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IAS 19 — Accounting for contribution- based promises

Date recorded:

At a previous meeting, in considering a narrow question regarding the impact of the 2011 revisions to IAS 19 on the accounting for contribution-based promises, the Committee acknowledged a broader question about how to account for contribution-based promises. The Committee previously considered this issue and published a draft Interpretation in 2004 which considered the accounting for contribution-based promises within its scope. However, the Committee suspended this project in 2006. The Committee decided at its May 2012 meeting to reconsider the work it had done when it published D9.

At this meeting, the staff sought the Committee’s views on two measurement issues for plans that would fall within the scope of the project; those being, the discount rate used to present value the employee benefit obligations and measurement of ‘higher of options’ in the plans.

The staff presented the Committee with an illustrative example of the accounting under IAS 19 of an employee benefit plan with a guaranteed return on contribution or notional contributions. In the example, the staff believed that IAS 19 did not properly reflect the obligations of the employer until such point that the fund maintaining the contributions was generating performance that is below the guaranteed rate of return. The staff noted D9 dealt with this problem for benefit plans with a fixed return by measuring the plan liability for a benefit that depends on future asset returns at the fair value of the assets for which the benefit is specified (regardless of whether they are plan assets or notional assets). No projection forward of the benefits was made and discounting of the benefit was therefore not required. This is different from the measurement approach in IAS 19 which does not consider return on assets when present valuing the post-employment benefit in arriving at the defined benefit liability (assets) and instead uses a high quality bond rate.

To address this issue, the staff recommended that the measurement of the defined benefit liability for plans covered under the project with a guaranteed return on contributions or notional contributions use a discount rate that reflects the risk of the assets (or notional assets) provided to fund the employee benefit. This is because by using a discount rate that reflects the return on the assets to present value the benefit, the estimated return on the assets that will ultimately be used to provide the benefit is taken into account.

Multiple Committee members expressed concern with the staff proposal. Some Committee members did not believe expected returns on assets should define discount rates unless the plan provides a guarantee linked to specific assets. These Committee members pointed to the IASB’s insurance project, where the Board has tentatively decided that asset rates should not be used to measure liabilities. Other Committee members were concerned that the staff proposal introduced measurement principles which were unique from those included in IAS 19. One Committee member preferred that the proposals consider other possible measurement solutions which exist in IAS 19, such as the measurement basis consistent with the asset ceiling.

The Committee Chair asked that as a matter of general principle, who favoured amending IAS 19 to allow an asset-based rate in the presence of something that makes it a defined benefit plan. Many Committee members voiced significant reservations about amending IAS 19 on discount rates without a detailed articulation as to which plans the amendments would apply. Thus, the Chair directed the staff to develop descriptions about the various types of plan to which such amendments should apply. The Committee will consider this inventory of plan types at a future meeting (along with other possible measurement approaches such as the asset ceiling approach).

The staff then presented its proposals regarding measurement of ‘higher of options’ in which an employee is guaranteed the higher of two or more possible outcomes. The staff noted that IAS 19 does not deal with options when using the projected unit credit method.

The staff considered whether a ‘higher of option’ should be measured at its intrinsic value only, or at its intrinsic value plus its time value. The staff noted that although measuring the option by including both the intrinsic value and the time value may better represent the obligations, they believed using only the intrinsic value was more appropriate for the Committee’s current work given that it is more consistent with the ‘best estimate’ approach currently used in IAS 19.

Many Committee members expressed support for the staff recommendation noting that it is more consistent with IAS 19 requirements. A few Committee members saw ‘higher of options’ as similar to an embedded option written by an employer, and consistent with IFRS 9 or IAS 39, preferred that these options be measured at fair value, but acknowledged that IAS 19 pushed you toward intrinsic value. In summarising the Committee discussion, the Committee Chair noted general support for measurement at its intrinsic value only.

Finally, the staff considered presentation of changes in ‘higher of options’ of the employee benefit plans covered by the project. The staff noted that to measure the ‘higher of option’ at intrinsic value is a remeasurement, and therefore, any changes in the ‘higher of option’ should be recognised in other comprehensive income for consistency with IAS 19.

One Committee member expressed concern with this proposal; noting an example of a plan in which the return of contributions is guaranteed (i.e., higher of 0 per cent or the return on assets). He was not comfortable with all returns above 0 per cent being recognised in other comprehensive income. Hearing this concern, the Committee Chair directed the staff, similar to earlier discussions, to consider different plan designs and bring back to the Committee example presentations for each plan. The Committee will consider this analysis at a future meeting.

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