IAS 19 — Effects of a potential discount on plan classification

Date recorded:


The Committee received a request about whether the existence of the potential discount on a contribution to a post-employment benefit plan will result in a defined benefit plan classification applying IAS 19. In the fact pattern described in the request, an entity sponsors a post-employment benefit plan (the plan) that is administered by a third party. The entity has an obligation to pay fixed annual contributions to the plan but it will have no legal or constructive obligation to pay further contributions if the plan does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. On the other hand, the entity is entitled to a potential discount on its annual contributions. The discount arises if the ratio of plan assets to plan liabilities exceeds a set level.

In considering whether the potential discount meets the criterion of "fixed contributions", the staff analyse and consider that the definition of defined contribution plans focuses on the downside risk that the cost to the entity may increase, and the definition does not exclude the upside potential that the cost to the entity may be less than expected. The staff further analyse that the actuarial risk and investment risk do not fall in substance on the entity for this specific facts. Accordingly, the staff conclude that the potential discount does not preclude the defined contribution plan classification.

The staff did not recommend to add this matter to the Committee’s standard-setting agenda and instead publish an agenda decision. In March 2019 meeting there was a lively discussion about the exposure to "downside risk" by the employer. Some Committee members expressed their concerns that the tentative agenda decision considers a very narrow fact pattern and that the particular facts and circumstances in the fact pattern should be included in the agenda decision.

Comment letters were received and certain respondents disagree with the Committee's technical analysis, mainly in the aspects of "actuarial and investment risk" and "fixed contributions".

Staff analysis

Respondents say the tentative agenda decision takes a narrow view of the reference to actuarial risk and downside risk in IAS 19:28 & 30. They have a broader view that, if contributions were structured so that the entity expects to receive a discount, the risk of failure to receive that discount constitutes actuarial risk for the entity, and the entity is exposed to downside risk as this risk relates to expectation. The staff do not disagree with the importance of assessment of actuarial risk and downside risk but consider the description of actuarial risk and downside risk are only the first part of the relevant paragraphs, and therefore the part of "entity's obligations (legally or constructively) towards employees" shall be the focus which draws the distinction between a defined contribution plan and defined benefit plan in IAS 19. If the entity's obligation is to pay fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions, it is a defined contribution plan, otherwise it would be a defined benefit plan.

Certain respondents consider the contribution paid by an entity that could be partially refunded is not fixed. The staff disagree with this viewpoint based on the discussion in the agenda decision Defined Contribution Plans with Vesting Conditions published in July 2011 and IAS 19:51(a).

Other respondents say the agenda decision could lead to inconsistent accounting between economically similar plans. The staff consider the classification of a post-employment benefit plan as defined benefit or defined contribution depends on the entity’s obligation to make a fixed contribution towards employees, not whether it voluntarily decides to make that contribution.

There were also respondents saying the fact pattern described in the submission has no sufficient detail to permit a conclusion on the classification of the plan. The staff agree that it is essential to consider all relevant terms and conditions of the plan as well as any informal practices that might give rise to a constructive obligation, and therefore recommending wording changes by (a) adding the requirements in IAS 19:27 in the agenda decision and (b) clarifying in the agenda decision the terms and conditions set out in the fact pattern are "the only relevant terms and conditions".

Staff recommendation

The staff recommend finalising the agenda decision subject to the above-mentioned changes.


A Committee member agreed with the editions to the tentative agenda decision but he still struggled with the downside risk notion which is fundamental to the entire analysis. IAS 19:BC29 states that downside risk should be assessed against the expected cost that is going to achieve an outcome that reflects the substance of the arrangement. As such, the narrow scope of downside risk could lead to different classification of the plan. He did not agree to finalise the agenda decision.

A few other Committee members are troubled with the term 'fixed contributions' as they did not think the amounts that could be refunded in the future are fixed because the contribution is in substance varied by actuarial experience and therefore continued to disagree with the staff analysis and agenda decision. The staff explained that, as set out in the agenda decision, the fundamental principle is whether the entity will have no legal or constructive obligation to pay further contributions. The Chair also explained that based on IAS 19:39, the entity's obligation may be increased if actuarial experience is worse than expected and hence the contributions subject to refund as set out in the fact pattern is not considered as 'vary with actuarial risk'. In order to address the Committee members' concerns, the staff also suggested some wording  changes to the agenda decision about the link between the benefit formula and actuarial risk when assessing whether the benefit plan might give rise to a constructive obligation. For example, if the plan includes a benefit formula, the determination of the entity's obligation must consider how the fixed contribution is set and whether it directly or indirectly relates to the investment risk.

On the other hand, some Committee members were comfortable with the revised wording of the agenda decision and consider that it should address the concerns about abusing the classification of defined contribution plan in practice. They thought the agenda decision was clear enough to answer the specific narrow-scope question in the fact pattern described in the request.

A Committee member expressed his concern over the conclusion paragraph which states in the fact pattern described in the request, the existence of a right to a potential discount would not itself result in classifying the plan as a defined benefit plan applying IAS 19. He considered that the entity still needs to consider other factors (such as frequency and duration) as well as other terms and conditions and some plans with discount could turn to a defined benefit plan classification. The conclusion in the agenda decision should include such a warning statement.

Based on the discussion, the changes to the tentative agenda decision to be made include (a) assessment of the frequency and manner of the contributions and discounts, when assessing the relevant terms and conditions of the plan, (b) the stronger link between the benefit formula and actuarial risk as mentioned above and (c) adding 'nonetheless the Committee reiterated the importance of assessing all the relevant terms and conditions as outlined in the earlier agenda decision' in the conclusion paragraph.

The Committee decided, by a majority of votes, to adopt the wording in the agenda decision subject to the above-mentioned changes.

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