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Liabilities — Amendments to IAS 37

Date recorded:

The staff presented an analysis of the comments received on the exposure draft relating to the proposed amendments to IAS 19 Employee Benefits. IAS 19 was would be amended as part of the liabilities project principally to converge the accounting for termination benefits with US GAAP (in particular with SFAS 146 and SFAS 88 but not necessarily with all aspects of US GAAP).

The staff pointed out that, overall, most respondents were in favour of the proposed amendments, though some concerns have been raised.

Definition of termination benefits

Some constituents asked for clarification of the term 'short period' in the definition of voluntary termination benefits. In particular, they asked whether 'short period' relates to (1) the period between the employer making the offer and the employee's acceptance of the offer or (2) the period between the employee's acceptance and the actual termination of the employee.

The Board agreed that (2) was the intended interpretation and to clarify this in the proposed paragraph 7(b) of IAS 19. There seemed to be a consensus that judgement is required in determining what a 'short period' is. The Board decided not to give any further guidance in this respect.

The Board agreed to a staff analysis that the term 'short period' implies that the bonus feature of (voluntary) long-term early retirement programs does not meet the criteria of a termination benefit even if such bonus features are not compensation for services rendered by the employee.

Recognition of termination benefits

The main concerns raised by respondents were:

  • The proposal to recognise voluntary termination benefits only when the employee accepts the offer is inconsistent with the unconditional and constructive obligation principles set out in IAS 37 in cases where the entity cannot withdraw the offer (irrevocable voluntary termination benefits).
  • More guidance should be provided on whether recognition of involuntary termination benefits requires specific communication to individual employees or just to the affected group of employees.

Regarding the first issue the Board decided that irrevocable offers of voluntary termination benefits should be treated in the same way as involuntary termination benefits and that the proposed paragraph 137 of IAS 19 should be amended accordingly. Regarding the second issue Board members expressed mixed views. Finally, there was a consensus that communication of the termination to each of the individual employees affected is not required for a present obligation to exist. A majority of Board members was of the view that the affected employees or group of employees must be aware of the fact that they are to be terminated. That is, a general statement that, for example, 10% of the employees of an entity will be terminated would not be sufficient. Subject to some drafting comments the Board agreed to amend the proposed paragraph 138 to something like:

...an entity shall recognise a liability and expense for involuntary termination benefits when it has a plan of termination that it has communicated to each of the affected employees being terminated, and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn...

Recognition of involuntary termination benefits that relate to future services

Some respondents suggested that involuntary termination benefits paid in exchange for future services should be recognised in the same way as voluntary termination benefits rather than spread over the assumed future service period. These constituents believed that the communication of the plan is the obligating event and the entity should recognise the amount that it expects to pay. Other respondents commented that the standard should also provide for situations where voluntary termination benefits would be provided in exchange for future services.

The Board reaffirmed its decision that because of the notion of 'short period' voluntary termination benefits can never be recognised in exchange for future services and agreed to clarify this in the basis for conclusion.

The Board also reaffirmed its decision that involuntary termination benefits in exchange for future services should be recognised over the period of the future services.