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IAS 19 – Remeasurement at a plan amendment or curtailment

Date recorded:

The Committee received a request to clarify the accounting for a plan amendment or curtailment in IAS 19 Employee Benefits. The submitter raised 2 issues.

If a plan amendment or curtailment of a defined benefit plan occurs, should an entity:

  1. Recognise the remeasurement of the net defined benefit liability (asset) that is required for the separate calculation of the amendment or curtailment gain or loss (i.e. past service cost)?
  2. Update any actuarial assumptions for the calculation of service cost and interest cost in the post-event period?

The purpose of the paper is to provide the Committee with a summary of the issues raised, and the staff’s research and analysis of the issues.

The staff recommend that the Committee should not add these issues to its agenda, because sufficient guidance exists, noting that the principle is explained in paragraph BC64 of IAS 19, which was revised in 2011.

The staff note that an entity should not update its assumptions to determine current service cost and net interest for the post-event period, and further, that an entity should not use the updated net DBL as at the event date to determine net interest for the post-event period.

Discussion

A Committee member questioned whether the recommendation in the paper would lead to sensible accounting. He noted that he acknowledged what paragraph BC64 of IAS 19 (2011) said, but added that he believed it was inconsistent with paragraph B9 of IAS 34, and that it would lead to accounting that failed the ‘common sense test’. He pointed out that paragraph B9 of IAS 34 Interim Financial Reporting required that significant fluctuations were taken into account, and noted that his preference would be to address the inconsistency between paragraphs BC64 of IAS 19 and B9 of IAS 34, as BC64 does not result in a sensible accounting answer.

In response to the comments made by the Committee member, the Chairman pointed out that this raised the longstanding question of whether assumptions should be set once and applied throughout the year, or updated on a quarterly basis.

The Committee member responded, noting that he agreed that routine true ups should be left until year end, and emphasised the fact that B9 of IAS 34 specifically stated that adjustments should be made for significant market fluctuations and significant one-off events (such as plan amendments, curtailments and settlements), and updating for such events was quite different to making routine revisions to assumptions partway through the year.

A staff member questioned the Committee member whether he would also read B9 of IAS 34 to require that significant changes in market interest rates should be adjusted for partway through a year, and further questioned, at what stage would a change in market interest rates become significant enough to trigger an adjustment.

The Committee member responded, noting that it would be a judgement, adding that there was always an element of judgement when setting actuarial assumptions.

An IASB member present commented that she tended to agree with the comments expressed by the Committee member in the situation of a plan amendment, settlement or curtailment, as these were events over which an entity had control, in contrast to situations where there were changes in the market value of assets or interest rate fluctuations, situations over which the entity would have no control. She noted that where an entity had made a decision to settle or curtail a plan partway through the year, it would seem appropriate that it should make the appropriate adjustments for such events, adding that when the IASB discussed whether or not assumptions should be updated on a quarterly basis, she did not recall settlements and curtailments being discussed. She noted that her recollection of that discussion was that the IASB was referring to interest rate movements and fair value movements, not settlements and curtailments (transactions).

Another Committee member noted that he believed the paper had the right technical analysis, and that the paper was consistent with his reading of the Standard - that assumptions were not updated during the year, even if an entity had all the numbers to enable it to do so. He noted that, similarly, US GAAP requires an entity to set the assumptions at the beginning of the year; however, under US GAAP these assumptions were updated if such updates were required to account for a transaction (for example, in the case of a settlement or curtailment). He noted that a key reason behind entities not being required to update assumptions on a quarterly basis was the cost involved, but further noted that in the event of a curtailment, settlement or plan amendment, entities already had to update measures, and accordingly, there would only be minimal additional costs in updating assumptions in such situations.

Another Committee member noted that she agreed with the comments of the first Committee member, with respect to the inconsistency between BC64 of IAS 19 and B9 of IAS 34. She highlighted the fact that the Basis for Conclusions had not been approved by the IASB and was not authoritative literature, and that she had concerns with the staff coming up with a principle from the Basis for Conclusions. She noted that she believed the issue was not one of frequency of reporting, but whether or not a significant event had occurred that should be adjusted for, pointing out that paragraph B9 of IAS 34 actually stated that “Pension cost for an interim period is calculated on a year-to-date basis by using the actuarially determined pension cost rate at the end of the prior financial year, adjusted for significant market fluctuations since that time and for significant one-off events, such as plan amendments, curtailments and settlements.”

Another Committee member noted that he shared the concerns expressed by previous Committee members who had spoken; noting that the staff had presented a supportable technical analysis, but one which did not provide sensible answers.

In bringing the discussion to a close, the Chairman proposed four options, and asked the Committee members to vote on the option they believed resulted in the best accounting, noting this was not necessarily the answer one would arrive at from a reading of IAS 19 (2011).

The four options were as follows:

  1. Accept the staff recommendation, as set out in paragraphs 82 through 84 of the agenda paper [An entity should not update its assumptions to determine current service cost and net interest for the post-event period; and an entity should not use the updated net DBL as at the event date to determine net interest for the post-event period]. Two Committee members voted in favour of this option.
  2. Update assumptions and complete re-measurement only in the case of an event within the control of the entity (i.e. plan amendment, settlement, curtailment). Four Committee members voted in favour of this option.
  3. As for option 2 above, but update and re-measurement also in the event of significant changes in interest rates, market value of assets, demographics etc. that are not within the control of the entity. Five Committee members voted in favour of this option.
  4. Do nothing at this stage – wait and observe practice that develops around the amendments. One Committee member voted in favour of this option.

The third option received the most support from Committee members, and upon being asked by the Chairman, nine Committee members indicated that they could accept this option. The Chairman asked the staff to implement and bring a paper back to a future meeting.

A Committee member expressed concern that requiring entities to update in the event of a significant change could lead to entities being required to make a continuous assessment, noting that the IASB had tried to avoid this.

The Chairman responded, noting that he did not believe such an amendment would lead to continuous assessment, as such adjustments would be triggered by an event ‘beyond the ordinary’, adding that he would expect that it would be rare that a change would be required without an employer triggered event.

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