IAS 19 — Employee contributions

Date recorded:

In March 2013, the IASB published for comment the Exposure Draft Defined Benefit Plans: Employee Contributions (Proposed amendments in 2011, which revised paragraph 93 of IAS 19 Employee Benefits). The paragraph states (emphasis added): “Contributions from employees or third parties set out in the formal terms of the plan either reduce service cost (if they are linked to service), or reduce remeasurements of the net defined benefit liability (asset) (e.g. if the contributions are required to reduce a deficit arising from losses on plan assets or actuarial losses). Contributions from employees or third parties in respect of service are attributed to periods of service as a negative benefit in accordance with paragraph 70 (i.e. the net benefit is attributed in accordance with that paragraph).”

The IASB noted that contributions from employees or third parties to a defined benefit plan should be attributed to periods of service as a negative benefit. This is because the measurement of the DBO should consider the present value of those future contributions that relate to the employee’s service before the reporting date. However, the IASB noted the general concern about the complexity of the required calculations and the potential confusion that these could introduce to practice. Consequently, the IASB decided to add a practical expedient to paragraph 93. It proposes to amend paragraph 93 so that contributions from employees or third parties may be excluded from being attributed to periods of service as a negative benefit and recognised as a reduction in the service cost in that period if, and only if, they are linked solely to the employee’s service rendered in the same period in which they are payable.

In the discussion of the proposed amendments, the IASB observed that paragraph 93 first states that contributions from employees or third parties in respect of service are attributed to periods of service as a negative benefit in accordance with paragraph 70, and then states that the net benefit is attributed in accordance with paragraph 70. This has caused confusion because paragraph 93 is unclear as to whether the back-end loading test in paragraph 70 should be performed on the net benefit or on the gross benefit and the negative benefit separately. The IASB observed that performing the test on the net benefit will result in added complexity. Depending on how the attribution test is applied, the outcome of the test may be influenced by changes in the assumptions from one year to another. Consequently, the IASB proposed to specify in paragraph 93 that the negative benefit from employee or third-party contributions should be attributed to periods of service in the same way as the gross benefit is attributed in accordance with paragraph 70, when they are not recognised as a reduction in the service cost in the same period in which they are payable.

The IASB invited comments on the following specific questions:

  1. The IASB proposes to amend IAS 19 to specify that contributions from employees or third parties set out in the formal terms of a defined benefit plan may be recognised as a reduction in the service cost in the same period in which they are payable if, and only if, they are linked solely to the employee’s service rendered in that period. An example would be contributions that are a fixed percentage of an employee’s salary, where the percentage of the employee’s salary does not depend on the employee’s number of years of service to the employer. Do you agree? Why or why not?
  2. The IASB also proposes to address an inconsistency in the requirements that relate to how contributions from employees or third parties should be attributed when they are not recognised as a reduction in the service cost in the same period in which they are payable. The IASB proposes to specify that the negative benefit from such contributions is attributed to periods of service in the same way as the gross benefit is attributed in accordance with paragraph 70. Do you agree? Why or why not?
  3. Do you have any other comments on the proposals?

For question 1, almost all of the respondents supported the proposed practical expedient to reduce complexity of the required calculations. Only one respondent explicitly disagreed with the proposed amendments because they think that contributions from employees or third parties should be attributed to periods of service in the same way as the gross benefit is attributed in all cases.

For question 2, the vast majority of the respondents supported the proposed amendments as worded in the Exposure Draft. No respondent explicitly disagreed with the proposal. Some requested further clarification of the proposed wording or requested examples to be added when the proposed practical expedient is not applicable or an entity decides not to apply it.

For question 3, some respondents commented on the transition requirement.

Staff’s paper identified the following points to be considered in the proposed amendments towards the final amendments:

Paragraph 93

  1. age-based contributions should be included in the scope of the proposed practical expedient;
  2. it should be noted that contributions are linked to salary as well as service;
  3. contributions, if qualified for the proposed practical expedient, should be accounted for in the same way regardless of the timing of the payment to reflect accrual accounting; and
  4. whether the attribution is based on straight-line or benefit formula should be determined for the gross benefit, and the negative benefit is to be separately attributed to employee service periods following either the straight-line or benefit formula as determined for the gross benefit, with the resulting net amount reported as the current service cost.

Paragraph 175

  1. no change is necessary to the footnote of paragraph BC150;
  2. negative benefit is to be separately attributed to employee service periods following either the straight-line or benefit formula as determined for the gross benefit, with the resulting net amount reported as the current service cost (same as paragraph 93).

Paragraph BC143(b)

  1. the same footnote for paragraph BC150 should be added to the term “Net benefit”.

Based on the above analysis staff recommend to the Committee to propose to the IASB that the wording of the proposed amendment in paragraph 93 of IAS 19 should be revised as follows:

“Contributions from employees or third parties set out in the formal terms of the plan either reduce service cost (if they are linked to service), or reduce remeasurements of the net defined benefit liability (asset) (e.g. if the contributions are required to reduce a deficit arising from losses on plan assets or actuarial losses). Contributions from employees or third parties that are linked to service are attributed to periods of service as a negative benefit applying the same attribution method that paragraph 70 requires for the gross benefit. However, if, and only if, contributions from employees or third parties are linked only to the employee’s salary and service rendered in the same period in which they are accrued, and independent of the number of years of service, the contributions may be recognised as a reduction in the service cost in that period. An example would be contributions that are a fixed percentage of the employee’s salary or contributions whose percentage depends on the employee’s age, so the percentage of the employee’s salary does not depend on the employee’s number of years of service to the employer.”

Staff also recommended amending Footnote of paragraphs BC150 and BC143(b) “Defined Benefit Plans: Employee Contributions, issued in [date to be inserted after exposure], addressed an inconsistency in the requirements that relate to how contributions from employees or third parties should be attributed when they are not recognised as a reduction in the service cost in the same period in which they are accrued. It specifies that the negative benefit from such contributions is attributed to periods of service applying the same attribution method that paragraph 70 requires for the gross benefit.”

The Committee generally agreed with staff to propose to the IASB that the wording of the proposed amendment should be revised as above.

A member suggested that two things should be added to the basis of conclusion. The first being clarification on the scope and that it should be broader. The second being a conclusion on what to do when there is a difference between the contribution and service cost.

Members also suggested clarification of the wording in the proposals in particular in paragraph 93 as they found the wording confusing and inconsistent.

Within the staff paper there is a flow chart. The Committee was in general agreement that this flow chart was very helpful and staff should consider including it in the basis of conclusions. However, one member suggested that they should think about the setup of it with the traditional “yes” and “no” flowchart approach.

Staff considered the re-exposure criteria and based on that they do not see re-exposure is necessary in relation to the issues respondents raised on the Exposure draft related to the clarification of the wording (or scope) of the proposed amendments.

According to the IASB’s work plan, as at 29 July 2013, the proposed amendments to IAS 19 Defined Benefit Plans: Employee Contributions is targeted to be finalised in Q4 2013. Accordingly staff recommend the mandatory effective date is set at 1 July 2014, with earlier application permitted, subject to the discussions at a future IASB meeting about the Interpretations Committee’s proposal about the amendments.

The Committee agree that it should propose to the IASB that re-exposure is not necessary based on the re-exposure criteria; and mandatory effective date is set at 1 July 2014, with earlier application permitted, subject to the discussions at a future IASB meeting.

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