Targeted Standards-level Review of Disclosures—IAS 19 Disclosure Objectives—Defined Benefit Plans (Agenda Paper 11B)

Background

Agenda Paper 11 is a cover paper and Agenda Paper 11A is a summary of the staff recommendations for this session and are consequently not summarised.

In Agenda Paper 11B, the staff present an analysis and recommendations on how the disclosure objectives for defined benefit plans in IAS 19 could be amended.

IAS 19 requires that for defined benefit plans an entity is required to use an actuarial technique to estimate the ultimate cost to the entity of the benefits that employees have earned for their service in current and prior periods. The entity assumes actuarial and investment risk.

Staff analysis

The staff have identified and analysed the following user needs with regard to disclosures about defined benefit plans:

• (a) understand the effect of a defined benefit plan on the amounts recognised in the primary financial statements;
• (b) understand the economics of an entity’s defined benefit plans and the risks to which the plans expose the entity;
• (c) evaluate the impact of the defined benefit obligation on an entity’s future cash flows;
• (d) understand the time period over which the defined benefit obligation is expected to wind down;
• (e) determine the value of the defined benefit obligation to input into analyses for forecasting;
• (f) assess the appropriateness of the assumptions and amounts underlying an entity’s valuation of its defined benefit obligation;
• (g) understand the sensitivity of the defined benefit obligation to different actuarial assumptions;
• (h) forecast future defined benefit obligations.

Staff recommendations

Staff recommend that the Board include a high-level, catch-all disclosure objective in IAS 19 requiring an entity to:

• (a) disclose information that helps users of financial statements to evaluate the risks and uncertainties associated with the entity’s involvement in the defined benefit plans and to assess the effect that those plans have on the financial performance, financial position and cash flows of the entity.

—supported (13/13 Board members present, 1 absent)

• (b) aggregate or disaggregate information provided to meet the specific disclosure objectives so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different features or characteristics.

—supported (13/13 Board members present, 1 absent)

Furthermore, staff recommend that the Board include the following specific disclosure objectives in IAS 19:

• (a) An entity shall disclose information that enables users to understand the amounts, including the components of those amounts, in its statements of financial performance, financial position and cash flows arising from its defined benefit plans

—supported (14/14 Board members)

• (b) An entity shall disclose information that enables users to understand the:
  • nature of the benefits provided by its defined benefit plan(s);
  • nature and extent of the risks, in particular the investment risks to which those plan(s) expose the entity; and
  • strategies that the entity has in place to manage the plan(s) and the associated risks.

—supported (14/14 Board members)

• (c) An entity shall disclose information that enables users to understand the expected effects of any defined benefit obligation on the entity’s future cash flows that are reasonably known to the entity at the reporting date.

—supported (13/14 Board members)

• (d) An entity shall disclose information that enables users to understand the time period over which the defined benefit obligation for plans that are closed to new members is expected to mature.

—supported (14/14 Board members)

• (e) An entity shall disclose information that enables users to understand the most significant assumptions used in determining the defined benefit obligation.

—supported (14/14 Board members)

• (f) An entity shall disclose information that enables users to understand the drivers of changes in the net defined benefit liability or asset from the beginning of a reporting period to the end of that period.

—supported (14/14 Board members)

The staff also recommend that the Board does not develop disclosure objectives to explicitly address user information needs about:

• (a) alternative defined benefit plan valuations to that required by IAS 19.

—supported (14/14 Board members)

• (b) sensitivity of the defined benefit obligation to different assumptions.

—supported (13/14 Board members)

• (c) forecasting future defined benefit obligations.

—supported (14/14 Board members)

Board discussion

Board members expressed support for adding a specific disclosure objective to IAS 19 requiring an entity to disclose information that enables users to understand the amounts, including the components of those amounts, in its statements of financial performance, financial position and cash flows arising from its defined benefit plans. However, some were concerned that this objective would be too specific and could, in turn, result in too detailed disclosures. One Board member highlighted that disclosure objectives are also for the Board to develop appropriate detailed requirements, so the objective would not have to be very detailed in of itself. He also would not include an explanation as to why users need this information as different users would use the information for different purposes.

There was also support for the objective to disclose information that enables users to understand the nature of the benefits provided by an entitys defined benefit plans, the nature and extent of the risks, in particular the investment risks to which those plans expose the entity to and strategies that the entity has in place to manage the plans and the associated risks. Board members discussed whether actuarial risk should be included as well, to which the staff replied that it is included in other disclosure objectives about measurement uncertainty. The Vice-Chair noted that risk should be understood to be downside as well as upside risk. One Board member was concerned that aggregation could eliminate information about heavily overfunded or underfunded plans, which was, in her view, important information for users.

