IAS 19 – Classification of payments to encourage early retirement (new)
The Committee received a request seeking clarification on the classification of bonus payment benefits in 'Altersteilzeit' plans (ATZ plans) in Germany, following the issuance of IAS 19 Employee Benefits (as issued in June 2011). ATZ plans are early retirement programs designed to create an incentive for employees within a certain age group to 'ease' the transition from (full or part time) employment into retirement before the employees' legal retirement age. ATZ plans offer bonus payments to employees in exchange for a 50% reduction in employment, with the employment terminated at the end of the required service period. The bonus payments are conditional on the completion of the required service period.
The submitter questioned whether the benefit is more appropriately classified as a termination benefit or a service (stay) benefit given that such a benefit payment was seen to have both a required service condition (akin to a service benefit) and a termination of employment condition (akin to a termination benefit). Although the submission makes reference to the ATZ plans in Germany specifically, the staff noted that similar arrangements exist in other jurisdictions, including supplementary early-retirement schemes, employees switching from full-time to part-time employment or from permanent to temporary employment and stay bonuses.
The Committee considered first the specific facts underlying the ATZ plan. Consistent with the staff's analysis, the Committee tentatively concluded that the bonus payment was economically similar to a service (stay) benefit (as opposed to a termination benefit). Its analysis in reaching this tentative conclusion was based on paragraph 162 of IAS 19(2011). In particular, although termination of service earlier than would otherwise be the case is part of the overall arrangement (i.e., an indicator of a termination benefit), the bonus payments are only paid if the employee provides the required service during the specified period (i.e., an indicator of a stay bonus). The Committee observed that a benefit could not be provided in exchange for both employee service and the termination of employee service (as this would be equivalent to offering a benefit that is payable if the employee works for an additional year and leaves employment immediately; an impossibility). Therefore, in circumstances where both features are present, as in the ATZ plan, an entity would consider what condition takes primacy. In this case, given that if the employee's service is terminated before the end of the specified period, the employee does not receive the termination benefits, the defining characteristic of the benefit is the requirement to provide service (i.e., a stay bonus).
Based on the perceived clarity of paragraph 162 of IAS 19(2011) in reaching the above tentative decision, the Committee tentatively decided not to add this issue to its agenda. However, there was concern by Committee members as to the wording of the tentative agenda decision. One Committee member sought the inclusion of indicators to highlight which indicators prevail if both 'stay' and 'termination' features are present in benefits. Other Committee members thought the agenda decision should consider the concept of a legal notification period when both 'stay' and 'termination' features are present. For example, if an agreement provides employees with an abnormally long termination notification period, it may be indicative of a stay benefit as opposed to a termination benefit. Ultimately, the Committee rejected these ideas and concluded that the tentative agenda decision should indicate the Committee's conclusion surrounding ATZ plans given analysis under IAS 19(2011), while indicating that other fact patterns in which the classification of a benefit has both a required service condition and a termination of employment condition would require separate assessment under IAS 19(2011).