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Disclosure initiative: Targeted standards-level review of disclosures

Date recorded:

Expected future cash flows for defined benefit plans (Agenda Paper 11A)

Background

This paper provided the background of the project and summarises the staff’s analysis and recommendations relating to the items of information to meet the specific disclosure objective about expected future cash flows for defined benefit plans. The Board was asked to vote on the staff recommendations.

Staff recommendations

The staff recommended that the Board:

  • a) Amend the specific disclosure objective to clarify that it is intended to capture information about the expected effect of the defined benefit obligation on the entity’s future cash flows.
  • b) Include in IAS 19 that, while not mandatory, the following items of information may enable an entity to meet this specific disclosure objective:
    • i. description of funding arrangements or policies that affect any expected future contributions to meet the defined benefit obligation that exists at the end of the reporting period.
    • ii. quantitative information about the expected future contributions to meet the defined benefit obligation that exists at the end of the reporting period.
    • iii. description of regulatory or other agreements that affect any expected future contributions.
    • iv. information about the expected pattern or rates of future contributions.

Furthermore, staff recommended that the Board include application guidance in IAS 19 to explain how an entity applies judgement to determine which of the items of information outlined above might be most relevant in its own particular circumstances. 

Staff analysis

The staff’s outreach and analysis identified that information about expected future cash flows is the most relevant information for their analysis about defined benefit plans.

The expected effect of defined benefit plans on an entity’s future cash flows can provide two types of information:

  • a) Information about expected future cash flows to meet the defined benefit obligation that exists at the end of the reporting period.
  • b) Information about expected future cash flows relating to defined benefit obligations that do not yet exist at the end of the reporting period.

The specific disclosure objective the Board tentatively decided upon does not require an entity to disclose information about expected future cash flows relating to defined benefit obligations that do not yet exist at the end of the reporting period.

The outreach also allowed stakeholders the opportunity to suggest what information would most suit their needs, including quantitative information, narrative information and any other items of information.

Staff have also provided, in appendix A to the agenda paper, updated illustrative examples building on those presented in the November 2019 meeting.

Board discussion and voting

There were 13 Board members present for the discussion, with one absent.

A Board member who agreed with the rewording of the disclosure objective thought that disaggregation is important and that the indicative examples should include disaggregation. The staff said they would consider that when bringing any examples back for further discussion.

The Vice Chair noted that although she can see that information that preparers are indirectly encouraged to prepare if it is relevant to their investors could be useful, she was concerned that there might be a disconnect in the context of having enforceable objectives. This could prompt questions to the Interpretations Committee. An entity is only required to disclose information linked to the defined benefit obligation that exists at the reporting date. However, if preparers think that it would be useful to users if they applied these requirements more broadly to their pension obligations they should provide additional information. Another member stressed that if the Board has decided not include information about unrecognised defined benefit obligations in the specific disclosure objective, it needs to be clear that the disclosure requirements relate to the recognised defined benefit obligation. The two should not be merged and the staff need to consider how the additional information will be communicated and whether some form of disaggregation would be necessary.

The Vice Chair also said that if the objective focused on recognised amounts but the examples started to introduce the broader picture, this could lead to an internal disconnect between the two sets of messages. She suggested clarifying that the focus is on the recognised amounts but acknowledging that there is a separate layer of information that could be helpful to include. The staff responded that the holistic basis on which entities think about future cash flows affecting their pension schemes is not necessarily going to include a clear distinction between these two aspects and pointed that the ask of entities is to explain how they have got to where they have got to as at the reporting date.

The Vice Chair stressed the need to be careful about the wording used in the context of the objectives-based approach, as there are references in the paper around not being too prescriptive so that preparers are putting together information that is realistic to prepare. She suggested that it should be made clear that the objectives have to be met (but the preparers can elect the best way to meet them), so that preparers do not think that they can forego the disclosure altogether.

A Board member asked whether the application guidance mentioned in the paper will be guidance or examples. The staff said that they envisaged it would be application guidance.

The voting was based on the recommendations as drafted, but with the clarification that there is a distinction between required information the additional layer of helpful information.

All Board members present voted in favour of the staff’s two recommendations.

Comparison between the Board’s tentative decisions and the disclosure requirements on IAS 19 Employee Benefits (Agenda Paper 11B)

Background

In this paper, staff summarised the background of the project, their analysis of feedback received, existing requirements and tentative Board decisions. They provide their recommendations to the Board on which they asked for voting and comment.

Staff recommendations

The staff recommended that the Board refine some of its tentative decisions relating to defined benefit plans, multi-employer plans and group plans. For defined benefit plans, the staff recommended that the Board:

  • a) Include an explanatory paragraph to the overall disclosure objective that summarises examples of features or characteristics that an entity could use as a basis for disaggregating information provided about defined benefit plans. (Recommendation 1)
  • b) Include information about asset-liability matching strategies as an example of information on investment strategies that, while not mandatory, may enable an entity to meet the specific disclosure objective about the nature and risks of defined benefit plans. (Recommendation 3a)
  • c) Include two additional items of information that, while not mandatory, may enable an entity to meet the specific disclosure objective about nature and risks of defined benefit plans:
    • i. a description of the plan amendments, curtailments and settlements.
    • ii. the fair value of the entity’s own transferable financial instruments held as plan assets, and the fair value of plan assets that are property occupied by, or other assets used by, the entity. (Recommendation 3b)
  • d) Amend the specific disclosure objective, and items of information, about drivers of change in the net defined benefit liability or asset to:
    • i. capture drivers of change in any reimbursement rights.
    • ii. include three additional examples of drivers of change: interest income or expense, changes in the effect of limiting a net defined benefit asset to the asset ceiling, and gains and losses from settlement. (Recommendation 7)

