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.