain consistency with the disclosures for multi-employer plans and defined benefit plans. Many respondents were supportive of the proposals, however some disagreed on the basis that for group plans the information is already provided in the parent's financial statements and for state plans, the information may not be available. Some other respondents also asked the Board to clarify whether the disclosures are required for defined contribution state plans as well.

Without much deliberation, the Board confirmed the proposal in the ED to make the disclosures:

• for defined benefit state plans consistent with the disclosures for multi-employer plans if the information is available
• for group plans consistent with the disclosures for defined benefit plans

For group plans the information can be included by cross-reference to disclosures in the parent entity financial statements provided that they:

• separately identify and disclose the information required for the group plan, and
• are available to users of the financial statements on the same terms as the financial statements and at the same time

Discussion at the January 2011 IASB Meeting

Presentation of components of defined benefit cost

As part of the exposure draft Defined Benefit Plans the Board intended to reduce the options in IAS 19 related to the presentation of components of defined benefit cost in either profit or loss or other comprehensive income. The Exposure Draft proposed the remeasurement of the defined benefit cost be recognised in other comprehensive income and eliminate the option of recognising in profit or loss. However, a certain number of comment letter respondents expressed concern with the elimination of the ability to recognise these costs in profit or loss because of the presentation mismatch that would be created. Examples cited of this situation included 1) unfunded plans where the assets are recognised as part of the corporate entity rather than in a separate off-balance sheet plan and 2) entities engaged in hedging as part of their plan management. During the November 2010 meeting, the Board withdrew their proposal in the ED and tentatively agreed entities could retain the option of presenting the remeasurement component in either profit or loss or other comprehensive income. The staff raised this issue to give the Board a chance to reconsider that previous tentative decision.

The IASB Chairman began the discussion stating that 90% of comment letter respondents supported the proposal for presentation in other comprehensive income; however, there were a few that raised the accounting mismatch concern. He does not support providing a full option approach and noted that the basis for conclusion in the Exposure Draft states that "perpetuating options in IAS 19 would not improve financial reporting". His belief is that retaining that option would open the Board up for criticism.

The Board considered whether to require recognition in other comprehensive income but to permit an option to recognise in profit or loss under certain circumstances, analogising to the fair value option presentation for financial liabilities within IFRS 9.

Multiple Board members expressed their continued belief the presentation in profit or loss was the preferable method but acknowledged that such a view was not supported by a majority of the Board. In discussing whether to permit an option to recognise in profit or loss under certain circumstances, one Board member questioned how they would not allow a presentation method than many thought was a better alternative (recognition in profit or loss) and noted that many investors share that view.

One Board member stated his support for allowing recognition in profit or loss under certain circumstances but rather than permitting an option for recognition in profit or loss would instead require recognition in profit or loss when an accounting mismatch exists. The staff noted that such an approach would be operationally more burdensome as it would require all entities to determine whether an accounting mismatch exists rather than simply permitting those entities with identified mismatches to elect an alternative presentation. Several Board members also expressed concern over what specific criteria would be used for determining whether an accounting mismatch exists.

One Board member proposed an approach with a default presentation in other comprehensive income but permit a one-time, irrevocable election on a plan-by-plan basis to present the remeasurement component in profit or loss. Unlike the fair value option within IFRS 9, this election could be made either at inception of the plan or at anytime going forward. However, once the decision to present in profit or loss has been made, there would be no ability to change the election. The basis for the Board permitting an election would be to allow entities to eliminate an accounting mismatch and the Standard would provide examples of instances where a mismatch may exist (the unfunded plan and hedging examples were specifically mentioned as indicators) but would not provide specific criteria for identifying a mismatch or a requirement that a mismatch exists in order to apply the election. His rational was to avoid having to detail specific criteria in order to utilise the option. The Board tentatively agreed (9 votes supporting the proposal) with this approach and also tentatively agreed that entities would need to disclose the use of the election as well as information on the reason for making the election.

Interaction of IAS 19 Proposals and IAS 37

Because of the interactions between IAS 19 and IAS 37, and the fact that both standards have pending projects to amend their respective requirements – albeit separate time tables, some coordination is needed in order to align their requirements. The discussion specifically focused on the timing of recognition for plan amendments, curtailments, settlements and termination benefits and their interaction with the timing of recognition for restructuring costs in IAS 37.

IAS 19 currently states that termination benefits should be recognised when the entity is "demonstrably committed" either to terminating employment before the normal retirement date or to providing termination benefits as a result of an offer made in order to encourage voluntary redundancy. The term "demonstrably committed" was also used in the exposure draft that preceded the issuance of IAS 37 but the language in IAS 37 was changed prior to issuance. However, the Board has made the tentative decision that entities shall recognise gains or losses when they occur and proposed removing the "demonstrably committed" language.

