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Post-employment benefits

Date recorded:

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.