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IAS 19 — Employee benefit plans with a guaranteed return on contributions or notional contributions — measurement

Date recorded:

In March 2012, the Interpretations Committee received a request to clarify the accounting for contribution-based promises in accordance with IAS 19 Employee Benefits. The Committee made tentative decisions on the following:

  • The characteristics of employee benefit plans that fall within the scope of its work;
  • Employee post- employment benefit plan or other employee long term benefits and the legal/constructive obligation aspects; and
  • Combined benefit promise that offers employees the higher of two benefit promises should be measured at its intrinsic value at reporting date.

At the July 2013 meeting, Committee members found the proposals to be acceptable but there were concerns raised with regards to the scope. The Committee asked Staff to prepare examples illustrating different methods of determining the defined benefit obligation for contribution based promises. One of the methods the Committee specifically requested Staff to consider was the insurance contracts approach. Within the current scope there were some problems reported by Committee members such as there is a large population that has been excluded due to measurement anomalies arising from projecting forward and discounting back the value of an asset which would exclude a large population as it would subject them to demographic risk. Also there may be a number of cash balance plans which would have an initial vesting period which again would be excluded from the scope proposed. There may also be some plain vanilla defined benefit plans that pay a fixed payment which would currently operate without any problems however would be caught within the scope of the proposal and hence the member suggested having narrative to exclude such preparers of financial statements.

Staff highlighted that this issue may have to return to the Committee as there will be various types of benefit promises which will have to be considered. The Committee summarised they had no objections with the proposals recommended by Staff but they raised uncertainties with these proposals. The Committee agreed to keep the scope as it is and to update the IASB on their findings and receive advice from the IASB on the need for any further work.

In the September 2013 meeting, staff presented to the Committee their proposal with regards to the measurement of benefit promises that fall within the agreed scope. Staff’s views were that by applying either the fair value approach or the insurance contracts approach to all the promises in the agreed scope would be a major change, perhaps beyond the limited scope amendment. In contrast, the mirroring approach may be too narrow and may not address the accounting for the plans that are troublesome. The best approach was found to be the fixed/variable distinction of D9, however they acknowledged that in the past this led to the fair value approach in the 2008 discussion paper Preliminary Views on Amendments to IAS 19 Employee Benefits. An approach consistent with D9 would require entities to measure benefits with a variable return at the fair value of the underlying reference assets and those with a fixed return using the projected credit method. Entitles would measure benefits that promised the higher of more than one benefit at the intrinsic value. Therefore staff highlighted the committee may need to accept some level of inconsistency in order to overcome similar obstacles to the IASB in the lead up to the 2008 discussion paper. However, staff believe the boundary effect arising from the fixed/variable distinction within the D9 approach should be smaller than the effect arising from the fair value approach to all benefits within the scope.

The Committee agreed with Staff’s proposed direction with regards to the measurement of the benefit promises that fall within the agreed scope. Staff will pursue an approach similar to D9 and, in the November 2013 meeting, will provide the Committee with an analysis of the application of that approach to the same types of promises they used to illustrate the application of the scope in the July 2013 meeting.

A staff member raised concern as to the exclusion of plans with vesting conditions. Staff clarified that the original reason for excluding this was due to a guarantee being attached to the vesting conditions. When this was discussed in previous meetings a few years ago, members found the measurement and attribution of a guarantee to the vesting conditions very confusing and therefore they concluded that such plans were to be excluded.

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