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IAS 19 — Accounting for contribution based promises

Date recorded:

At its May 2012 meeting, the Committee received a request to clarify the accounting for contribution-based promises (i.e., how to measure the present value of the defined benefit obligation related to contribution-based promises) in accordance with IAS 19 Employee Benefits (2011). An underlying concern in the submission was whether the revisions to IAS 19 in 2011, which clarified the treatment of risk-sharing features related to defined benefit obligations, affect the accounting for contribution-based promises.

At that meeting, the Committee tentatively decided not to add the issue to its agenda. However, the Committee noted that it would consider adding the more broad issue of the accounting for contribution-based promises to its future agenda. The Committee previously considered this issue and published IFRIC Draft Interpretation D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions (D9) in 2004 which considered the accounting for contribution-based promises within its scope. However, the Committee suspended this project in 2006 and instead referred the issue to the IASB to be included in the IASB’s project on post-employment benefits. The IASB later deferred work on this issue to a future broader project on employee benefits.

At the July 2012 meeting, the staff provided the Committee with comment letter analysis of the responses to D9 originally prepared in 2005 and the responses to the discussion paper Preliminary Views on Amendments to IAS 19 Employee Benefits (the DP) regarding the accounting for contribution-based promises. This information was to be used to support the staff’s proposals on possible revisions to the scope and measurement model of D9 before delivering a more defined draft interpretation to a future meeting.

While comment letter analysis revealed multiple issues and concerns with D9 and the DP, the two primary issues requiring consideration before a possible future revision to D9 can be developed include the scope of the revised interpretation and the measurement of the defined benefit obligation.

The staff’s comment letter analysis noted support for the use of defined benefit accounting for plans that fall within the scope of D9. However, further clarification was requested on the scope of D9 and, in particular, on the distinction between defined contribution and defined benefit plans. The scope of D9 was originally set to cover plans with a promised return on actual or notional contributions. However, respondents to D9 noted that the scope implies a direct connection between the contributions made to the plan and the return on those contributions (considered only a problem for funded plans).

To cover all plans that provide a guaranteed return on contributions, the staff recommended that the Committee clarify that there does not need to be a link between the returns on contribution and the return on the assets held in the benefit plan. Additionally, the staff recommended that the Committee clarify that the return on the contribution does not need to be linked to the return on a specific asset and that D9 would include not only post-retirement benefits but also long-term benefits. Thus, the revised scope would clarify that an employee benefit plan would fall within the scope of the interpretation if the employer has a legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay for all employee benefits relating to employee service in the current and prior periods in respect of a promised return on actual or notional contributions or any other benefit guarantee based on the value of one or more underlying investible or non-investible asset.

A few Committee members expressed concern with this change in scope. They noted that the proposed scope would actually lead to more plans being included in the scope of a revised D9; that being, plans that provide a guarantee not based on the return of the contributions made, but based on the return on, or value of, other assets, as well as plans in which the promised return is not based solely on investible assets (such as a measure based on corporate performance).

Another Committee member requested that the staff perform outreach to understand how widely the provisions of D9 are currently being applied, and likewise, understand more fully whether the accounting for contribution based promises is a widespread issue creating diversity in practice. Similarly, another Committee member asked to understand more fully the implications of the proposed change in scope both in terms of the number of plans likely to be impacted by this scope and likely impact on practice.

While multiple concerns were expressed about scope creep following the staff’s recommendation, the Committee tentatively agreed to the staff’s scoping recommendation as a working assumption to be reconsidered once more outreach is performed.

Regarding measurement models, the staff outlined the four proposed methodologies for measuring the liability which were originally developed in 2005 as part of the redeliberations of D9. The staff noted that they were currently analysing the work done on measurement in 2005 with a view to bring a proposal on measurement to the Committee at its next meeting. Limited research to date suggested that some preparers were using the fixed/variable measurement approach outlined in D9. However, the staff did not have sufficient information on how widespread that use was and whether those applying D9 have simple or more complex plan structures. Therefore, the staff intend to perform further outreach before making any formal recommendation to the Committee. Committee members agreed with the staff’s plan. However, one Committee member requested that the staff provide practical examples of the four approaches to a future meeting so that distinguishing characteristics of each approach can be determined.

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