Cash Balance and similar plans: Definition of benefit promises

The Board had an inconclusive discussion about how to account for cash balance plans in the context of the current requirements of IAS 19. The staff recommended that IAS 19 be amended to identify three categories of benefit promise:

• defined contribution,
• defined benefit and
• asset-based promises. An asset-based promise would be one whose amount changes in response to the change in an asset or index, other than assets or indices that yield fixed increases.

Several Board members were unhappy with the staff proposal, which some thought added more complexity to IAS 19, making it 'almost Byzantine'. Board members proposed an alternative approach that would bifurcate an asset-based pension promise into the contribution and the guarantee/derivative promise. Put another way, everything that is related to salaries and service would be accounted for under IAS 19; any guarantee with respect to returns during the accumulation phase would be accounted for under IAS 39.

The Board discussed the alternatives, noting that there are strong similarities between asset-based promises and both some types of insurance contracts and deposits. The staff agreed that they were not in a position to comment on the model proposed during the meeting and would bring this issue back at a subsequent meeting.

Recognition of changes in defined benefit pension obligations

The Board agreed that the forthcoming Discussion Paper on employee benefits should present the presentation proposals in the context of IAS 1 - that is, possible presentation changes that might result form the financial statement presentation project would be ignored for the purposes of the employee benefits DP.

Presentation issues

The Board's preliminary view is that all changes in post-employment benefit obligations and in the value of plan assets should be presented in profit or loss in the period in which they are incurred.

The Board discussed a staff proposal that the forthcoming Discussion Paper should present at least one alternative. One alternative proposed by the staff (Alternative 2 in the Observer Notes) was withdrawn at the meeting. The Board discussed two other proposals:

• Only service costs would be presented in profit or loss; all other changes in the benefit obligation and plan assets would be presented as components of income outside profit or loss.
• Report price variances (including changes in the discount rate applied to the closing balance of the pension obligation and changes in the fair value of plan assets) in income but outside profit or loss; all other recognised changes in the pension obligation would be recognised in profit or loss.

Some Board members were opposed to presenting any alternative to the Board's preliminary view. Others disagreed, noting that eliminating all smoothing mechanisms would be controversial. In addition, other Board members noted that a consistent message received in their work on financial statement presentation was that users want a presentation that distinguishes how the business is financed (or funded) from all other activity.

The Board developed an alternative that is a hybrid of the two proposals above. Under this approach, all changes in the post-employment benefit obligations and in the value of plan assets would be reported in comprehensive income. All actuarial gains and losses, other than those arising from changes in the discount rate, would be reported in profit or loss. Actuarial gains and losses arising from the change in the discount rate and returns on plan assets would be reported in comprehensive income outside profit or loss. This alternative will be included in the forthcoming discussion paper.