This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 - Agenda paper 3

Date recorded:

Background

The IASB issued an exposure draft to amend to IAS 19 Employee Benefits and IFRIC 14 IAS19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). The staff presented a summary of the comment letters in July 2016. See Agenda papers 3D and 3D for this meeting which reproduce the agenda papers 6A and 6B discussed in July 2016.  The purpose of this session was for the staff to present their analysis and recommendations:

  1. Agenda paper 3A: Analysis of the feedback received on the proposed amendments to IFRIC 14 to address the availability of a refund from a defined benefit plan.
  2. Agenda paper 3B: Analysis of the feedback received on the proposed amendments to IAS 19 to address remeasurement when a plan amendment, curtailment or settlement occurs.
  3. Agenda paper 3C: Analysis of the feedback on the proposed transition requirements of the proposed amendments to IAS 19 and IFRIC 14.  

The staff would present the Interpretations Committee’s recommendations to the Board at a future meeting.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 — Analysis of the feedback on the proposed amendments to IFRIC 14 — Agenda paper 3A

This paper summarised the feedback on matters that affect IFRIC 14 that the staff believed would require further consideration. Other issues were presented in Appendix A of the agenda paper.

The staff indicated that there was general support for the proposed amendments. However, the matters described next were raised by respondents.

Potential inconsistencies between the principles in IAS 19 and IFRIC 14

  1. The effect of uncertain future events on the existence of a right to a refund because of decisions by other parties.
    Some respondents believed that the possibility that a surplus could be extinguished by uncertain future events as a result of decisions by other parties was not relevant in assessing the existence of an entity’s unconditional right to a refund of the surplus at a reporting date. In response, the staff stated that if other parties have the power to wind up a plan or to enhance benefits without the entity’s consent, the entity did not have an unconditional right to a refund. The staff also believed that there were no inconsistencies with paragraph 9, BC10 and 17 of IFRIC 14. This was because paragraph 9 addresses the consequences of the entity’s own intentions. The staff also believed that paragraph 17 addresses the economic benefits available in the form of a contribution reduction while the proposed amendments deal with the economic benefits in the form of a refund.
  2. Inconsistent treatment of events that could affect the surplus.
    The concern related to the lack of justification for treating other parties’ powers to make investment decisions differently from the powers to enhance benefits. The staff believed that the power of other parties to make investment decisions without affecting the benefits for plan members affects the future amount of plan assets but did not affect the existence of an entity’s unconditional right to a refund.
  3. Appropriateness of the use of control to recognise any surplus as an asset.
    The staff believed that an entity’s assessment of the right to a refund of the surplus was based on a control principle which was different from assessing the control of a plan asset.
  4. The mixed measurement approach proposed.
    The staff did not agree with this concern because IFRIC 14 requires an entity to recognise a liability for a minimum funding requirement to the extent that the contribution payable will not be available after they are paid into the plan.
  5. Possible inconsistency between the proposal and the measurement of defined benefit obligations.
    The concern related to an inconsistency with IAS 19 which does not require an entity to consider other parties’ powers in the measurement of the net defined benefit obligation. The staff noted that the Board already concluded in the proposed amendments that the application of the asset ceiling requirement is separate from the determination of the plan surplus (deficit)

The staff did not recommend any changes be made to the proposed amendments in relation to the issues noted above.

Reflection of the economic substance of defined benefit plans.

Some respondents expressed concerns that the proposal was too prescriptive and would not allow an entity to exercise judgement.  Some believed that an entity should consider the powers of other parties only when the power is substantive or more likely than not to be executed. And some believed the proposed restrictions on the right to a refund may not be relevant given the practical reality of how decisions are made.

The staff disagrees with these concerns because they believe that the amendments simply clarify how an entity assess whether it has an unconditional right to a refund. The staff does not recommend any change to the proposed amendments on those issues.

Other substantive issues

  1. The distinction between the purchase of annuities and the purchase of annuities as part of a wind-up of a plan.
    Some respondents noted that it was unclear how to distinguish the power that other parties might have to purchase annuities to settle liabilities (i.e. a plan buy-out) from the power to purchase annuities as plan assets. The staff agreed with this concern and proposed modifying the wording of the amendments to make the distinction clear. The staff recommended amending the proposed paragraph 12A of IFRIC 14 to refer to other parties’ surplus to settle in full the plan’s liabilities rather than their power to wind-up a plan.
  2. An entity’s right to a refund if decisions must be made jointly between the entity and others. 
    The staff believed that in those situations the entity did not have an unconditional right because the entity’s right is affected by the decisions of the other party.
  3. How the proposals affect the availability of a refund in future contributions.
    The staff believed that the assessment of the economic benefits available in the form of a refund of a surplus was different from the assessment of the economic benefits in the form of a reduction in future contributions. Accordingly, other parties’ powers were not relevant when an entity assesses the economic benefit available in the form of a contribution reduction.

