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IFRIC 14 – Availability of refunds from a defined benefit plan managed by an independent trustee

Date recorded:

The IFRS Interpretations Committee (“the Committee”) received a request to clarify whether a trustee’s power to augment benefits or to wind up a plan affects the employer’s unconditional right to a refund and thus restricts recognition of an asset, in accordance with IFRIC 14.

The Committee discussed this issue at its May and July 2014 meetings, and a summary of the discussions and tentative decisions reached at said meetings can be found in the introduction to Agenda Paper 5 (link to IASB's website) for this meeting.

As a result of concerns expressed by some Committee members about the consequences of the tentative decision at the July 2014 meeting, the Committee requested the staff to perform further analyses on:

  1. the relationship between the general requirement of IAS 19 and the tentative decision at the July 2014 meeting; and
  2. the interaction of this tentative decision with the requirement to recognise an additional liability when a minimum funding requirement applies.

The purpose of this paper was to present these analyses and additional analysis on the power to wind up the plan, together with a new proposal.

The Project Manager introduced the paper and asked the Committee members whether they agreed with the staff’s technical analysis in the agenda paper; and whether they agreed with the proposed amendment in Appendix C of the agenda paper, as an amendment to IFRIC 14 separate from annual improvements.

One Committee member observed that the previous proposal had taken account of the trustees’ powers as a measurement issue, which presented significant operational challenges. He noted that the new proposal effectively treated it as a recognition issue, which he believed was the right way of dealing with it, and was more operational.

The Committee member drew attention to the comment in paragraph 56 of the agenda paper, which stated that “it is important to remember that our discussion relates to a closed plan with no future accrual of benefits”, and asked the staff to clarify that this did not mean that the amendment would only apply to closed plans.

The Director of Implementation Activities clarified that the proposed amendment would apply generally, and not only to closed plans.

Several other Committee members noted that they were struggling to understand the difference between trustees enhancing the benefits [which would result in no recognition of the surplus] and trustees being able to make investment decisions that would use up the surplus, for example, purchasing annuities. One of the Committee members noted that there was a very fine line between making members better off by increasing the level of benefits, and making them better off by increasing their security by coming out of equities and going into annuities. He noted that the annuities could be held as an investment in the plan as a plan asset, which would arguably make the members better off by providing them with greater security, but would use up the surplus because typically the fair value of the annuity would be less than the fair value of the assets spent to purchase it. He further noted that he could not see the conceptual difference between the two scenarios, and inquired of the staff as to whether this was effectively a rule rather than a conceptual difference.

The Director of Implementation Activities responded, and noted that he agreed that the consequence of both actions lead one to the same place; however, he noted that in a scenario where benefits were being enhanced, the pension promise was being changed. However, in a scenario where annuities were being purchased, the pension promise was not being changed, and that is how he distinguished between the two scenarios.

The Committee member highlighted the importance of articulating very clearly in the Basis for Conclusions how the distinction had been drawn. Another Committee member also supported including discussion on this in the Basis for Conclusions.

Several Committee members commented with respect to the accounting for a gain or loss on settlement. As noted in the agenda paper, the IASB staff had performed analysis to assess whether the tentative agenda decision conflicted with the general guidance in IAS 19 and IFRIC 14 in a number of areas, including accounting for a gain or loss on settlement. While they agreed with the staff conclusion that the tentative agenda decision did not create a conflict, the Committee members noted that it would be helpful to provide further clarification that in accounting for the settlement, the calculation of the gain or loss, and the impact of the asset ceiling were two very different things.

When called to a vote by the Chairman, twelve of the thirteen Committee members present agreed with the staff recommendations in the paper. One Committee member abstained.

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