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| IAS 19 Employee Benefits: Effect of Minimum Funding Requirements on Asset Ceiling |
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Issue Description: IFRIC is consideering how the existence of a minimum funding requirement (MFR) would affect the asset ceiling as determined in accordance with IAS 19. Discussion at the June 2005 IFRIC Meeting The staff proposed that a draft interpretation be developed stating that an asset should be recognised for any excess of an IAS 19 surplus over an MFR surplus (or deficit) only to the extent that
It was noted that the key questions in the mind of constituents are 'what is the interaction between the minimum funding requirements and the plan asset recognition rules' and 'what is meant by reduction in future contributions'. It was further noted that there are questions both of recognition (whether a plan asset could be recognised) and measurement (how it is measured when an MFR exists.) Members expressed some concerns that the proposal in (a) above would result in recognition of the effect of changes in rates (for example a regulatory change in the minimum funding requirement) which are neither enacted nor substantively enacted at balance sheet date. The staff clarified that the intention of this paragraph would be too allow the recognition of changes where the MFR will change as a result of past events (for example rate changes) that have already occurred at the balance sheet date. The IFRIC noted that where there is no scope for the entity to ever receive the excess created by the MFR back, this is an additional cost to the entity of providing the scheme. Where there is some scope to receive the excess back (for example on a gradual basis as the scheme winds down and the regulators are satisfied as to the adequacy of plan assets absent the MFR) then the MFR should not be incorporated into the IAS 19 calculations. In any case it was acknowledged that the existence of the MFR does result in an economic restriction as the entity may not be able to get the returns that they would if the assets were not tied up in the plan. It was agreed that the impact of MFRs would vary significantly from one jurisdiction to the next. The IFRIC agreed that the staff should further develop the principles they recommend, amplifying and clarifying the wording. The IFRIC also agreed that to the extent possible the language should be consistent with IAS 19, and particularly that the phrase 'reasonable assumption' is inappropriate. The IFRIC briefly considered whether an additional liability should be recognised when an MFR liability exists over and above the IAS 19 deficit. The IFRIC agreed that the resolution of this issue would flow from the model to be developed in respect of plan assets. The IFRIC briefly considered the impact of MFRs in a business combination (because, arguably, the amount an entity would pay for another entity with a scheme subject to an MFR, is different to what the entity would pay for another identical entity without an MFR) and agreed that this would most appropriately be dealt with in the IASB's project on Business Combinations Phase 2. At its next meeting the IFRIC will consider worked examples of the impact of MFRs on plan assets, together with a paper that further develops the principles discussed above. Discussion at the September 2005 IFRIC Meeting The IFRIC continued its deliberations on two issues:
At the previous meeting the IFRIC consensus was that a refund of surplus should be treated as 'available' to the extent that either of the following is true:
At this meeting, the IFRIC discussed the remaining questions as well as some related issues identified at the previous meeting including: 1. The definition of availability; The IFRIC discussed a proposed definition of the term 'available' in the context of IAS 19. The staff proposed the following definition:
A refund of plan assets or reduction in future contributions is available to the extent that there is no restriction on the entity, by virtue of any legal or constructive obligation, to use the surplus assets in this way. The IFRIC indicated that the definition does not seem to encompass situations where a potential future merger of funds will result in the utilisation of the surplus in one of those funds, as a method of utilising the surplus. 2. The treatment of the refund that may be available assuming the gradual run-down of the plan; The point was made that in the case where a surplus exists in a fund, and is not distributable to the sponsor at the discretion of the fund itself, an asset exists. This is despite any MFR requirements which would only be taken into account in assessing the extent to which that asset is recognised (that is, the ceiling). A concern was raised about allowing recognition issues to affect measurement considerations when discussing the MFR issues. 3. The methodology and assumptions to be used for determining the reduction in employer contributions that may be possible; The IFRIC discussed at some length, the differences that would arise in the methodology and assumptions when determining the reduction in employer contributions depending on whether the fund is a closed or an open fund and compared this to the situation where a fund is being run-down and one that is fully functional. The point was made that the MFR issues under discussion, highlight the difficulties in applying IAS 19 in its present state. IFRIC members expressed concerns about allowing for future changes in the size and demographics of the workforce consistent with the management's forecasts. Instead, there was general support for the view that only the circumstances at the balance sheet date should be taken into account without a futuristic forecast of changes. The counter argument to this view is based on the fact that although the asset is measured based on conditions existing at the balance sheet date, It will be available to employees or former employees in the future. 