The staff recommended no changes be made to the proposed amendments related to items (b) and (c) above.

Discussion

The Interpretations Committee approved the staff recommendations without changes.

There was extensive debate in relation to the first issue related to potential inconsistences between IAS 19 and IFRIC 14. The concerns noted were the following:

  1. It would be necessary to separate the recognition of an asset (a right to a refund) from its measurement—the assessment of whether there is an unconditional right should not be dependent on factors that could affect the measurement of the asset (i.e. changes in market, demographic, changes in legislation etc.). The staff response was that the ED proposed that if the trustees have a right to increase benefit of the employees, then an entity would not have a right to a surplus.  In contrast, if the trustees have the right to wind up the plan the entity still has an unconditional right because in this case it becomes a matter of measurement only. The staff did not view this as contradictory. One committee member noted that enhancing benefits is a future event that should not affect the existence of the right to a refund. The staff responded that the Interpretations Committee had already concluded that if the trustees can enhance benefits to the members they can deny the entity the right to the surplus.   One observing Board member pointed out that if the trustees can use the funds to improve the benefits the entity cannot have a right to a refund, because the entity would be unable to prevent the trustee from handing the refund to somebody else.  
  2. It was not clear why the power to enhance benefits is treated differently from the power to invest the asset; and
  3. the significant number of respondents that raised issues on this topic. 

On the other hand, the members that supported the staff analysis pointed out the following: (i) the staff had appropriately explained the difference between control of the plan asset vs control of the right to a refund; and (ii) the ED focused on whether an entity has a right to a refund and not on the measurement; nevertheless IFRIC 14 (in paragraph 14) required measuring the refund with consideration of the cost to be incurred; accordingly, in case of a wind-up of a plan the measurement of refund had to be net of costs.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 — Analysis of comment letter of proposed amendments to IAS 19 — Agenda paper 3B

This paper summarised the feedback on matters that affect IAS 19 that the staff thinks would require further consideration. Other issues were presented in Appendix A of the agenda paper.

Accounting when a plan amendment, curtailment or settlement occurs

The staff noted that close to half of respondents agreed with the ED.  However, other respondents either disagreed with the proposed amendments or expressed concerns about specific aspects of the ED.  The main issues raised were: the consequences of a minor plan event (and materiality judgements); the unit of account and lack of comparability; additional costs in applying the proposed amendments; and the potential to make changes to achieve a particular accounting treatment.  Some respondents also expressed concerns about the lack of consistency with IAS 34 because the amendments do not address the occurrence of significant market fluctuations during the reporting period.

The staff noted that the Board’s intention was not to change whether and when an entity remeasures the net defined liability. The staff proposed to amend the scope of the proposal to exclude minor plan events. The amendments would require an entity to used updated assumptions to measure current service cost and net interest after a plan event if the plan affects a significant proportion of employees covered by the plan. The staff also believed that addressing significant market fluctuations during the reporting period was beyond the scope of the proposed amendments and proposes to clarify in the amendments that they only apply when there was a plan event.

Discussion

The Interpretations Committee did not support the staff recommendation to exclude minor plan events from the scope of the amendment. Instead the Interpretations Committee elected to make a reference to materiality so that entities are able to make their own judgements. The Interpretations Committee approved the remaining staff proposals.

The discussion was mostly focused on minor events, with many expressing concern that the term was not clear. The staff responded that their intention was to use the same criteria as for curtailments in IAS 19 (which is based on the number of employees affected). Several Interpretations Committee members noted that it would be more appropriate to rely on management judgements on materiality.

The staff indicated that they concerned with using the term materiality instead of more objective criteria, because entities might make different decisions in similar situations.

Exposure Draft of proposed amendments to IAS 19 and IFRIC 14 — Analysis of the proposed transition requirements, first-time adoption and effective date — Agenda paper 3C

The ED proposed that the amendments should be applied retrospectively with an exception included for adjustments to the carrying amount of assets outside the scope of IAS 19. Most respondents agreed with the transition requirements for IFRIC 14. On the other hand, half of the respondents either disagreed with the requirement to apply the amendments retrospectively in IAS 19 or expressed concern about the transition requirements. The concerns related to cost-benefit considerations; (the nature of a plan event as a one-off event; and separate presentation of cumulative remeasurement as a component of equity).   The staff believed that the proposal to exclude minor plan events would alleviate some of the concerns.  They also believed that retrospective application provides relevant information for comparative periods. The staff also proposed to clarify that an entity was not required to restate equity balances (for entities that present cumulative amount as a separate component of equity) when applying the amendments retrospectively. They indicated that there were no concerns noted from the proposed amendments not providing transition relief for first-time adopters and accordingly does not propose any change to the ED.

Discussion

The Interpretations Committee approved the staff recommendations. No significant comment or question was raised during the discussion.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.