IFRIC 14 — IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
- IAS 19 Employee Benefits
- IFRIC D19 was issued 24 August 2006. Click for Press Release (PDF 64k)
- Comment deadline was 31 October 2006
- IFRIC 14 was issued 4 July 2007. Click for Press Release (PDF 37k)
- Effective Date of IFRIC 14: Annual periods beginning on or after 1 January 2008. Earlier application permitted.
- 28 May 2009: IASB proposes to amend IFRIC 14 with respect to voluntary prepaid contributions. Click for Details.
- 26 November 2009: IASB amends IFRIC 14 with respect to voluntary prepaid contributions, effective for annual periods beginning 1 January 2011, with earlier application permitted. Click for Details.
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 58 of IAS 19 Employee Benefits 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 58 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 19.58, 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
- (a) during the life of the plan, without assuming that the plan liabilities must be settled in order to obtain the refund, or
- (b) assuming the gradual settlement of the plan liabilities over time until all members have left the plan, or
- (c) assuming the full settlement of the plan liabilities in a single event (i.e. as a plan wind-up),
it shall recognise 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.
Discussion at the January 2009 IASB Meeting
Proposed amendment to IFRIC 14
The staff presented a proposed amendment to IFRIC 14 to clarify the accounting where an entity makes voluntary prepaid contributions and there is a minimum funding requirement. The staff recommended an approach that would treat the prepayment as partially recoverable. However, many Board members felt that the whole of the prepayment is recoverable and, hence, full recognition of the prepayment was appropriate. The chairman took a vote and the Board agreed to full recognition. The amendment is to be exposed in due course.
May 2009: IASB proposes to amend IFRIC 14
On 28 May 2009, the IASB published an exposure draft of proposed amendments to IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The proposed amendments are aimed at correcting an unintended consequence of IFRIC 14. As a result of the interpretation, entities are in some circumstances not permitted to recognise as an asset some prepayments for minimum funding contributions. The ED proposes to correct the problem. Comments on the ED are due 27 July 2009. Click for Press Release (PDF 96k).
Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – IASB proposes amendments to IFRIC 14 (PDF 73k).
Discussion at the October 2009 IASB Meeting
The Board received a staff analysis of comments received as a result of its proposed amendment of IFRIC 14 Prepayment of a Minimum Funding Requirement (ED/2009/4). It also redeliberated its conclusions in that exposure draft (ED).
The staff briefly introduced its comment letter analysis. The staff noted that some respondents wished the IASB to extend its amendments to the measurement of surpluses, not only repayments, but the Board agreed with the staff that such an extension was beyond the scope of the project.
The Board agreed to proceed with the amendment to IFRIC 14 such that it address only the treatment of a prepayment of a minimum funding requirement.
The Board considered whether to provide additional guidance on the definition of 'unconditional right to a refund' in IFRIC 14. The Board agreed that no elaboration was necessary.
The ED proposed to delete IFRIC 14 paragraph 22. In response to concerns raised by respondents about whether the other amendments proposed replaced all the requirements of paragraph 22, the Board decided to retain the paragraph.
The Board agreed that the amendments should be applied from the beginning of the earliest comparative period presented in the first financial statements in which the entity applies IFRIC 14.
November 2009: IASB amends IFRIC 14
On 26 November 2009, the IASB issued Prepayments of a Minimum Funding Requirement (Amendments to IFRIC 14). The amendments correct an unintended consequence of IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Without the amendments, in some circumstances entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct the problem. The amendments are effective for annual periods beginning 1 January 2011, with earlier application permitted. The amendments must be applied retrospectively to the earliest comparative period presented. Click for IASB Press Release (PDF 101k).