​IFRS committee calls time on attempt to produce IAS 19 guidance

The International Financial Reporting Standards Interpretations Committee (IFRS IC) has confirmed that it will call a halt to its efforts to develop accounting guidance to address the measurement challenges presented by defined benefit (DB) plans with a guaranteed minimum return.

Committee members, who are charged with interpreting the accounting rules issued by the London-based International Accounting Standards Board, warned that they did not expect to come up with a solution within the confines of International Accounting Standard 19 (IAS 19) and its existing requirements.

IFRS IC member Tony de Bell said: “To be honest, I’m not sure you can resolve it without addressing the broader aspects in [IAS]19.”

Commenting on the decision, Towers Watson employee-benefits accounting specialist Eric Steedman told IPE that it was “never on the cards that the Interpretations Committee would reverse its provisional decision to stop work on these issues”.

He added: “Somewhat ironically, the reason for passing on this was that the underlying issues are too fundamental to be solved in that forum.”

In summary, the Committee failed to reach a consensus identifying a suitable scope for an amendment to IAS 19 that would improve the accounting for a sufficiently wide population of plans, limit any unintended consequences that might arise from making an arbitrary distinction between otherwise similar plans, or pass the cost-benefit test.

In a draft agenda decision rejection notice released in January, the Committee noted that, “because of the difficulties encountered in progressing the issues, the Interpretations Committee [decided] to remove the project from its agenda”.

Work on DB plans with a guaranteed return started when the IFRS IC received a request asking it to clarify whether the 2011 revisions to IAS 19 had any affect on how sponsors should account for this group of plans.

In May 2012, the committee decided to revisit its earlier work on what was often referred to as the IFRIC D9 project, a stalled bid by the Committee to address the accounting challenges thrown up by non-traditional benefit plan designs such as intermediate-risk plans.

These plans – also known as ‘intermediate risk’ plans – sit awkwardly within the IAS 19 projected unit credit measurement model.

The IFRIC D9 initiative ground to a halt in 2006 when the IASB launched what turned out to be an unsuccessful project to develop a new accounting methodology to address contribution-based promises.

But a widely panned discussion paper on the topic in 2008, plus the pressure on board time of the equally failed drive to achieve convergence with US accounting literature by 2011, led the IASB to defer any further work on pensions to a future broader project.

In its place, the board instead embarked on a series of quick-fixes to IAS 19, among them the removal of deferral and amortisation mechanisms within the standard, as well as the introduction of a net-interest component of income statement expense.

And so the Committee’s recent work on contribution-based promises adds up to the third attempt inside a decade to address the accounting for this troublesome group of plans by either the IASB or the IFRS IC.

A feedback statement on the IASB’s 2011 agenda consultation bracket pensions accounting, share-based payments and income taxes together as longer-term priorities for the board to address.

The recent developments are unlikely to placate Germany’s national accounting standard setter, the DRSC.

In a sharply worded letter to the Committee, the rulemaker’s president Liesel Knorr wrote that the sheer number of issues the Committee has considered since 2011 “shows that a more fundamental review of IAS 19 by the IASB is warranted in the near future”.

The letter also calls for the IASB to define the range of issues the IFRS IC is able to consider to arrive at a process that “leads to answering issues rather than rejecting them”.

Separately, during the 13 May meeting, the committee also recommended that the IASB proceeds with an amendment to IAS 19 dealing with the discount rate objective in the standard.

The IASB issued the amendment on the recommendation of the IFRS IC.

It clarifies that the high-quality corporate bonds used as the basis for arriving at the IAS 19 discount rate should be denominated in the same currency as the liability.

It also explains that entities should assess the depth of the market for high-quality corporate bonds at currency level as well.

The IASB issued the amendment in December 2013 as part of its 2012-14 annual improvements project. 

The changes are slated to take effect from 1 January 2016 if the IASB signs off on them.

Committee members rejected a staff proposal for more outreach on the topic to assess the impact of the proposed amendment on countries such as Ecuador, which uses the US dollar in a bid to avoid currency volatility.

Towers Watson’s Eric Steedman does not expect to see any upheaval in practice as a result of the amendment.

“This is really just putting beyond doubt what is already a very common approach to interpreting the wording,” he said.