IAS 19 — Measurement of the net DBO for post-employment benefit plans with employee contributions

Date recorded:

In May 2012, the Committee received a request seeking clarification on applying paragraph 93 of IAS 19 Employee Benefits (2011). IAS 19 (2011) was issued in 2011 and will be effective from annual periods beginning on or after 1 January 2013.

The submitter mentioned that paragraph 93 of IAS 19 (2011) was intended to address measurement of the net DBO for plans where the risk of plan deficits and/or surplus is shared with employees through their contributions to the plan. There was a concern that the guidance in paragraph 93 of IAS 19 (2011) would affect any plan with employee contributions resulting in a change in the measurement of the net DBO for virtually all of those plans. The submitter thought that this may be an unintended consequence of the language in paragraph 93 of IAS 19 (2011).

The staff sent out a request for information to the International Forum of Accounting Setters (IFASS) and also the Electronic Benefits Working Group (EBWG) to help assess the Committee’s agenda criteria.

In determining whether paragraph 93 was intended to be a clarification or intended to be a change in measurement, the staff initially looked at the summary of discussions at the February 2011 IASB meeting. At the 2011 meeting, the IASB discussed various aspects of risk sharing agreements based on comments received from Exposure Draft (ED) Defined Benefit Plans published in March 2010. One of the aspects discussed was how the effect of employee contribution should be accounted for.

The staff was of the view that the requirements of paragraph 64A of the ED, the second bullet of the IASB’s decision in February 2011 and paragraph 93 of IAS 19 (2011) are all the same. They all require employee contributions, including the expected future contributions resulting from employee service in the current and prior periods, should be considered in calculating the net defined benefit obligation. The staff think that such a requirement is theoretically correct because the measurement of the net DBO should include (the present value of) those future contributions that relate to employee service before the reporting date. Ignoring future contributions that relate to past service would impair the concept of accrual accounting. The staff noted that future contributions related to future service were not relevant to the discussion. Employee contributions linked to employee service are part of the funding of the total benefits paid to employees so the ultimate cost of a defined benefit plan is shared between employers and employees. Such contributions have the effect of reducing service cost for the corresponding periods so the cost included in the profit and loss is only the entity’s share and not the total cost of the defined benefit. Hence employee contributions in respect of service are attributed to periods of service as a negative benefit.

The staff was of the view that the requirements of paragraph 93 of IAS 19 (2011) are a clarification of the requirements in IAS 19 (2008) rather than a change in accounting for the measurement of the defined benefit obligation. If employee contributions are linked to employee service, the ultimate cost (and therefore risk) is shared between employee and employer. The revisions did not change the fundamental measurement approach that an entity estimate the ultimate cost of the benefits and attribute those benefits to periods of service.

The staff noted that the purpose of the exercise was to ensure that the timing of the payment of the contribution does not affect the allocation of cost. The staff acknowledge general concerns that it was unclear as to how to account for employee contributions and hence this could cause different accounting treatments relating to interpretations of the standard. Staff research identified that the prevalent accounting under IAS 19 (2008) is to account for employee contributions by deducting them from service cost when received, as opposed to including them within the measurement of the DBO.

The staff presented three options to the Committee to choose from:

  • Option 1 — Reject the issue because the IASB’s intention is clear.
  • Option 2 — Provide guidance to clarify more the IASB’s intention.
  • Option 3 — Amend IAS 19 (2011) and change its requirements to make the accounting more operational (i.e., to minimise the impact to current practice).

The staff recommended option 2.

One Committee member indicated the Dutch Accounting Standards Board had issued guidance where 2 views were offered to account for employee contributions – projection of everything or just those employee contributions related to future salary increases. This indicated that there was already diversity surrounding the treatment. The member also noted that the approach proposed by the staff to account for the employee contributions is not the approach adopted by entities under IAS 19 (2008) currently but was unclear as to whether this was already required.

A second Committee member had slightly differing views as to the approach that should be taken. No preference for any of the presented options was given. They were not in support of option 2 as by providing options it indicates that the standard itself is not clear. They mentioned that paragraph 93 of IAS 19 (2011) could be amended to provide additional clarity around what the IASB intended with the paragraph. Other Committee members were split between options 2 and 3. A number of the Committee members preferred option 3 but highlighted the time constraints with the standard being applied next year. Some questioned whether the current practice of deducting contributions from current service cost should be changed.

The Chair summarised the responses from Committee members and identified that currently the examples in the staff response were not useful in clarifying the issue. It was concluded that options 2 and 3 would be explored. Application examples would be developed and then, based upon these, the Committee could decide whether IAS 19 (2011) wording should be amended if the examples demonstrate what the standard required in the opinion of the Committee members.

All members were in agreement with this proposal.

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