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:
- unfunded plans where the assets are recognised as part of the corporate entity rather than in a separate off-balance sheet plan
- 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.