4. The treatment of any additional obligation on the entity that arises as a result of the MFR If the MFR contribution requirement exceeds the entity's future contribution requirement in any given year, the staff recommended that an additional liability be recognised in respect of the difference in that year. In other words, the difference between the MFR contribution requirement and the entity's future contribution requirement is not limited to zero in any given year. The IFRIC considered whether any additional obligation arising from the MFR requirement would be accounted for in terms of IAS 19 or IAS 37 but no decision was made. The staff was asked to prepare a summary of the points raised during the discussion for purposes of including them in the IFRIC Update publication so as to indicate to constituents the current thinking of IFRIC. After considering other issues to be tabled at a subsequent meeting, the IFRIC will be asked to consider whether to proceed with the drafting of an interpretation. Discussion at the March 2006 IFRIC Meeting The key decisions made at the September 2005 meeting were as follows:
The IFRIC considered a draft interpretation based on the above decisions. The IFRIC debated whether an obligation exists merely because of a requirement to place a certain amount into the bank account of the pension fund. The discussion included whether it is of significance if the entity is able to recover that amount through reduced future contributions or otherwise. IFRIC agreed that an obligation exists provided that the MFR is with respect to past service and that if the resultant asset (which may arise if the contribution is made) were recoverable, the liability to make an extra contribution (the MFR) may have a value of nil as a result of applying the IAS 19 methodology which offsets liabilities and assets. If at the balance sheet date the contribution had not been made to the pension fund, IFRIC discussed the possible accounting to recognise the obligation arising from the MFR. Some IFRIC members suggested that the debit entry should recognise a plan asset that would then be subject to an impairment test that takes into account whether or not it would be recoverable through reductions in future contributions. Any impairment would be recognised in profit or loss. Others believe this accounting cannot be achieved because IAS 19.103 precludes unpaid contributions from plan assets. IFRIC members commented that the draft interpretation should clearly separate the issue of the MFR liability from the asset ceiling issue that may arise once the MFR liability has been settled. IFRIC discussed the applicability of the draft interpretation to funding requirements in general, as some IFRIC members believe there to be no distinction in substance between MFR set out by governments and those set out by contract or otherwise between entities and employees (or their representatives, such as trade unions). It was not clear how IFRIC decided to proceed with that issue. Various questions that may arise on transition were discussed briefly, and staff suggested that a paper be prepared for consideration at a future meeting. The staff asked the IFRIC to consider the following outstanding issues: Future changes in the workforce At the previous meeting, the IFRIC rejected the view that the entity should make allowances for any future changes in the size and demographics of the workforce consistent with the management's most recent budgets/forecasts in determining the future contribution reduction available. The IFRIC decided that actuarial assumptions, including demographic assumptions, used in computing the net plan asset available should be consistent with the assumptions made to compute the benefit obligation at the balance sheet date. Some IFRIC members pointed out that, in practice, actuarial valuation techniques often consider normal attrition of the workforce and compensate for that by assuming new employees join to replace those that leave the employ of the entity. Following on from this, any significant future changes in the workforce would be accounted for as curtailments. Associated costs The staff recommend that the IFRIC should not issue guidance on how the present value of the associated cost should be determined (includes costs associated with gradual settlement or wind-up of the plan). The IFRIC appeared to agree with this recommendation. Discussion at the May 2006 IFRIC Meeting The IFRIC continued its discussion of how the additional liability resulting from a minimum funding contribution requirement should be presented in the financial statements. The staff noted that this additional liability arises only because of the limit on the measurement of the balance sheet asset in IAS 19.58. Presentation of results The staff noted that IAS 19.58 governs the presentation of the net balance sheet position in the pension plan rather than the gross liability. The staff proposed that the adjustment which results from the impact of the limit in that paragraph should be recognised and presented in the financial statement on a net basis. There was general agreement with the staff proposals. Treatment of future minimum funding contributions payable The IFRIC discussed a staff recommendation that the additional liability to be recognised in respect of such a minimum funding requirement was equal to the present value, using IAS 19 assumptions, of the contributions payable in accordance with the minimum funding requirement. In addition, in some circumstances, a minimum funding requirement may also stipulate a schedule of future minimum contributions payable in order to cover the future accrual of benefits over the period during which the contributions are payable. In this case, the staff noted that the contributions payable in respect of future accrual did not generate an additional liability at the balance sheet date as they represented a future rather than a present obligation. The staff suggested that the future minimum funding contribution requirements, in respect of future accrual, reduce the extent to which the entity can take a future contribution reduction. Therefore the available asset from a contribution reduction should be calculated as the present value of the IAS 19 service cost less the future minimum funding contribution requirement in respect of future accrual in each year. The IFRIC agreed with