IFRIC 14 — IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
- IAS 19 Employee Benefits
|24 August 2006||IFRIC D19 IAS 19 — The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements published||Comment deadline 31 October 2006|
|4 July 2007||IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction issued||Effective for annual periods beginning on or after 1 January 2008|
|28 May 2009||Exposure Draft ED/2009/4 Prepayments of a Minimum Funding Requirement (Proposed amendments to IFRIC 14) published||Comment deadline 27 July 2009|
|26 November 2009||Amended by Prepayments of a Minimum Funding Requirement (Amendments to IFRIC 14)||Effective for annual periods beginning on or after 1 January 2011|
Summary of IFRIC 14
In many countries, laws or contractual terms require employers to make minimum funding payments for their pension or other employee benefit plans. This enhances the security of the retirement benefit promise made to members of an employee benefit plan.
Normally, such statutory or contractual funding requirements would not affect the measurement of the defined benefit asset or liability. This is because the contributions, once paid, become plan assets and the additional net liability would be nil. However, paragraph 64 of IAS 19 Employee Benefits (2011) limits the measurement of the defined benefit asset to the 'present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.' IFRIC 14 addresses the interaction between a minimum funding requirement and the limit placed by paragraph 64 of IAS 19 on the measurement of the defined benefit asset or liability.
When determining the limit on a defined benefit asset in accordance with IAS 19.64, under IFRIC 14 entities are required to measure any economic benefits available to them in the form of refunds or reductions in future contributions at the maximum amount that is consistent with the terms and conditions of the plan and any statutory requirements in the jurisdiction of the plan. The entity's intentions on how to use a surplus (for instance, whether the entity intends to improve benefits rather than reduce contributions or get a refund) must be disregarded.
Such economic benefits are regarded as available to an entity if the entity has an unconditional right to realise them at some point during the life of the plan or when the plan is settled, even if they are not realisable immediately at the balance sheet date. Such an unconditional right would not exist when the availability of the refund or the reduction in future contribution would be contingent upon factors beyond the entity's control (for example, approval by third parties such as plan trustees). To the extent the right is contingent, no asset would be recognised.
Economic benefits available as a refund
If an entity has an unconditional right to a refund
- during the life of the plan, without assuming that the plan liabilities must be settled in order to obtain the refund, or
- assuming the gradual settlement of the plan liabilities over time until all members have left the plan, or
- assuming the full settlement of the plan liabilities in a single event (i.e. as a plan wind-up),
it recognises an asset measured as the amount of the surplus at the balance sheet date that it has a right to receive as a refund. This is the fair value of the plan assets less the present value of the defined benefit obligation, less any associated costs, such as taxes.
If the refund is determined as the full amount or a proportion of the surplus, rather than a fixed amount, the amount shall be calculated without further adjustment for the time value of money, even if the refund is realisable only at a future date, as both the defined benefit obligation and the fair value of plan assets are already measured on a present value basis.
Economic benefits available as a reduction in contributions
In the absence of a minimum funding requirement, IFRIC 14 requires entities to determine economic benefits available as a reduction in future contributions as:
- the present value of the future service cost to the entity (excluding costs borne by employees) over:
- the shorter of the expected life of the plan; and
- the expected life of the entity;
- determined using assumptions consistent with those used to determine the defined benefit obligation (including the discount rate); and
- based on conditions that exist at the balance sheet date.
This means, an entity shall assume
- no change to the benefits provided by a plan in the future until the plan is amended, and
- a stable workforce unless it is demonstrably committed at the balance sheet date to make a reduction in the number of employees covered by the plan.
IFRIC 14 contains illustrative examples that outline the accounting treatments under a number of different scenarios.
Effective date and transition
IFRIC 14 is effective for annual periods beginning on or after 1 January 2008. Earlier application is permitted.
The Interpretation is to be applied from the beginning of the first period presented in the financial statements for annual periods beginning on or after the effective date. The IFRIC had initially proposed full retrospective application, but decided to amend the transitional provisions reflecting concerns from constituents.