Board members broadly agreed with the proposed disclosure objective to provide information that enables users to understand the expected effects of any defined benefit obligation on the entity’s future cash flows that are reasonably known to the entity at the reporting date. One Board member highlighted that this was the most desired disclosure by investors. There was some debate as to how far into the future cash flows would have to be projected and disclosed. Board members thought that it should only be short to medium term. Also, the question arose which cash flows should be included and whether they should be presented net or gross. There was also discussion around what ‘reasonably known’ could mean. Board members thought it meant ‘knowable’, instead of what the entity decides to know and also, the disclosure should only include information on current plans and not any future plans the entity might plan to set up. Board members found that the disclosure objective should be more specific to result in the intended level of information. On the other hand, it should not be too prescriptive.

Board members supported the specific disclosure objective in IAS 19 requiring an entity to disclose information that enables users to understand the time period over which the defined benefit obligation for plans that are closed to new members is expected to mature. Board members discussed what ‘expected to mature’ would mean in that context. A majority thought it meant the point at which investors do no longer have to worry about the plan. This could be when the youngest member is expected to die or when the bulk of members are expected to die. There was also discussion around whether this information would also be relevant for open plans, which was confirmed by the staff, however there are practical restrictions. The information would change every year with new members joining and hence, the staff only recommend this disclosure objective for closed plans. One Board member said that there should be some consideration about whether, for this disclosure objective, the entity should base the information on the gross or net obligation.

On the high-level, catch-all disclosure objective, the Board questioned whether the end of the disclosure section would be the best placement or whether it would not be better placed at the beginning. The part about aggregation and disaggregation was perceived as too generic for many. As that part is relevant for every standard, it would be better to put it in one place rather than in every standard.

Targeted Standards-level Review of Disclosures—IAS 19 Disclosure Objectives—Employee Benefits other than Defined Benefit Plans (Agenda Paper 11C)

Staff analysis

In this part of the session, the staff presented an analysis of user information needs with regard to defined contribution plans, multi-employer plans and group plans, and other employee benefit plans.

Staff recommendations

Defined contribution plans

Staff recommend that the Board include a high-level, catch-all disclosure objective in IAS 19 requiring an entity to disclose information that enables users to understand how defined contribution plans affected the entity’s statements of financial performance and cash flows.

—supported (12/14 Board members)

Multi-employer and group plans

Staff recommend that the Board require:

• (a) an entity that accounts for its multi-employer plan or a group plan as a defined benefit plan to comply with the disclosure objectives for defined benefit plans recommended above.

—supported (14/14 Board members)

• (b) an entity that accounts for its multi-employer plan as a defined contribution plan to comply with the disclosure objective for defined contribution plans recommended above.

—supported (14/14 Board members)

For an entity that accounts for its share of a defined benefit multi-employer plan or group plan as if it were a defined contribution plan to, staff recommend that the Board:

• (a) require the entity to comply with the disclosure objective for defined contribution plans recommended above.

—supported (14/14 Board members)

• (b) require the entity to comply with a specific disclosure objective to disclose information that enables users to understand:
  • the nature of the benefits provided by its defined benefit plan(s);
  • the nature and extent of risks, in particular the investment risks to which those plan(s) expose the entity; and
  • the strategies that the entity has in place to manage the plan(s) and the associated risks.

—supported (14/14 Board members)

• (c) explain in IAS 19 that users need the information in (b) above to:
  • assess how the entity intends to deliver the benefits promised to members of its defined benefit plan(s); and
  • evaluate how the risks associated with those plan(s) might affect the entity in future.

—supported (14/14 Board members)

Other employee benefits

Staff recommend the Board include a high-level, catch-all objective in IAS 19 requiring an entity to disclose information that enables users to understand:

• (a) the nature of termination benefits and other long-term employee benefits; and
• (b) how those benefits affected the entity’s statements of financial performance, financial position and cash flows.

—supported (10/14 Board members)

Finally, the staff recommend that the Board include a high-level, catch-all disclosure objective in IAS 19 requiring an entity to disclose information that enables users to understand how short-term employee benefits affected the entity’s statements of financial performance and cash flows.

—supported (10/14 Board members)

Board discussion

On defined contribution plans,Board members said that as there is no investment risk and, hence, disclosures would not have to be as detailed as for defined benefit plans. The impact of defined contribution plans on the statement of financial position would be low. Therefore, some Board members thought it would be sufficient if entities made a one-line disclosure similar to short-term employee benefits or no disclosure at all. However, some said that hybrid or accelerating plans would need more than just a one-line disclosure.

On multi-employer plans one Board member said that the risk was increased compared with other schemes as there is a risk that an employer terminates their participation in the scheme.

On other employee benefits, Board members thought that termination benefits only need to be disclosed when they affect the statement of financial position. This would only be the case for accumulating benefits or complex termination schemes that involve, for example, stock options. A staff member added that salary is arguably the largest part of short-term employee benefits and there would be some merit to disclose that, even if it does only affect the statement of financial position.