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​IASB interpretations committee mulls restrictions on DB plan surpluses

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The International Financial Reporting Standards Interpretations Committee could be on the verge of restricting the ability of defined benefit plan sponsors to recognise a plan surplus on their balance sheets.

Summing up the committee’s 15 July discussion of the issue, chairman Wayne Upton said: “Having looked at this issue again, my sense of a majority of those who spoke was that it is not an asset.”

He added: “It doesn’t meet the criteria for recognition, which makes measurement irrelevant.”

Ten IFRS IC members supported this analysis.

The IFRS approach to pensions accounting is set out in International Accounting Standard 19, Employee Benefits (IAS 19).

In 2007, the IFRS IC’s predecessor issued IFRIC 14, which interprets the requirements of IAS 19.

Paragraph 58 of IAS 19 limits the measurement of a defined benefit 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 deals with the interaction between a minimum funding requirement and the restriction paragraph 58 on the measurement of the defined benefit asset or liability.

The 15 July discussion leaves the committee’s staff to consider ahead of a future meeting whether its asset-ceiling guidance, IFRIC 14, as written, is sufficient basis for that conclusion, or whether some further action is required from the committee.

That action could take the form of an amendment to IFRIC 14.

Alternatively, because IFRIC 14 is an interpretation of IAS 19, the IFRS IC might ask the IASB to amend the standard.

The IFRS IC discussed the issue at its May meeting.

Committee members tentatively decided to develop either an amendment or an interpretation on this issue and requested further analysis from staff.

When a DB plan sponsor applies IAS 19, it must first measure the DBO using the PUC 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 will recognise the lower of any surplus and the IAS 19 asset ceiling – that is, the economic benefits available to the entity from the surplus.

The IFRS IC developed IFRIC 14 in order to provide guidance on calculating the asset ceiling.

More recently, a constituent 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.

And example would be the trustees of a DB scheme whose future actions could reduce the ability of a sponsor to recognise an asset.

For example, the trustees of a plan might opt to augment members’ benefits or wind up the plan and purchase annuities.

Eric Steedman, IAS 19 expert at Towers Watson in the UK, told IPE: “This will be dependent on the scheme rules.

“It is quite hard to generalise here. It is not necessarily just down to legislation.

“If the committee follows the trajectory it seems to be on, sponsors will need to re-examine the conclusions they previously made under IFRIC 14 and see if they still stand up. In many cases they will, but in some they might not.”

He added: “A lot of people will also be relying on the ability to take contribution reductions, but, as plans close, that becomes less available.

“So I can foresee a situation where, as more plans close and funding levels improve, people need to look more closely at these things.”

He said the course the IFRS IC was on could mean change for some people but not for everyone.

“I would think over time there will be more people caught by these considerations, but, again, it will depend on the plan specifics,” he said. 

“I don’t have the sense that this is going to be a flood, but it might be significant for those who are affected.”

IFRS IC member Tony Debell warned during the meeting that committee members needed to think through the implications of any actions very carefully.

He said: “I understand why people feel uncomfortable with the notion that if someone can just take it away, I don’t get it, but the company controls its right to have whatever is there, and that’s the model that IAS 19 is built on.

“I’m just concerned we’re going with an answer we feel comfortable with rather than an answer supported by what the literature says.”

In particular, Debell warned that IFRIC 14 was concerned not only with recognition of an IAS 19 balance sheet asset but also with the interaction with any minimum funding requirement.

He said “one of the consequences of doing this would be not only to take an asset off the books” but also to add “a liability on as well”.

“I want to make sure everybody understands that is what you would be doing when there is a minimum funding requirement,” he said. 

The IFRS IC is scheduled to meet next in September.

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