In order to align the recognition requirements for plan amendments, curtailments, termination benefits and settlements with the restructuring guidance in IAS 37, and to prevent having to make consequential amendments to IAS 19 once the amendments to IAS 37 are complete, the Board has tentatively agreed on the following:

• If a curtailment or plan amendment is linked to a restructuring or termination benefit, the gain or loss should be recognised when the related restructuring costs or termination benefits are recognised. Otherwise, the gain or loss should be recognised when the curtailment or plan amendment occurs,
• If termination benefits are part of the detailed plan or restructuring, they should be recognised when the related restructuring costs are recognised if that is earlier. Otherwise, termination benefits should be recognised when the entity can no longer withdraw the offer of the benefits, and
• A settlement should be recognised when it occurs.
   

Discussion at the 1-2 February 2011 Special IASB Meeting

The meeting began with the staff providing the Board with a time table until the final Standard would be issued at the end of March 2011. After the completion of today's discussion, the remaining topics for deliberation at the regularly scheduled February 2011 Board meeting would be transition, effective date and any carryover issues identified. The staff also provided the Board with an agenda paper which summarised the Board's tentative decisions to date.

Distinction between defined benefit plans and defined contribution plans

Some comment letter respondents expressed concern over the inclusion in the examples of defined benefit plans in paragraph 26 of IAS 19 of the criterion that a plan benefit formula that is not linked solely to the amount of contributions. They noted that as a result, certain plans have been classified as defined benefit plans which otherwise have characteristics of defined contribution plans. Specifically mentioned were certain defined contribution plans that have a benefit formula which determines the benefits to be paid out if the plan assets are sufficient, but for which the employer has no obligation to provide additional contributions if the plan assets are not sufficient (i.e., the benefit payments are the lower of benefit formula or the plan assets available).

The staff recommended the Board clarify that the existence of a benefit formula itself would result in classification as a defined benefit plan by including guidance that for defined benefit plans, a benefit formula would create an obligation that requires the employer to pay additional contributions as a result of current or past service. One Board member questioned the inclusion of the word "additional" with regards to contributions and whether it was necessary. The staff clarified that a defined contribution plan may require the employer to contribute an amount to the plan, this criterion is to focus on whether an additional contribution related to the benefit formula would be required. The Board tentatively agreed to clarify that for a plan to be classified as a defined benefit plan, a benefit formula needs to give rise to a legal or constructive obligation that may require the employer to pay additional contributions as a result of current or past service.

Accounting for risk sharing features in a defined benefit plan

Term of the benefit promise vs. assumptions

Determining whether an input of a defined benefit obligation is part of the benefit formula or an actuarial assumption is often difficult and the determination impacts the recognition and presentation of changes to that input. For example, amending benefits promised to employees results in past service costs, recognised when the change occurs and presented with current service costs. However, changes in actuarial assumptions are actuarial gains or losses and recognised when there is a change in the best estimate of the assumption and presented with remeasurements.

The Board considered whether to provide additional guidance on whether an input into the calculation of the defined benefit obligation is a part of the benefits promised or part of the actuarial assumptions. The Board tentatively agreed not to provide further clarification as the determination involves judgment based on the specific facts and circumstances.

Employee contributions

Some comment letter respondents expressed concern on how the proposals in the exposure draft ED/2010/3 Defined Benefit Plans would be applied for employee contributions and the allocation to periods of service. Employee contributions share the same difficulties as determining whether an input is a term of the plan or an actuarial assumption.

The Board tentatively agreed to clarify that the benefit to be attributed under either the benefit plan formula or on a straight-line basis (in accordance with paragraph 67 of IAS 19) would be net of the effect of employee contributions and attributed in a similar manner. The Board believes that doing so would address the concerns of those who feel that the benefit obligation includes cost of future increases in salaries but not the benefit of future contributions related to salary increases.

The staff acknowledged that there currently exists diversity in practice about how benefits are attributed to periods of service but did not propose any further clarification.

The Board also tentatively agreed to amend the proposal in the exposure draft in paragraph 64A to only refer to the effect of employee contributions on the defined benefit obligation, without referring to the presentation of the effect in the statement of other comprehensive income.

Conditional benefits

Some respondents expressed concern with the proposal to consider conditional indexation of benefits in the liability when the indexation is conditional on the assets in the plan. Some felt that the effect of a future increases in the assets is taken into account in the measurement of the liability but not in the measurement of plan assets. Additionally, some felt the requirements were too narrow and the effect of conditional indexation is only taken into account if the terms of the plan allow an entity to adjust the benefits promised.

The Board tentatively agreed to clarify that the assumptions used to estimate conditional indexation or changes in benefits should be 1) reflected in the measurement of the obligation regardless of whether the indexation or changes in benefits are automatic or are subject to a decision by the employer, by the employee, or by a third party such as trustees or administrators, and 2) be mutually compatible with the other assumptions used to determine the defined benefit obligation. Two Board members disagreed with the decision.

