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IASB clarifies accounting for employee contributions to defined benefit plans

  • IASB (International Accounting Standards Board) Image

Nov 21, 2013

The IASB has issued "Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 'Employee Benefits')." The amendments clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service. The amendments are effective for annual periods beginning on or after July 1, 2014, with earlier application being permitted.

Background

In outlining the accounting requirements for employee benefits, IAS 19 Employee Benefits mandates that an entity has to consider contributions from employees (or third parties) when accounting for defined benefit plans. Contributions that are linked to service must be attributed to periods of service as a reduction of service cost.

In 2012, the IFRS Interpretations Committee received submissions seeking clarification regarding the accounting for employee contributions set out in the formal terms of a defined benefit plan. The submitters requested additional guidance on the accounting of employee contributions related to service and also expressed concerns about the complexity of the requirements when applied to simple contributory plans.

The Interpretations Committee referred the matter to the IASB and suggested simplifying the requirements in IAS 19 for these plans. The IASB came to the conclusion that contributions from employees or third parties reduce the ultimate cost of a defined benefit and should therefore be accounted for consistently with the accounting for the defined benefit. The conclusions were published as ED/2013/4 Defined Benefit Plans: Employee Contributions (Proposed amendments to IAS 19) in March 2013.

 

Amendments

With Defined Benefit Plans: Employee Contributions (Amendments to IAS 19 Employee Benefits) the IASB has amended the requirements in IAS 19 for contributions from employees or third parties that are linked to service:

  • If the amount of the contributions is independent of the number of years of service, contributions may be recognized as a reduction in the service cost in the period in which the related service is rendered (note: this is an allowed but not required method). 
  • If the amount of the contributions depends on the number of years of service, those contributions must be attributed to periods of service using the same attribution method as used for the gross benefit in accordance with paragraph 70 of IAS 19.

The amendments are intended to provide relief in that entities are allowed to deduct contributions from service cost in the period in which the service is rendered. This was common practice before the 2011 amendments to IAS 19. In those cases the impact of retrospective application would be minimal.

 

Effective Date

The amendments are effective for annual periods beginning on or after July 1, 2014. Earlier application is permitted but corresponding disclosures are required. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively.

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