For multi-employer plans, staff recommended that the Board include additional items of information that, while not mandatory, may enable an entity to meet the specific disclosure objective about nature and risks of the plans, as follows:

  • a) For all multi-employer defined benefit plans, a description of the agreed allocation of a deficit or surplus on the wind-up of the plan or the entity’s withdrawal from the plan.
  • b) For a multi-employer defined benefit plan accounted for as a defined contribution plan, the fact that the plan is a defined benefit plan and information about any deficit or surplus in the plan that may affect the amount of future contributions to be paid by the entity. (Recommendation 9)

Recommendation 10:

For group plans, staff recommended that the Board: 

  • a) Include additional items of information, as follows:
    • i. for a group plan accounted for as a defined benefit plan, an item of information that an entity would be required to disclose to meet the specific disclosure objective about amounts in the primary financial statements arising from defined benefit plans during the period. That item is the contractual agreement or stated policy for charging the net defined benefit cost to individual group entities.
    • ii. for a group plan accounted for as a defined contribution plan, an item of information that while, not mandatory, may enable an entity to meet the specific disclosure objective about nature and risks of the plans. That item is any deficit or surplus in the plan that may affect the amount of future contributions to be paid by the entity.
  • b) Specify that an entity can satisfy the disclosure objectives by cross-reference to the disclosures in another group entity’s financial statements that is available to users of the financial statements on the same terms as the entity’s financial statements and at the same time.

For the following items, the staff recommended that the Board should not refine its tentative decisions on the specific disclosure objective, and items of information, about the following items:

  • (a) Amounts in the primary financial statements relating to defined benefit plans (Recommendation 2)
  • (b) Expected future cash flows resulting from the defined benefit obligation (Recommendation 4)
  • (c) The time period over which payments to closed plans will continue to be made (Recommendation 5)
  • (d) Significant actuarial assumptions (Recommendation 6)
  • (e) Defined contribution plans (Recommendation 8)
  • (f) Short-term employee benefits, other long-term employee benefits and termination benefits (Recommendation 11)

Board discussion and voting

Recommendation 1

One Board member noted that moving away from a checklist approach and focusing on fewer but more relevant disclosures will require an educational effort to ensure that people understand that this is a new approach. The staff responded that once the requirements are drafted they will look different to existing requirements in terms of style and approach. Because they have focused on feedback from investors as to what information is key for them in the pension notes and why, they expect the volume of disclosures will decrease under the new proposals.

10 Board members voted in favour.

Recommendation 2

All Board members present voted in favour.  

Recommendation 3

A Board member noted that the information required by IAS 19:142 was only added in 2011. The staff said that user feedback was that this information was not particularly useful.

All Board members present voted in favour.  

Recommendation 4

All Board members present voted in favour.  

Recommendation 5

A Board member who agreed with the approach was concerned with limiting this information to closed plans, because duration is also relevant to open plans. The staff clarified that this decision is not stating that this information is not useful at all for open plans, but explains why it is more useful for closed plans, as the focus of this objective is on the key information for users. The wording is explicit for closed plans and silent for open plans.

11 Board members voted in favour.  

Recommendation 6

A Board member questioned whether disclosing alternative actuarial assumptions reasonably possible at the reporting date would help users, as they might not be able to calculate the relevant movements in the defined benefit obligation themselves. The staff responded that this information would be useful because it would help users to understand assumptions used and make judgements around comparability and whether assumptions are in line with expectations. One member said that, because this is not required information, most entities would choose not to disclose it.

11 Board members voted in favour.  

Recommendation 7

The Vice Chair was concerned with drifting away from a mandatory reconciliation. Some preparers might provide only a bland narrative explanation of the drivers of change, with no numbers, and think they have met the proposed requirements. She suggested retaining a non-detailed reconciliation requirement for the key drivers of change. Other members agreed with this suggestion. One thought that a reconciliation would be particularly helpful for users who do not have an accounting background. Another thought it was particularly important for the net obligation in the statement of financial position. Others stressed that the reconciliation should only relate to the key drivers of change.

12 Board members voted in favour, subject to the amendment discussed above.

Recommendation 8

13 Board members voted in favour.

Recommendation 9

A member asked why the staff analysis in relation to IAS 19:148(d)(iii) is moving towards a more qualitative disclosure with no requirement to disclose the expected future contributions. The staff said that for multi-employer plans the key information is the entity’s financial statement exposure to the bigger plan that a different entity holds. The staff also clarified that this analysis is in relation to defined contribution and not defined benefit schemes.

All Board members present voted in favour.  

Recommendation 10

All Board members present voted in favour.  

Recommendation 11

A Board member thought the proposed wording limits the financial statements by allowing cross-reference to other documents and that it is not clear what ‘same terms’ means, i.e. IFRS, accounts in English, etc. They suggested leveraging on the relevant wording in IFRS 10. The staff said a lot of research had been undertaken but that they are open to redrafting and propose to use the same language used in IFRS 7 to avoid confusion.

All Board members present voted in favour.  

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