Limits on contributions

Some respondents noted that a plan may cap the amount of contributions an employer can be required to pay, either because of a funding arrangement between the employer and the plan or local laws and regulations. They asked the Board to clarify if such a limit should be taken into account in the measurement of the deferred benefit obligation. The Board tentatively agreed to clarify that limits on the legal and constructive obligation to pay additional contributions should be included in the calculation of the defined benefit obligation.
 

Discussion at the February 2011 IASB Meeting

As part of its continual deliberations surrounding the Exposure Draft Defined Benefit Plans published 29 April 2010, the Board considered the following topics:

• Presentation of remeasurements
• Feedback on tentative decisions to date
• Project status
• Effective date of any amendments and transitional requirements

Presentation of remeasurements

As part of its 21 January 2011 meeting, the Board tentatively decided that:

• although remeasurements should be presented in other comprehensive income, in some circumstances it would be appropriate to allow an entity to elect to present remeasurements in profit or loss (primarily to address accounting mismatches) for a given plan
• the election to present remeasurements in profit or loss would need to be irrevocable
• when an entity makes that election, amounts previously recognised in other comprehensive income should not be reclassified to profit or loss.

As a result of the Board's tentative decision that an election to present remeasurements in profit or loss would be on a plan-by-plan basis and would be irrevocable, the staff performed outreach and identified challenges to this presentation, including when a change in facts and circumstances would trigger reassessment of the irrevocable election to present remeasurement in profit or loss.

Accordingly, the staff asked the Board to reconsider its previous tentative decision that would allow an election and instead confirm the proposal in the Exposure Draft that the remeasurements component should be presented in other comprehensive income, as, in the staff's view, this would be the simplest, most understandable alternative and has received wide support from respondents to the Exposure Draft.

In evaluating this proposal, the Board noted certain drawbacks with the proposal in the Exposure Draft, including:

• introducing an accounting mismatch for a small number of entities
• expanding the use of other comprehensive income when the Board has yet to consider the presentation of the statement of comprehensive income more broadly
• proceeding with changes to the presentation of defined benefit cost when the Board has yet to consider the measurement of defined benefit plans
• eliminating presentation in profit or loss for first-time adopters who currently recognise all defined benefit cost through profit or loss.

The Board noted, however, that limiting the choice of presentation would improve the comparability of financial statements; a fundamental objective of the Exposure Draft serving to reduce the current options in IAS 19.

Likewise, the Board concluded that although the changes included in the remeasurement component may provide information that assists with an assessment of the uncertainty of future cash flows, many regard those changes as not providing useful information about the likely amount and timing of future cash flows. Therefore, inclusion of the remeasurement component as an item of other comprehensive income would provide further clarity in distinguishing the remeasurement component from service and finance costs.

As a result of this discussion, the Board reversed its previous tentative decision from the 21 January 2011 meeting that would have allowed for an irrevocable election on a plan-by-plan basis to present the remeasurement component in profit or loss or other comprehensive income; instead confirming the proposal in the exposure draft that the remeasurement component should be presented in other comprehensive income by an eight-to-seven vote.

Feedback on tentative decisions to date

In prior Board meetings, the staff was asked to gather feedback from the Employee Benefits Working Group members on tentative decisions to date, inclusive of any staff recommendations for necessary amendments to tentative decisions reached.

As a result, discussion points included:

• disclosure of risk exposure
• disaggregating the defined benefit obligation
• disclosure of information about the maturity profile of the defined benefit obligation
• presentation of administrative costs.

As a result of discussions, the Board confirmed:

• no change is required to the tentative decision to focus the disclosure of risks that the participation in a defined benefit plan exposes the entity to risks that are unusual or specific to the entity, without requiring excessive detail about generic risks;
• disaggregation of the defined benefit obligation would be required at a minimum when an actuarial valuation is performed, and that entities are required to carry forward this information in periods when no actuarial valuation is performed, with related disclosure of the date of last actuarial valuation;
• an entity should disclose the duration of the liability by outlining the weighted average duration of the liability, with clarity surrounding any unique maturity profile components
• costs related to managing plan assets should be deducted from the return on plan assets with no specific requirements for the presentation of other administrative costs.

Several Board members expressed concern about the prescriptive nature of the disaggregation requirements. The Board members would prefer the inclusion of factors that should result in disaggregation of the defined benefit obligation. This view was confirmed by the majority of Board member, and the staff will consider such recommendations in future updates.

Project status

All tentative decisions to date were summarised for Board member review, with Board members asked to comment as to whether they intend to dissent from the amendments to IAS 19 based on tentative conclusions reached. Three Board members expressed potential intention to dissent, for reasons including failure to present pension-related costs within profit or loss, as well as concerns with respect to net reporting and other comprehensive income reporting without recycling, as outlined in the Exposure Draft.

