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

Date recorded:

The staff introduced the paper and described the background of the project.

This paper continues the Interpretation Committee’s discussion of the distinction between the variable and non-variable components for employee benefit plans that fall within the Interpretations Committee’s agreed scope.

The issue: Many consider that the projected unit credit method of recognition and measurement for defined benefit plans does not faithfully represent the economics of employee benefit plans with a promised return on actual or notional contributions. This is because the discount rate prescribed in IAS 19 does not reflect the risk of the promised return, in particular when the promised return depends on actual or notional assets (or contributions).

Staff analysis:

Agenda Paper 2B at the November 2013 meeting included the following three alternatives to defining the variable component:

  1. Approach A—Promises of a return on contributions based on the return on actual plan assets held.
  2. Approach B—Promises of a return on contributions based on the return on a specified class of assets.
  3. Approach C—Promises of a return on contributions based on any variability that includes a market reference.
Note: The paper includes a description of pros and cons of each approach and appendix A of the staff paper includes a table comparing the impact of each approach for nine cases.

The staff has identified the following ways of implementing Approach B:

  1. Approach B’—Fair Value Hierarchy – one suggestion at the last meeting was to use the fair value hierarchy from IFRS 13 Fair Value Measurement. This approach would classify a component of a promise as variable if the asset it refers to qualifies as a Level 1 (or potentially Level 2) asset.
  2. Approach B’’—Equity Instruments – this approach would classify a component of a promise as variable if the asset it refers to meets the definition of an equity instrument in IAS 32 Financial Instruments.

The approaches above are not mutually exclusive or exhaustive, therefore it might be possible to combine aspects depending on the Interpretation Committee’s preferences.

Staff recommendation:

Based on the above, the staff recommends that the Interpretations Committee defines the variable component using a combination of Approach A and Approach B’’. Thus the variable component would be a promise that would reference:

  1. a return on the actual plan assets; or
  2. a return on an equity instrument.

Comments raised by IC members:

Several members raised concerns such as (i) the scope should be very narrow because to solve every issue it would be necessary to amend IAS 19, (ii) in the past the Board has rejected proposals that are ruled based instead of principle based, (iii) it is necessary to deal with plans that share risk between employers and employees, (iv) it is not clear who is benefiting from this amendments, (v) the paper does not clearly explain why IAS 19 does not help.

Some members agree with the staff proposal because they believe that the only method to address this issue is through a ruled-based approach because it relates to a very specific issue

The chairman requested a vote and seven members voted for dropping the project. Further to the vote, there was continuous debate with similar comments as to the ones discussed but without changes to the outcome.

The chairman concluded that the agenda decision will have to clarify that this is a problem beyond IFRIC resources and recognise the issue that there is diversity in practice.

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