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IAS 19 – Defined contribution plans with vesting conditions (finalised)

Date recorded:

In May, the Committee considered a request to clarify the impact that vesting conditions have on the accounting for defined contribution plans. The question that had arisen was whether contributions are recognised as an expense in the period they are paid for or are they recognised over the vesting period. The Committee agreed with the staff's position and noted there is no significant diversity in practice nor does it expect significant diversity in practice to emerge in the future. As such, in May, the Committee decided to not take this project forward.

Subsequently, the Committee received comment letters from three major constituents. One of them agreed with the Committee's tentative decision and the other two did not object to it. While these comment letters suggested editorial changes, two constituents made substantive comments. The Committee analysed the substantive comments relating to: a) vesting period as an indicator that should be considered in determining the period over which an employee renders service in exchange for a specific benefit, and b) that there is an alternative interpretation to that taken by the Committee and that this alternative view should not be precluded.

The majority of the Committee members disagreed with the constituent's proposal to highlight the vesting period as a strong indicator for the period over which the contributions to a defined contribution plan are recognised as an expense. In particular, these Committee members agreed with the staff's position that there is a distinction between the two periods when accounting for defined contribution plans as defined in IAS 19: a) the period of service that obliges the employer to pay contributions to the separate entity that runs the defined contribution plan (contribution period); and b) the period of service that entitles the employee to receive benefits from the separate entity that runs the defined contribution plan. The Committee tentatively agreed that paragraph 44 of IAS 19 requires an employer to recognise contributions to a defined contribution plan over the period of service that obliges the employer to pay contributions to the separate entity that runs the defined contribution plan (the contribution period).

The Committee reaffirmed its May decision that an alternative interpretation of paragraph 44(a) of IAS 19 might be taken but concluded that it was contrary to the concept of defined contribution accounting and the related guidance and explanation in other paragraphs. As such, the Committee read paragraph 44(a) of IAS 19 to mean that contributions to defined contribution plans are expensed or recognised as a liability when they fall due and refunds are recognised as an asset and income when the entity/employer becomes entitled to it, e.g. the employee failing to meet the vesting conditions.

The Committee agreed with the staff's position to incorporate some of the proposed editorial changes for clarification purposes in the wording of the final agenda decision and reaffirmed the Committee's decision not to take the project forward.

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