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IAS 19 — Settlements

Date recorded:

At the January 2008 meeting, the IFRIC discussed a possible agenda item on how payments of benefits under a defined benefit plan are to be accounted for and if such payments represented settlements in the IAS 19 Employee Benefits meaning. The payments in question arise when plan participants have an option to receive a lump sum payment instead of ongoing payments.

The staff originally concluded that such payments would fall under the settlement notion in IAS 19 and that this would be in line with US GAAP. However, US GAAP provides for a materiality threshold for settlement treatment (that is, below this threshold the entity has an option not to treat the payment as a settlement) while IAS 19 does not, which would in practice lead to divergence.

Further staff research showed that there is a consistent practice under IFRS of not treating such payments as settlements. Requiring this treatment would have material practical consequences. Due to the threshold under US GAAP and many preparers in the US using this threshold in practice, the treatment under IFRS and US GAAP is already consistent in most cases. Therefore, although there is theoretical divergence from US GAAP, in practice it does not exist.

Classifying such payments as settlements mandatorily would in fact lead to divergence unless IFRS would also introduce a threshold.

The IFRIC therefore decided not to add the item to its agenda on the basis that it expects no divergence in practice. However, there will be no reference to the outcome of the IASB'S project on pensions.

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