the staff's analysis and conclusion. Other statutory funding requirements The IFRIC agreed that the Interpretation need not address other statutory funding requirements. Transition The IFRIC generally agreed with the staff proposals for transition. However, it was evident from the discussion of the proposed Basis (not available to Observers) that individual members had concerns with how the Basis was drafted and suggested different matters of emphasis. Next steps The IFRIC Chairman asked for an indication of which IFRIC members would object to the Interpretation along the lines discussed. None indicated an intention to object. The staff would was directed to prepare a revised draft Draft Interpretation and Basis for Conclusions with the intention that this would be approved formally at the July 2006 meeting. The staff will hold a public Education Session with the IASB during its June 2006 meeting. Discussion at the July 2006 IFRIC Meeting Review of text of a Draft Interpretation The IFRIC discussed a revised draft of a Draft Interpretation on this topic. The revised draft included changes approved at the May 2006 IFRIC meeting. The detailed drafting was not available to Observers, although the substance of the changes was included in the Observer note. Exposure Decision The Chairman polled IFRIC members as to who would object to the issue of a Draft Interpretation based on the Draft Interpretation as presented, amended and supplemented by the decisions reflected above. No IFRIC members intimated an intention to object to the Draft Interpretation. Drafting comments will be taken out of session and the normal 'negative clearance' will be sought from the Board in die course. It is hoped to issue the Draft Interpretation for comment presently. Draft Interpretation Issued On 24 August 2006 the IFRIC issued for public comment Draft Interpretation D19 IAS 19 – The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements. Discussion at the March 2007 IFRIC Meeting The IFRIC discussed a variety of amendments to D19 reflecting the proposals in the comment letters received. The following decisions were made with regard to the major issues (in all cases no final wording was agreed in the meeting): Title of the Interpretation No changes will be made to the title but the scope in paragraph 5 of D19 will be clarified. A revised wording will be considered by the staff. Availability of an economic benefit (paragraph 7 and 8 of D19) Some respondents noted that there are cases when the realisability of the asset is not within the control of the entity. For example, an entity may be required to make application to the trustees of the fund or a regulatory body in order to access the surplus in accordance with the rules of the fund. Some respondents inferred that, in these cases, a refund is not available. The IFRIC had a thorough discussion on this issue and noted that availability requires the entity to have an established, unconditional right to the refund, that is, from the entity's perspective 'there has to be evidence that the asset is the Fund's'. The staff was directed to investigate this issue further, including an analysis on recognition and measurement. IFRIC members were asked to agree a revised wording with the staff offline before the May meeting. Definition of 'contractual minimum funding requirements' D19 will be amended to clarify that minimum funding requirements do not include contributions that are part of the benefit promise made to employees (benefit-related promises) but only contributions that are set as a requirement to fund that promise. In addition, it will be clarified that that only the minimum funding requirements that give rise to statutory or contractual contribution obligations are within the scope of the Interpretation. Clarification of the use of the term 'substantive enactment' Some respondents pointed out that the term substantive enactment is normally applied to statutory obligations only and not to contractual obligations and that the requirement for substantive enactment should apply to the economic benefits available as a refund as well as a future contribution reduction. A sentence similar to that in paragraph 14 will be added to paragraph 7 of D19 outlining that no allowance shall be made for expected changes in the terms and conditions of the minimum funding requirement that are not substantively enacted at the balance sheet date or not yet contractually agreed. Time value of money Paragraph 11 of D19 will be amended to clarify that 'in the rare cases, when the refund is a fixed nominal (or absolute) amount to be paid in the future, the entity shall make an allowance for the time value of money using IAS 19 assumptions.' Reduction in future contributions Future demographic changes (paragraph 15 of D19) Some respondents noted that calculating service costs for future periods requires assumptions that are not required in the calculation of the defined benefit obligation (DBO). In particular, the assumptions underlying the present value of the DBO calculation do not include an explicit assumption for new entrants. Other respondents noted that the assumption in respect of future new entrants can have a significant effect and would, in particular, seem reasonable when there is an expectation of a declining membership. In such a case this should be incorporated in the calculation of the asset available as a reduction in future contributions. The IFRIC had a thorough discussion on this issue and mixed views were expressed. It appeared that a majority does not want to take future reductions into account but that the assumptions should be same for both the calculation of service costs for future periods and the DBO. One IFRIC member noted that planned reductions reflected in the entity's budgets or forecasts should be taken into consideration. No final decision was made and the staff was asked to reconsider the current guidance in D19 to reflect the views expressed during this meeting. Minimum funding contributions Some respondents noted that the attribution of benefits between past and future service, as shown in Illustrative Example 3, may not be straightforward as it is possible to have a minimum