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 were defined in the ED (without substantial change from current IAS 19 requirements) as:
- a significant reduction in the number of employees covered by a plan; or
- an amendment to the terms of a defined benefit plan so that a significant element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.
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):
- retain it as currently defined in IAS 19, or
- remove it from the definition of curtailments (which will result in the removal of the definition of curtailments in its entirety).
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).
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).
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.
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.
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'.
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.
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.
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.
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