Update on Project and Next Steps
After a short introduction from the chairman the staff gave an update of the latest outcomes from the Discussion of Post-employment Benefits at the January IASB meeting. The staff informed participants that the Board decided to follow a two step-approach for the short-term improvements to pensions accounting, with each step representing a separate exposure draft (ED), with final standards to be published by 2011:
- Step 1: Recognition, presentation, disclosures and other minor issues
- Step 2: Contribution-based promises
The staff explained that the ED for step 1 was expected for Q3/2009. Some participants welcomed this split compared to the three step approach originally proposed to the IASB at its January 2009 meeting. Others would have preferred the treatment of actuarial gains and losses to be dealt with as part of the long-term project that would review the measurement of defined benefit schemes. One member noted that some of the minor issues should be addressed via the IASB's annual improvements process because this might lead to an earlier effective date. A number of working group members emphasised that as disclosures were important for investors, these should be dealt with in the short term.
Issues to Be Addressed in the Exposure Draft on Step 1
Staff sought opinions on the following items that would be addressed in an ED as 'other issues':
- Additional guidance on the discount rate
- Multi-employer exemption
- Identification of back end loaded plans
- Accounting for plans with risk-sharing or conditional indexation features
- Short-term and long-term benefits
- Tax relating to pension costs
Additional guidance on the discount rate
Participants identified several issues with the current guidance for determining the discount rate used to measure the defined benefit obligation. It was acknowledged that, whilst welcomed, providing more guidance could be difficult until the broader issue of measurement of defined benefit plans was addressed. Further, participants highlighted that the current guidance issued by various sources is varies and sometimes contradicted each other. One member of the working group noted that the discount rate is only one part within a large group of estimates required for measuring the defined benefit obligation.
The staff asked participants whether providing a blanket exemption that would enable participants to treat defined benefit multi-employer plans like defined contribution plans on a much wider scale than under present IAS 19 would reduce information in an unacceptable way. Many participants were concerned about providing such an exemption, as this had the potential of misuse by entities structuring plans as multi-employer plans. One member supported such an exemption with restrictions (for example, where the entity plays a dominant role in the plan) if accompanied by detailed disclosures. One of the Board members present noted the danger that if those plans were not accounted for by the entities, they would not be accounted for anywhere.
Identification of back end loaded plans
It was noted that under current IAS 19 future salary increases must be included in assessing whether the benefit formula leads to materially higher benefits in later stages of a plan. One member said that this was preferred view by accountants. Another member added that this was an additional smoothing mechanism. This issue was identified by many as a source of divergence in practice. Working Group members generally felt that this should be included in the first ED.
Accounting for plans with risk-sharing or conditional indexation features
While most participants agreed this was an issue and more guidance would help, one member remarked that this could delay the deadline for the ED, especially if risk-sharing plans were addressed.
Short-term and long-term benefits
It was acknowledged the distinction between short-term and long-term benefits was an issue that should be resolved as it affects measurement of the benefit.
Tax relating to pension costs
It was suggested that this would be an issue for annual improvements.
Proposed Amendment to IFRIC 14
The staff introduced the proposed amendment to IFRIC 14 that would clarify the accounting for voluntary contributions to a plan where a minimum funding requirement existed. Participants were informed that the Board decided at the January Board meeting that this was akin to a prepayment and, hence, the full amount of voluntary contributions should be capitalised. Many members supported this decision, but highlighted that IFRIC 14 was in need for further clarification and was difficult to apply in many jurisdictions.
Possible Simplifications of Pension Accounting for Non-publicly Accountable Entities
On behalf of the staff of the IFRS for Non-publicly Accountable Entities (formerly SME or Private Entities) project team, members of the working group were asked for possible simplifications to defined benefit pension accounting for private entities. It was noted that actuarial valuations were costly and unnecessary burdensome for some small entities. Moreover, in some economies there would not be a sufficient number of actuaries to value such plans.
While some members saw room for simplification by increasing the periods between valuations or by using a unified model that was suitable, yet not perfect, for a wide range of plans, others were concerned about providing such simplification, as pension promises are both complex and risky by nature, and opting for simplistic valuation solutions would obscure that fact. Other proxy measurements mentioned comprised either using a valuation for funding purposes (where funding requirements existed) or quotes for insuring the obligation. However, it was acknowledged that insurance companies would not provide this information without being paid on a recurring basis.
One representative of the actuarial profession noted that there were already efforts to provide actuarial valuations on a not-for-profit basis via an association called 'Actuaries without Frontiers'. Another participant highlighted that involvement of an actuary is not a requirement in IAS 19 and probably this was also true for the private entities IFRS. Some believed that actuaries are sometimes not in a position to provide appropriate valuations because the population of employees would be too small to apply the usual methodologies. It was noted that while for large pension plans, potential measurement errors could be kept within reasonable limits as the 'rule of large numbers' applied, the range of possible outcomes and hence the potential for errors would be far greater for plans with only a small number of participants.
Most participants agreed that any simplification in accounting must be accompanied by appropriate disclosures.
Financial Statement Presentation – Implications for Employee Benefits
Staff from the financial statement presentation project team provided a summary of the proposals in the recently issued Discussion Paper on financial statement presentation.
The group had a lengthy discussion about the implication on presenting assets, liabilities, income, and expenses from post-employment benefits. In particular, members were interested in how the changes in a pension obligation would be allocated to the 'operating', 'investing,' and 'financing' sections, and where remeasurement gains or losses would appear.
The staff informed members that the Board had decided that all components of changes in the pension obligation would have to be presented separately on the face of the statement of comprehensive income within profit or loss. Many working group members preferred an approach under which only service cost would be presented in the operating section, but would prefer to allocate remeasurements into other comprehensive income (OCI). Those members saw this component as not being management's responsibility. This was also identified as a possibility to take away political pressure from the proposals. One of the analysts present noted that OCI only existed for political reasons.
The staff turned the discussion to possible approaches to disaggregate changes in the pension obligation. One of the crucial items was the identification of the return on plan assets. The discussion paper on pensions proposed three alternatives:
- Expected return
- Return based on dividends received for equity returns and market rates for debt investments
- Implicit rate of return
Staff highlighted that there was not much support for the second alternative and some support for the implicit rate of return. However, the majority of the participants favoured an expected return approach, possibly accompanied by more guidance on how to determine it. Analysts present preferred an 'actual returns' approach, which they would support with footnote disclosure of the expected rate and explanation about the differences.
The chairman closed the session by asking participants whether there were any areas for improvement of working group meetings. Working group members were generally satisfied with the way such meetings were handled. However, they would appreciate earlier involvement in the comment letter analysis and more timely delivery of the minutes of the meeting.
The next meeting will take place end of March or early April 2009.
This summary is based on notes taken by observers at the Employee Benefits Working Group meeting and should not be regarded as an official or final summary.