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IFRIC 14 — Availability of refunds from a defined benefit plan managed by an independent trustee

Date recorded:

The Committee received a request to clarify whether a trustee’s power to change benefits or to wind up a plan affects the employer’s unconditional right to a refund and thus restricts recognition of an asset, in accordance with IFRIC 14.

The Committee discussed this issue in May 2014.  The question is whether the trustee’s unilateral power to use a surplus is relevant to the existence of a right to a refund of a surplus in the following circumstances.

The trustee acts on behalf of the plan’s members and is independent of the employer;

The trustee has discretion, in the event of a surplus arising in the plan, to make alternative use of that surplus:

  • By changing the benefits payable to members; or
  • By winding up the plan through purchase of annuities, or both; and
  • The trustee has not exercised such a power at the end of the reporting date

At its May meeting, the Committee tentatively decided to develop either an amendment or an Interpretation on this issue and requested further analysis to clarify how certain facts affected the measurement and how an entity should distinguish the facts that are relevant to the existence of an entity’s right to a refund of a surplus from the facts that are relevant to measuring the surplus.

One of the IASB members present shared some observations from small group meetings with IASB members.  She noted that she, along with some of the other IASB members had concerns over recognising and measuring the asset, ignoring the possibility of changes to future cash inflows as a consequence of the trustee’s power, which was seen by some as being inconsistent with the description of an asset in the Conceptual Framework as the entity does not have control over the surplus.  She noted that, at a minimum, the IASB members would need to be convinced why paragraph 12 of IFRIC 14 should not be looked at very closely in this situation.

A Committee member also noted that she shared the concerns highlighted by the IASB member (which are set out in paragraph 48 of Agenda paper 6: Availability of refunds from a defined benefit plan managed by an independent trustee), that if someone else was able to take out all of the economic benefits embodied in the surplus, it put into question the existence of the asset itself and the control over the asset, adding that she did not see how it could be demonstrated that the recognition criteria for an asset had been met.  She noted that she believed the issue was not one of measurement, but of recognition, and that if the Committee still believed it was a measurement question, she did not understand the amendments to paragraphs 11 and 15A of IFRIC 14, and questioned how past history could help predict the future behaviour of trustees and what would entities do in a situation where there was no past history?  She finally noted that it would be preferable to treat the issue as a recognition issue, control of the economic benefits flowing from the surplus, rather than trying to deal with it as a measurement issue.

Another Committee member noted that he believed there was a deeper issue here, and not just something that could be addressed in an annual improvement.  He noted that the proposed paragraph 15A was inconsistent with other parts of the Standard itself, noting that paragraph 89 of IAS 19 that states that “actuarial assumptions do not reflect future benefit changes…”, meaning that future benefit changes should be ignored as part of the measurement.  He also noted that BC102 stated that measurement assumptions were very subjective and therefore, suggested that the limit on the surplus should reflect available refunds or reductions in contributions.  He noted that he believed that going down the route of introducing paragraph 15A would be inconsistent with some of what was in the current literature, but acknowledged that the broader issue needed to be addressed, i.e. the conceptual justification for not recognising an asset based on entitlement to the refund if the plan was wound up.

Another Committee member noted that he shared the concerns expressed by the previous Committee member that this points to a much bigger question.  He noted that he believed that IFRIC 14 got to recognition of an asset if the right to a refund existed under any of the three situations in paragraph 11 of IFRIC 14, and that IFRIC 14 then went on to talk about measuring the economic benefits available at the amount of the surplus – the amount the entity has a right to receive, and therefore, the accounting in IFRIC 14 got to recognition of the surplus.  He noted that he was concerned with introducing the notion that, in the absence of a right, no asset could be recognised because in the future another party could affect the amount of the surplus, and noted that a number of parties could affect the amount of the surplus in the future (e.g. governments could change legislation or tax authorities could change tax requirements), and he did not believe anyone could say it was relevant to the determination of recognition today.

Several other Committee members also noted that they had similar concerns to those expressed by previous Committee members. 

In bringing the discussion to a close, the Chairman questioned whether the issue was much bigger than it looked, or much smaller due to the fact that this was an issue primarily affecting only one jurisdiction (the UK), and questioned whether there were any other jurisdictions where this power of the trustee actually existed.

The Committee members noted that this issue appeared to exist primarily in the UK, and the Director of Implementation Activities noted that it was a significant issue within the UK.

The Chairman noted that based on the preceding discussion, it appeared that the majority of those who spoke did not believe there was an asset as the recognition criteria were not met, which made the measurement issue irrelevant.

Ten Committee members confirmed that they held this view.

The Chairman then asked the Committee members whether they believed IFRIC 14 got to this answer, or whether the Committee needed to do something to make this clearer.

A Committee member noted that IFRIC 14 was an interpretation of IAS 19, and that he did not believe the guidance in IAS 19 got to that answer.  He noted that he understood that people felt uncomfortable with the notion that if the surplus could just be taken away, the entity would not get it, but noted that the entity controlled its right to have whatever was there, which was the model that IAS 19 was built on.   He expressed concern that the Committee was going with an answer that made it feel comfortable, rather than an answer supported by what the literature said, and noted that if the Committee wanted to go down this route, it needed to think very carefully about how this position would be supported in an interpretation of IAS 19.

There was also discussion with respect to the impact this approach would have on the minimum funding requirement, and whether it would only be the trustee’s power or anyone else’s power to alter the terms of the plan in the future – to remove the surplus – that would affect the recognition of an asset. 

A Committee member noted that the issue was deeper than an annual improvement to IFRIC 14, and further noted that if the Committee felt that the asset should not be recognised, then the next step would be for the staff to think about how that was articulated – whether it was an exception, and if it was an exception – what would the scope of the exception be – only the trustee’s right? 

Based on the preceding discussion, the Chairman summarised the situation, noting that the question the Committee needed to answer was whether, when an entity had given up control by granting authority to someone they do not control (trustee) that changed the answer to recognising an asset?  He noted that the Committee needed to figure out what the answer was, and then the vehicle would be dealt with later.  He asked the staff to bring a paper back to the next meeting addressing this.  The Committee members agreed with this approach.

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