The International Accounting Standards Board has issued two proposed amendments to International Accounting Standard 19, Employee Benefits (IAS 19) and its related asset-ceiling recognition guidance.
The changes address how defined benefit (DB) plan sponsors reflect funding contributions agreed with their trustees as an extra liability on the company’s balance sheet, and assess their accounting assumptions following a special event such as a DB plan amendment, settlement or curtailment.
Advisers have broadly welcomed the changes to IFRIC 14 but warn that DB schemes must pay close attention to the proposals.
Towers Watson consultant Eric Steedman said: “The proposed amendment addresses a long-standing ambiguity in the application of IFRIC 14 for entities that have an unconditional right to a refund of surplus after a plan has run-off, but that do not have an unconditional right to ensure a ‘business-as-usual’ run-off happens.”
The advisers were less welcoming, however, of the IASB’s proposed changes to the treatment of so-called special events, with Lane Clark & Peacock partner Tim Marklew slamming the proposals as “unnecessary tinkering”.
Alex Waite, a partner with Lane Clark & Peacock, added: “Whether or not a company must show an extra liability on the balance sheet often depends on a ‘legal lottery’ of what the small print of the scheme’s trust deed and rules say, leading to big inconsistencies from company to company.”
He warned that such funding liabilities could end up being much bigger than the normal deficit figure calculated under IAS 19.
And Aon Hewitt consultant Simon Robinson said he agreed with the view the changes to IFRIC 14 were less onerous than first feared in some quarters.
“Initially, references during the committee’s discussions to actions that trustees could take to stop a sponsor from using any surplus suggested that almost no UK pension would be able to recognise a surplus,” he said.
“We then saw the committee draw a distinction between a buy-in and a buyout, which reined-in the scope of any adverse impact on surplus recognition because vanishingly few trustees have a unilateral right to buy out benefits.
“This is a fairly arbitrary distinction, and, although I can see where they are coming from, economically, the two are virtually the same. It would have to be pretty extreme circumstances for a buy-in and a buyout to have different economic impacts.”
The amendment to IAS 19 and IFRIC 14 were developed by the IFRS Interpretations Committee (IFRS IC), responsible for interpreting the requirements of IFRSs such as IAS 19.
The IFRS IC’s predecessor issued IFRIC 14 in 2007 to provide guidance on the application of the asset-ceiling requirements of the pensions standard.
Paragraph 58 of IAS 19 limits the measurement of a DB asset to the “present value of economic benefits available in the form” of refunds from the plan or reductions in future contributions to the plan.
IFRIC 14 also deals with the interaction between a minimum funding requirement and the restriction in paragraph 58 on the measurement of the DB asset or liability.
When a DB plan sponsor applies IAS 19, it must first measure the DB obligation using the projected unit credit method on the one hand and fair value any plan assets on the other.
This calculation will produce either a DB asset or liability at the balance sheet date.
Where a plan is in surplus, the sponsor recognises the lower of any surplus and the IAS 19 asset ceiling.
An unidentified source has asked the committee to consider whether preparers should take account of events that might disrupt the plan unfolding in line with the IAS 19 assumptions when they apply IFRIC 14.
The IFRS IC explored the issue during its March, May, July and September meetings last year.
Based on those discussions, advisers, among them Aon Hewitt, warned of the potential adverse impact of any changes to IFRIC 14 on DB schemes.
Alongside the amendment to IFRIC 14, the IASB has also proposed a change addressing the assumptions DB plan sponsors must use in their pensions accounting following a plan amendment, settlement or curtailment.
LCP partner Tim Marklew said: “In my view, the proposed new rules will, if adopted, make the calculation of company pension costs more complicated and more unpredictable, without providing any extra useful information.
“This looks like unnecessary tinkering with the rules, and we will be urging the IASB to reconsider whether to go ahead with these amendments.
“Meanwhile, companies planning changes to their pension schemes should bear in mind the potential impact of these proposals on their future pension costs.”
Simon Robinson added: “This change aligns IFRS with US GAAP. It requires you to remeasure the whole of the P&L effect of an exceptional event such as a settlement on a scheme from the date of the settlement going forward.
“Although I don’t think this change will make a huge difference, it will be more onerous on sponsors. It will certainly add a lot of complexity. If you have an event like a curtailment that only affects a small number of members, you will nonetheless have to remeasure the whole scheme.”
He added that there were also potential issues ahead with a proposed change to paragraph 64 of IAS 19 that forms part of the special-event amendment.
“Again, this change is not without its problems,” he said. “If you have a settlement that hasn’t cost the sponsor anything, why should it reduce the company’s balance sheet?
“I don’t think it is reasonable to impose a P&L charge on a company for using an asset that IAS 19 tells it isn’t an asset. One way out of this situation would be the old FRS 17 approach under UK GAAP, which allowed companies to offset any unrecognised surplus.”
Interested parties have until 19 October to comment on the proposal
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