funding requirement (MFR) that does not attempt to identify past and future service. The IFRIC noted that in this case professional judgement must be applied and that no further guidance will be included in D19. Assumptions One respondent questioned whether the future minimum funding contributions are to be calculated using the MFR or IAS 19 assumptions. The IFRIC pointed out that MFR contribution obligations should be determined based on the MFR assumptions rather than the IAS 19 assumptions and that the calculation of the MFR future contribution obligation should incorporate the expected MFR funding level. All other amounts used in applying the Interpretation should be derived using IAS 19 assumptions. It appeared that no further guidance would be included with regard to this issue. Term of the calculation Some respondents questioned what treatment is required when the expected life of the plan is greater than the expected life of the entity. An amendment will be made to clarify that the economic benefit available as a future contribution reduction should be calculated over the expected life of the plan or the expected life of the entity, whichever is the shorter. Liability recognition and consistency with the framework Some respondents disagreed with, or asked for further clarification of the rationale for, the requirement to adjust the defined benefit asset or liability before the contribution is paid into the plan (paragraph 18 of D19). The IFRIC noted that there is no inconsistency with the framework. It appeared that the increase in the net defined benefit liability is considered to be a liability in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. A fuller explanation of the rationale for the approach will be included in the Basis for Conclusions. Illustrative examples The Illustrative Examples will be amended to clarify that contributions payable are not recognised on the balance sheet unless they would be unavailable after they are paid. In addition an arithmetical error will be corrected. Transition requirements The Interpretation will require application from the beginning of the first period presented, that is, no full respective application. The staff was directed to present a revised Draft Interpretation at the May 2007 meeting. Discussion at the May 2007 IFRIC Meeting The IFRIC discussed a variety of amendments to D19 reflecting the proposals in the comment letters received. Additional guidance and examples on what is a minimum funding requirement The staff noted that it had added requirements to the scope of the Interpretation such that:
IFRIC members generally supported these scope clarifications, but had concerns about the manner in which the clarifications had been expressed in the Interpretation. An entity's right to a refund The IFRIC agreed that an entity should recognise a potential refund as an asset only if the entity has an unconditional right to that refund. The IFRIC agreed that the entity's intentions with respect to the use of the surplus do not affect the existence of the asset. In addition, if the entity's right to a refund depends on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, the entity does not have an unconditional right to the refund (and therefore should not recognise an asset). Assumptions underlying the future service cost used to determine the reduction in future contributions The IFRIC discussed a wording that would require an entity to determine the maximum economic benefit that is available from refunds, reductions in future contributions or a combination of both. An entity should not recognise economic benefits from a combination of refunds and reductions in future contributions that are mutually exclusive. IFRIC members expressed concerns that the Interpretation should be based on facts and circumstances existing at the balance sheet date, rather than assumptions about the future. Thus, an entity should assume a stable workforce unless (at the balance sheet date) something had happened that would negate that assertion, for instance, closing a plan to new members. The IFRIC noted that closing an existing plan to new members was not a curtailment; however the act of closing the plan to new members did affect the defined benefit obligation and minimum funding requirements. Title The IFRIC agreed that the title of the Interpretation should be the title should be IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Re-exposure The IFRIC agreed with a staff analysis that re-exposure was not necessary. Effective date The IFRIC agreed that the Interpretation should be effective for financial years beginning on or after 1 January 2008. Approval The IFRIC Chairman asked whether, based on the draft Interpretation and the discussions today, whether any IFRIC members would not support the Interpretation. None of the IFRIC members indicated a dissent. Next Steps The staff will present a revised draft Interpretation to the IFRIC as soon as possible, with the intention that it will be presented to the June 2007 meeting of the IASB for their approval, subject to written ballot. Provided that the IASB approves the Interpretation, it should be issued in July 2007. Interpretation Approved at the June 2007 IASB Meeting The IFRIC had reached a consensus that:
The IFRIC had made a number of clarifications since issuing the first draft D19, including a clarification of when an entity controls an asset arising from the availability of a refund and to the requirements relating to assumptions underlying the measurement of a reduction in future contributions. While some Board members complained about the length of the document, the Board unanimously agreed to issue it as a final Interpretation. The staff pointed out that some of the length was due to the insertion of practical examples. However, the staff was of the opinion that the interpretation would be unintelligible to without these examples. Some constituents had, moreover, expressly asked for them to be kept in the interpretation. July 2007: IFRIC 14 Issued On 4 July 2007, the IFRIC pubished IFRIC 14 IAS 19 - The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements.
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