Finding the right way to say no

The good news from the International Financial Reporting Interpretations Committee (IFRIC) is that it has now hacked seven interpretive requests from its backlog of nine International Accounting Standard 19 (IAS19) issues awaiting an agenda decision. The bad news for the IFRIC is that, having worked through the issues, the interpretive committee has declined to add any of them to its agenda

So, having diverted extra staffing resources to the pensions accounting project team, IFRIC is left with just two IAS interpretive candidates awaiting attention: issues relating to the non-consolidation model and definition of plan assets; and pension promises based on performance hurdles. But the challenge with saying "no", if you happen to be the IFRIC, is finding the right way to say it.

The bind the IFRIC finds itself in is that it must explain why no interpretation is necessary without interpreting the standard through a backdoor. Not a great way to win friends, warned IFRIC member Bernd Hacker: "I heard a lot of talk that these are exactly the things that make IFRIC non-interpretations very unpopular because these are interpretations ... they are agenda decisions [but] people out there call them non-interpretations." Take the request from an unnamed IFRIC constituent for guidance on the correct accounting treatment for employee contributions in cost-sharing pension plans. On a typical retirement plan, IFRIC heard, employees might agree to pay variable contributions, subject to the overall funding level of their pension plan. The employer and its employees might agree, for example, to split the plan's funding on a 60/40 basis.

Relying in their analysis on paragraphs 7 and 120A of IAS19, IFRIC staff concluded, on the broad issue of how employee contributions should be accounted for, that the standard "seems clear that contributions to a pension plan received during the reporting period from employees towards the cost of their pension plan should be deducted from the current service cost". And because these contributions are paid during the service period, they do not affect the defined benefit obligation.

In a bid to support this rationale, staff looked to the guidance in the Canadian equivalent of IAS 19, a broadly comparable accounting standard, which is found at paragraphs 71-4 of Section 3461 of the Canadian standard.

Moving the focus onto employee contributions in a cost-sharing pension plan, staff identified two key issues: whether cost-sharing in a defined-benefit plan should be taken into account in determining both the current service cost and the defined benefit obligation; and whether any surplus that must be used to adjust either member benefits or contributions should be treated as an addition to the liability.

Paragraph 83(b) appears to dispose of the first issue, staff argued. When determining both current service cost and the defined benefit obligation, entities should look to the "terms of the plan (or resulting from any constructive obligation that goes beyond those terms) at the balance sheet date". On the second issue, staff said that paragraph 85 is clear: "If the formal terms of the plan (or a constructive obligation that goes beyond those terms) requires an entity to change benefits in future periods, the measurement of the obligation reflects those changes." In other words, if your plan surplus is already spoken for, you can't use it to reduce the defined benefit obligation.

IAS19 is effectively silent - it only addresses surpluses - when it comes to solving the puzzle of whether a plan sponsor can treat additional employee contributions to fund a deficit as a deduction from its IAS19 liability. However, staff said that paragraph 91 does allow this more favourable treatment, albeit in the case of future medical costs.

And again, to add weight to their reasoning, staff told the IFRIC that: "paragraph 3461.74 of Canadian GAAP, which along with US GAAP gives detailed guidance on employee contributions that is broadly comparable with their treatment under IAS 19, adds detail to this requirement".

The answer to part of the question will lie closer to home than Canadian GAAP. Plan sponsors must also look at the terms of their plan to figure out how to account for either a surplus, or their right to call on employees to stump up additional contributions to a defined-benefit scheme.

IASB member Jim Leisenring, observing the meeting, appeared to have reservations: "I was in great shape with this until I read the submission," he began. "After I read the submission, I said ‘did we answer any of the questions?'... I'm not sure." This was, he said, a case of the IFRIC "taking 750 words to explain why [a standard] is clear ... Essentially, when we do this, we are saying to the submitter ... you should never have asked this question. We are in an awfully awkward position when we have these questions. I don't know what the hell to do about it. So I'm not going to say any more."