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IAS 19 - Employee benefit plans with a guaranteed return on contributions or notional contributions

Date recorded:

At the November 2013 meeting Staff presented three papers to the Committee (see below).

  • Agenda Paper 2A - Scope
    • vesting conditions;
    • demographic risks; and
    • salary risks.
  • Agenda Paper 2B – Distinction of components
    • distinction between non-variable and variable components; and
    • appendix A – analysis of how the proposed distinction is applied to various types of benefit promises.
  • Agenda Paper 2C – Recognition and measurement
    • non-variable components;
    • variable components; and
    • “higher of” options.

Agenda paper 2A presents Staff’s analysis on the agreed scope for employment benefit plans and if they should include or exclude benefit promises with vesting conditions, demographic risk and salary risk. Staff recommends that benefit promises with vesting conditions and demographic risks should be within the scope of the project, and benefit promises with salary risk should remain beyond the scope of their project. Staff asked the Committee if they agreed with their recommendation and if they agreed to delete the exclusion of plans that are subject to future events other than salary risks.

The majority of Committee members agreed with the recommendation provided by Staff, in particular in relation to vesting conditions. There was some reservation with regards to the approach Staff had taken in relation to demographic and salary risk.

A member highlighted that the issue with demographic risk is that it covers a vast array of issues and therefore all demographic risks cannot be treated the same. Another member said that the demographic risks presented by Staff may not be included in a defined benefit scheme and therefore when setting up a model it will be difficult to include a variety of demographic risks. In disagreement another member commented that it makes sense to include demographic risks, for example the effects of mortality rates would affect all schemes. A member suggested that Staff should take a closer look at certain types of demographic risks rather than taking them all into consideration. He agreed with Staff that salary risk should be excluded. Another member suggested that Staff should be clearer on what is included and/or excluded on salary risk.

The Chairman concluded that although Committee members had different views and proposals, the majority of Committee members did not disagree with the proposal Staff presented. Therefore, Staff are to go ahead with the current scope and bring back more analysis on this scope to a future meeting.

Agenda paper 2B presented Staff’s discussion on the distinction between fixed and variable components for employee benefit plans that fall within the Committee’s agreed scope. A sample of benefit promise designs was provided in Appendix A of the paper. Staff recommended that instead of defining “fixed” components positively, promises that do not meet the definition of a variable component should fall within the non-variable component. Staff think that defining variable components as a return that references the actual plan assets would strike the best balance between improving the accounting for troublesome promises and limiting the effect of the change and asked the Committee if they agreed. The three views presented in the Staff paper for defining a variable component are as follows:

  • view A - Promises of a return on contributions based on the return on actual plan assets held;
  • view B - promises of a return on contributions based on the return on a specified class of assets; and
  • View C - promises of a return on contributions based on any variability that includes a market reference.

A member started by agreeing with Staff that defining fixed component is easier and it is difficult to analyse a variable component positively. Another member asked Staff how many problematic plans this solution would capture. Staff replied that such an analysis would require more time.

Another member said that objective here is to address the accounting for a range of plans that have problems when adopting IAS 19. This member said View A would exclude a large number of plans that are problematic. It would also lead to different accounting for schemes that have similar plans but have different assets.

A member highlighted that addressing a large number of plans can be problematic and therefore agreed with Staff on limiting the scope and revisiting the issues with other plans at a later date. In agreement, other Committee members said that View A is too narrow. Another member said that the paper should focus on plans with guaranteed returns as IAS 19 cannot address the full scope of retirement plans.

The Chairman concluded that in general, View A was seen by the Committee as too limited and therefore Staff need to look at other options that capture plans with a notional balance. Staff are to bring this issue back to the Committee at a later meeting.

Agenda paper 2C discusses the recognition and measurement for employee benefit plans that fall within the Committee’s agreed scope, specifically recognition and measurement for:

  • non-variable components;
  • variable components
  • “higher of” options.

Non-variable components

Staff noted the current accounting treatment for fixed promises is not problematic and previously the Committee indicated that they want to retain consistency between the proposals and current accounting treatments.  Staff recommended to the Committee that the existing defined benefit methodology as per IAS 19 should be applied for non-variable components of employee benefit plans that fall within the Committee’s agreed scope. 

The Committee agreed with Staff on their recommendation with regards to non-variable components.

Variable components

For a benefit promise with an asset-based return, the D9 approach proposes that an entity shall measure the liability at the reporting date at the fair value of the asset on which the benefit is specified. Concerns were raised specifically on how benefits that promised a variable return plus a fixed margin would be measured and whether an entity should reflect credit risk in the measurement. In addition, the IASB noted the difficulty in reconciling the attribution of the variable component and the fixed component of D9 plans. Staff presented their analysis under the following sections:

  • measurement at fair value;
  • unvested benefits;
  • benefits that include a margin;
  • credit risk; and
  • attribution of benefits to periods of service.

Staff recommended as follows on the variable component of a benefit promise that falls within the scope:

  • the plan liability should be determined at fair value at the reporting date based on the underlying reference asset;
  • if a benefit is unvested at the reporting date, the measurement of the plan liability shall be determined by the extent to which the benefit is expected to vest in the future;
  • the general principle identified for the measurement of the variable component should be applied to benefits that include a fixed margin. This would require the entity to measure the variable component at the fair value of an asset that replicates the same features (only relevant if the Committee decides that such benefits are included in the definition of the variable component in 2B).
  • the measurement of the variable component should not consider credit risk, and therefore it should be measured based on the fair value of the underlying assets without adjustment; and
  • the variable component of a benefit promise is allocated to periods of service in line with the benefit formula.

The discussion began with a member agreeing with staff that where the plan has a fixed component then using the underlying assets as a reference to determine fair value seems reasonable. However, the member was not sure how Staff would address composite type benefits as the idea of using a hypothetical asset to fair value the liability does not seems appropriate. The member agreed with Staff not to include credit risk.

Another member generally agreed with Staff but highlighted that the use of hypothetical assets to fair value the liability would increase complexity in this area. The member suggested that Staff should refer to paper 2B and define the real scope. In addition, the member would like to see how many schemes would be captured under this method.

In agreement another member can see the potential difficulty in using the fair value of hypothetical assets and asked staff if they should focus on vesting conditions rather than focusing on defined benefit plans versus defined contribution plans.

The Chairman highlighted to the Committee that they need to consider if they should invest more time and use further resources on this topic. He suggested that Staff should take the observations from this meeting and bring back a paper in the January 2014 meeting that assesses the comments made by the Committee. But the Committee needs to assess if the projects needs to be stopped as it is too broad.

Two members commented here. The first member said that he would prefer to have a narrow scope project rather than stopping the project altogether and the second member would like Staff to consider outreach to the National Standard Setters (NSS) to understand how this issue affects them.

“Higher of” options

Staff presented the objections the IASB raised in September 2013 in relation to the measurement of “higher of” promises at their intrinsic value and the results from comments letters. Staff also presented their analysis and on the measurement of promises that are the higher of two variable components. Staff requested any comments on “higher of” plans.

A member was unsure why intrinsic value was chosen rather than fair value. Other members agreed that fair value could have been chosen but it would lead to complexity, however intrinsic value can also be used. No further comments were made.

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