The International Financial Reporting Interpretations Committee (IFRS IC) has approved the release of an update to its asset-ceiling guidance, IFRIC 14.
In broad terms, the amendments could severely restrict the ability of defined benefit (DB) sponsors in the UK to recognise a plan surplus as a balance-sheet asset.
The committee, responsible for interpreting IFRSs, approved the changes during its 6 September meeting.
The International Accounting Standards Board must now ratify the updated interpretation at a public meeting.
If approved by the board, the interpretation will have an effective date of 1 January 2019, with earlier application permitted.
In broad terms, the changes to IFRIC 14 set out to clarify the accounting treatment of plans where plan trustees can wind up a plan without the sponsor’s consent.
This gives rise to a number of considerations.
First, the committee has proposed amending IFRIC 14 so that a sponsor “does not have an unconditional right to a refund of a surplus on the basis of assuming the gradual settlement of the plan liabilities”.
Second, the committee has proposed that the surplus available to a sponsor through a future refund does not include amounts that other parties can use for other purposes without the sponsor’s consent.
In a third change, the IFRS IC argues that a scheme trustee’s power to buy an annuity or make some other investment decision does not affect the availability of a refund.
Finally, the committee has set out to clarify that trustees do not have the power to wind up the plan, or to change benefits, if the power is conditional on uncertain future events.
On other matters, the committee has proposed a further amendment to paragraph 7 of IFRIC 14.
This amendment requires sponsors to take account of any statutory requirements that are substantively enacted, as well as contractually agreed terms and conditions of a plan and any constructive obligations.
This assessment would apply where a sponsor is considering whether it is entitled to a refund from a scheme or a refund of future contributions.
The IFRS IC’s predecessor issued IFRIC 14 in 2007 in a bid to clear up confusion around the application of the asset-ceiling requirements in IAS 19.
The guidance helps preparers assess how much of a DB surplus a plan sponsor is available to recognise as a balance sheet asset.
The IASB and its interpretations committee issued this latest amendment to IFRIC 14 in June.
The amendments have met with a mixed response from auditors and consultants, with opinion split equally for and against.
EY audit partner John O’Grady was among the critics of the proposed changes around the meeting table.
“I think it’s confusing the measurement of the right with the existence of the right,” he said.
His comments reflect the long-standing view of some critics who argue that the changes create an artificial distinction between a buy-in – effectively an investment decision by the trustees – and a buyout.
He added that neither of the two actions affected the existence of the right to a refund – merely the amount.
At the end of last year, the UK audit regulator, the Financial Reporting Council (FRC), weighed into the debate and said it expected companies to make disclosures consistent with the requirements of the as yet unfinalised ED.
The FRC’s intervention led to the Royal Bank of Scotland accelerating the recognition of a £4.2bn (€4.9bn) liability for service cost in respect of its DB pension scheme.