Comment letter analysis

In March 2013, the IASB published for comment the ED Defined Benefit Plans: Employee Contributions (Proposed amendments to IAS 19). The comment period ended on 25 July 2013.

63 comments received from six continents and global organisations including global accounting firms. The IASB requested comments for two specific questions:

• Question 1: The IASB proposes to amend IAS 19 Employee Benefits to specify that contributions from employees or third parties set out in the formal terms of a defined benefit plan may be recognised as a reduction in the service cost in the same period in which they are payable if, and only if, they are linked solely to the employee’s service rendered in that period. An example would be contributions that are a fixed percentage of an employee’s salary, where the percentage of the employee’s salary does not depend on the employee’s number of years of service to the employer. Do you agree? Why or why not?
• Question 2: The IASB also proposes to address an inconsistency in the requirements that relate to how contributions from employees or third parties should be attributed when they are not recognised as a reduction in the service cost in the same period in which they are payable. The IASB proposes to specify that the negative benefit from such contributions is attributed to periods of service in the same way as the gross benefit is attributed in accordance with paragraph 70. Do you agree? Why or why not?
• Question 3: Do you have any other comments on the proposals?

The vast majority of respondents agreed with the proposals. The staff has now identified several points for consideration of amendments before publishing the final amendments.

Paragraph 93

Contributions from employees or third parties set out in the formal terms of the plan either reduce service cost (if they are linked to service), or reduce remeasurements of the net defined benefit liability (asset) (e.g. if the contributions are required to reduce a deficit arising from losses on plan assets or actuarial losses). Contributions from employees or third parties that are linked to service are attributed to periods of service as a negative benefit applying the same attribution method that paragraph 70 requires for the gross benefit in the same way that the gross benefit is attributed in accordance with paragraph 70. However, if, and only if, contributions from employees or third parties are linked only solely to the employee’s salary and service rendered in the same period in which they are accrued payable, and independent of the number of years of service, the contributions may be recognised as a reduction in the service cost in that period. An example would be contributions that are a fixed percentage of the employee’s salary or contributions whose percentage depends on the employee’s age, so the percentage of the employee’s salary does not depend on the employee’s number of years of service to the employer.

Footnote of paragraphs BC150 and BC143(b)

1 Defined Benefit Plans: Employee Contributions, issued in [date to be inserted after exposure], addressed an inconsistency in the requirements that relate to how contributions from employees or third parties should be attributed when they are not recognised as a reduction in the service cost in the same period in which they are accrued payable. It specifies that the negative benefit from such contributions is attributed to periods of service applying the same attribution method that paragraph 70 requires for the gross benefit in the same way that the gross benefit is attributed in accordance with paragraph 70. See paragraph BC5 of this Exposure Draft.

The staff noted that the IFRS Interpretations Committee ("IC") agreed with the amendments at the September 2013 IFRS IC meeting.

Question 1: Does the IASB agree that the wording of the proposed amendments should be revised as above?

One Board member stated that they were not entirely comfortable that all contributions are necessarily a reduction in the liability, that is, a reduction in the deficit. This raised the possibility of a fundamental review of the pension liability – this was supported by a couple of other Board members, although the staff only confirmed that at the moment there was no plan for a fundamental review.

A few Board members requested clarification on the difference between accrual and payable.

The Board tentatively agreed to the proposed amendments.

Question 2: Does the IASB agree that:

1. re-exposure is not necessary based on the re-exposure criteria; and
2. the mandatory effective date is set at 1 July 2014, with earlier application permitted?

The Board tentatively agreed with the staff.