Consultants draw blank on latest IAS 19 amendment

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  • Accountancy


The London-based International Accounting Standards Board (IASB) has released a narrowly focused amendment to its pensions accounting standard, International Accounting Standard 19 (IAS 19), Employee Benefits.

The change, the board said in a press statement, will clarify how defined benefit (DB) plan sponsors must attribute service-related pension contributions from either employees or third parties.

The new requirements will take effect from 1 July 2014, with early application permitted.

But pensions accounting experts contacted by IPE have drawn a blank when asked which plans would be hit by the clarification.

Simon Robinson, a consultant actuary with Aon Hewitt, said: “Their narrow scope amendment takes most – perhaps all – pension plans out of the scope of this change.  I have yet to find a UK plan, for example, that will be caught by this change.”

Under the new requirements, where the contributions to a DB scheme depend on the number of years’ past service, sponsors must following paragraph 70 of IAS 19 and use the same attribution method as they used for the gross benefit.

However, a practical expedient built into the amendment allows sponsors to account for the contributions as a reduction in service cost in the accounting period in which service is rendered if they are independent of past service.

Robinson said he would struggle to value a plan in line with the new requirements.

“My primary problem is that it takes a negative DC benefit (employee contributions) and tries to apply DB accounting to it.

“The process of valuing one of these plans under this approach would almost certainly be a disproportionate effort compared with any arguable benefit in terms of theoretical correctness.”

Separately, a leading practitioner close to the issue agreed it was difficult to see where, if at all, the new requirements would kick in.

Where they do apply, the source added, applying them in practice could prove challenging, particularly where recordkeeping is incomplete.

Another major firm of actuaries told IPE the amendments were not expected to change practice among UK plan sponsors.

Elsewhere on IAS 19, newly published minutes of the November 2013 International Financial Reporting Standards Interpretations Committee (IFRS IC) meeting reveal that the extent of the committee’s continuing struggle to determine which troublesome DB plans to address with its revamped IFRIC D9 project.

The D9 project is a bid by the committee to address the accounting mismatch that arises when the IAS 19 discounting model to a population of troublesome contribution-based promises.

The mismatch is the result of applying either a high-quality corporate bond or government bond discount rate to member benefits that are calculated by reference to the returns on different pool of assets.

The November minutes note: “The Interpretations Committee acknowledged that the scope of this project might be broader than it had envisaged, specifically depending on the definition of the variable components of the plans that fall within the agreed scope.”

In other tentative decisions reached during the 12 November meeting, committee members agreed benefit promises with vesting conditions and demographic risks should be within the scope of the project.

But benefit promises with salary risk look set to remain outside the project scope.

As for where the dividing line will fall between variable and non-variable components, the majority of committee members said they would be unhappy with any more to limit the definition of a variable component to returns based on the actual return on any plan assets.

Behind that concern was the fear that any such move would leave many economically similar plans outside the scope of any interpretation and accounted for under IAS 19’s projected unit credit approach.

In an interview with IPE, interpretations committee member Andrew Watchman said: “The challenge facing IFRIC is to define the scope of this third category in a way that captures the plans for which the mismatch issue is most evident and problematic, without sweeping in many other plans for which the existing model seems to work well enough.”

The November 2013 IFRIC Update warns: “The Interpretations Committee acknowledged that the scope of this project might be broader than it had envisaged, specifically depending on the definition of the variable components of the plans that fall within the agreed scope.”

The report continues that the committee will “discuss at a future meeting how to proceed with this project”.

Readers' comments (1)

  • Your report of pension and accounting "experts" drawing a blank is interesting in what it says of the breadth (or lack of breadth) of knowledge of these experts.

    The "employee contribution amendment" is not necessarily addressed to the most important issue troubling employers' pension accounting, but it appropriately addresses a relevant issue for practically all plans in one of the most "pension important" markets - Switzerland.

    The standard Swiss plan is a DC plan with guarantees that also commonly has a schedule of retirement savings contributions that increases with age.

    The increase schedule can lead to a materially higher benefit attribution to later years of service requiring that benefit be "re-attributed" on a straight line basis.

    So, if a plan currently credits say 5% of pay and will later credit 10% of pay, then the re-attribution would "pull forward" some of the future 10% into the current DBO and Service Cost.

    Now in our example plan it is quite likely to find that the employee has to pay a part of the contribution and if it were the case that the employee has to pay half of it, then it would be logical that the increase in future contributions of the employee should be "pulled forward" in the same way as the plan benefit.

    So that is precisely what the narrow scope amendment addresses, and it addresses it pretty well correctly.

    I hope this helps the experts to appear a little less blank.

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