Effective date of any amendments and transitional requirements

In conjunction with discussion above, as well as previous Board meetings, the Board discussed the potential effective date of the amendments to IAS 19, as well as the transition timeline and requirements surrounding such amendments.

The Board confirmed that the effective date of required amendments to IAS 19 will be no earlier than 1 January 2013, but no consensus was reached on the effective date because the Board will consider the effective date and early adoption considerations as part of its broader considerations of the feedback received from the request for views on effective dates and transition consultation.

Transition requirements, like the effective date, will be discussed at a future meeting; however, the following tentative decisions were reached:

• for entities already applying IFRSs, the amendments to IAS 19 should be applied retrospectively in accordance with the general requirements of IAS 8, except that:
• the Board specify that the carrying amount of assets outside the scope of IAS 19 need not be adjusted for changes in employee benefit costs that were included in the carrying amount before the beginning of the financial year in which this amendment; and
• the Board specify comparatives need not be presented for the disclosures for the sensitivity of the defined benefit obligation for the year of initial application of the amendments to IAS 19.
• for entities adopting IFRSs for the first time, the amendments to IAS 19 should be applied retrospectively in accordance with the general requirements of IFRS 1, except that:
• the Board allows a temporary exemption for entities adopting IFRSs with a date of transition before the effective date of the amendments to IAS 19 that comparatives need not be presented for the disclosures for the sensitivity of the defined benefit obligation.

Discussion at the March 2011 IASB Meeting

Effective Dates and Transition

The IASB reconfirmed their previous decisions on effective date and transition requirements for the post employment benefit plans project.

Those decisions were:

• An effective date of 1 January 2013 for the amendments to IAS 19 Employee Benefits
• Permit early application of the amendments to IAS 19, but only if all the amendments are applied early
• Require an entity to disclose the fact that it has applied the amendments to IAS 19 early, if that is the case.

June 2011: Near Final Draft of amendments to IAS 19

The IASB has released a Near Final Draft (NFD) of amendments to its standard on accounting for pensions and other postretirement benefits (OPEB). This project forms part of the Memorandum of Understanding between the IASB and the FASB and represents the first step in a broader reconsideration of the accounting for pensions and OPEB. The IASB believes the amendments will yield significant improvements to the transparency and comparability of pension obligations. The following areas are affected by the amendments:

• recognition of changes in the net defined benefit liability (asset) including immediate recognition of defined benefit cost, disaggregation of defined benefit cost into components, recognition of remeasurements in other comprehensive income, plan amendments, curtailments and settlements;
• disclosures about defined benefit plans;
• accounting for termination benefits, including distinguishing benefits provided in exchange for service and benefits provided in exchange for the termination of employment and affect the recognition and measurement of termination benefits;
• miscellaneous issues, including the classification of employee benefits, current estimates of mortality rates, tax and administration costs and risk-sharing and conditional indexation features; and
• other matters submitted to the IFRS Interpretations Committee.

Access to the NFD on the IASB's website is for subscribers only. The publication of the amended IAS 19 is expected later this month.

June 2011: IASB issues amended IAS 19

On 16 June 2011, the IASB published an amended IAS 19 Employee Benefits.

Accounting for employee benefits, particularly pensions and other postretirement benefits, has long been a complex and difficult area and initial plans for a full review of pension accounting had to be deferred in light of competing priorities, ultimately leaving the IASB to proceed alone on improving specific aspects of the existing requirements of IAS 19 Employee Benefits. Prior to the amendment, IAS 19 permitted choices on how to account for actuarial gains and losses on pensions and similar items, including the so-called 'corridor approach' which resulted the deferral of gains and losses.

The Exposure Draft proposed eliminating the use of the 'corridor' approach and instead mandating all remeasurement impacts be recognised in OCI (with the remainder in profit or loss) – and in fact had proposed extending these requirements to all long-term employee benefits (e.g. certain long service leave schemes). The final amendments make the OCI presentation changes in respect of pensions (and similar items) only, but all other long term benefits are required to be measured in the same way even though changes in the recognised amount are fully reflected in profit or loss.

Also changed in IAS 19 is the treatment for termination benefits, specifically the point in time when an entity would recognise a liability for termination benefits. The final amendments do not adopt the equivalent US-GAAP requirements verbatim (which requires individual employees to be notified), but the recognition timeframe may be extended in some cases.

Finally, various other amendments to IAS 19 may have impacts in particular areas. For instance, employee benefits not settled wholly before twelve months after the end of the annual reporting period would be captured as an 'other long term benefit' rather than a 'short term benefit', and whilst presented as a current item in the statement of financial position, would be measured differently under the amendments.

Click for: IASB press release on the amendments to IAS 19 (link to IASB website)