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IAS 19: Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions

Go To List of IFRIC Issues Issue Description: This issue involves accounting for plans that have a stated contribution level but provide a minimum guaranteed return. Under IAS 19 these would technically be defined as defined benefit plans because of the minimum guarantee. Without the guarantee they would be defined benefit plans. Discussion at IFRIC Meeting November 2002: Background discussion. No decisions reached. Discussion at IFRIC Meeting February 2003: The IFRIC considered how to apply IAS 19 to a plan that would be a defined contribution plan but for the existence of a minimum return guarantee. The terms of the plan are that a contribution is made each year based on the employee's current salary and the employee receives a benefit (a lump sum or an annuity) equal to the contributions paid into the plan plus the return generated on the assets acquired. The employer guarantees a minimum return on the assets over the period to when the benefit is paid. The IFRIC agreed that such plans should be accounted for as defined benefit plans. It was proposed that this would be done by accounting for the minimum return as the defined benefit plan with an additional liability recognised in respect of the excess return on assets over the minimum guarantee. Some concern was raised as how this relates to the position that the minimum guarantee is determined over the employee's service and consequently excess returns in a particular period could be used to offset lower returns in other periods. Further concern was raised that the corridor approach would apply to accounting for returns on assets in excess of that expected whereas the increase in liability would be immediate. It was agreed that the staff would consider these points and bring the issue back to the IFRIC with further proposals. Discussion at IFRIC Meeting April 2003: The staff came to the IFRIC with a first Draft Interpretation. The following issues were discussed: 1. Possible lack of convergence with US GAAP 2. The allocation of benefits to accounting periods when the benefit formula is stated in terms of current salary 3. The fact that the proposed methodology ignores expectations about future returns on the plan assets 4. How to allocate the change in the additional liability that arises from excess returns on plan assets between the expected return and actuarial gains and losses The staff stated that the lack of convergence with US GAAP is based on the differences between the definitions of defined benefit plans and defined contribution plans themselves. Indeed, US GAAP is more focused on the nature of the benefit given to the employees rather than the employer's side. The IFRIC noted that the lack of convergence in this regard should not affect the progress of the project. The staff noted that the allocation of benefits to accounting periods is a broader issue. The IFRIC decided that this issue should not be addressed in this project. For example, the EITF has discussed five different variations of the projected unit credit method. The IFRIC confirmed that a projection of salary increases should not be considered in projecting the future benefit obligation-based on the facts of the plan considered. An IFRIC member proposed that actuaries be involved in the project to ensure the IFRIC is properly capturing the effect on the calculation. Some IFRIC members expressed concerns about the drafting relating to points 3 and 4 above and asked the staff to redraft to make sure that the facts are directly linked to IAS 19. The IFRIC discussed the possibility of measuring the defined benefit piece and the defined contribution piece separately-recording the higher of the two calculations. No decisions were made. The IFRIC will discuss a revised draft interpretation at its July 2003 meeting. Discussion at September 2003 IFRIC Meeting The IFRIC concluded that multi-employer plans should be accounted for as defined benefit plans regardless of whether the plan assets exceed the minimum guarantee. The IFRIC concluded that the liability should be the higher of the fair value of the assets in the plan or the minimum guaranteed return on those assets at the balance sheet date. Therefore, the expected return on assets should not be projected forward and then discounted back. In some cases the fair value of plan assets will be nil; however, a liability equal to the guaranteed amount should be recorded. When the liability is measured at the fair value of the plan assets, an extra line item should be presented on the income statement to reflect defined contribution accounting. The balance sheet should be the same regardless of how the liability is measured. The entity should continue to provide disclosures for a defined benefit plan throughout the life of the plan. The IFRIC also clarified that the scope includes only plans with fixed guarantees, including cash balance plans. Therefore a plan that guarantees a return equal to the S&P 500, for example, would not be included in the scope of this interpretation. The IFRIC was aware that the EITF in the US is currently addressing this issue and will follow their deliberations. The staff will prepare a pre-ballot draft for the next meeting. Discussion at the December 2003 IFRIC Meeting The IFRIC was asked to give final comments on a draft interpretation on the accounting for both variable and fixed guaranteed minimum returns on contributions. Some members continue to believe such plans should be viewed as defined contribution plans with an embedded derivative (the embedded derivative being the guaranteed return). The IFRIC concluded that most defined benefit plans could be viewed in that way and confirmed its decision that IAS 19 could not be interpreted as such. There was concern as to the proper mechanics in applying the standard that the staff and certain IFRIC members will further explore outside of the IFRIC meeting. If significant, this issue may be brought back at a future meeting. Notwithstanding the measurement issue, the IFRIC voted to submit the exposure draft to the IASB for approval to be issued. Discussion at the IFRIC Meeting February 2004 The IFRIC continued its discussion of applying IAS 19 to a plan that would be a defined contribution plan but for the existence of a minimum return guarantee. Previously the IFRIC had concluded that such plans must be treated as defined benefit plans. The IFRIC determined that until such time as the corridor approach is removed from IAS 19 it must be included in the IFRIC interpretation. However, the IFRIC asked that its conceptual disagreement with the application of the corridor approach to this situation should be specifically included in the basis for conclusions. The IFRIC determined that where assets are not plan assets as defined in IAS 19, they should be treated as notional assets. A definition of notional assets that includes those relevant assets that are not held by a plan will be drafted and included in the interpretation. The IFRIC considered a revised example that uses the straight-line allocation method to illustrate that the assessment of whether higher levels of benefit are attributed to later years of service would have to take into account expected future salaries. The IFRIC agreed that the example was appropriate. The IFRIC agreed that subject to the amendments above, and any minor editorial amendments, the document should be issued as an draft interpretation. Discussion at the IFRIC Meeting March 2004 The final draft of the proposed draft interpretation was given negative clearance by the IASB at its March meeting. However, at that meeting a number of non-fatal concerns were aired by Board members. The IFRIC considered the comments of the Board presented to them by staff and agreed to amend the Basis for Conclusions to better explain the methodology required by the draft interpretation and to reduce the content of the example. Staff will make the amendments and circulate the draft interpretation for out-of-session approval. July 2004: IFRIC Draft Interpretation D9 In July 2004, IFRIC D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions was issued for public comment.