The International Financial Reporting Standards Interpretations Committee has tentatively declined to add a standard-setting project to its workplan dealing with the attribution of defined benefit (DB) pension rights to periods of employee service.

The committee ruled that the requirements of International Accounting Standard 19, Employee Benefits, are clear, with 12 members of the body backing the decision.

The committee’s chair, Sue Lloyd, played down fears that the decision would force sponsors to restate their accounts.

She said any such decision would depend on what individual fact patterns are “compared to what is in the agenda decision”. 

“I think that the more important, generic point is that when we recently updated the Due Process Handbook, we made a specific reference to the fact that people do need to apply relevant agenda decisions to be in accordance with IFRSs but we believe that agenda decisions provide new insights.”

She added: “And so, because it’s new information, something they didn’t have in the past, that means that typically it wouldn’t result in the need to restate. They would change going forward.”

Details of the decision are set out in the committee’s official journal, IFRIC Update. The decision is open for public comment until 15 February 2021.

Committee staff analysis

In their analysis for the meeting, the Interpretations Committee’s staff explained at paragraph 6 of the meeting paper that the submission concerns a DB pension promise with three main characteristics.

Under the plan, an employee is entitled to a lump sum accrued at a rate of one month’s salary for each completed year of service over a maximum of 16 consecutive years – provided the employee is in service at the date of retirement.

Crucially, an employee who worked for the entity for four years, left their employment, and then returned for three years before retirement, would receive benefit based on three years’ of service and not seven years.

Paragraph 70 of IAS 19 sets out the principles that govern the attribution of benefit to periods of service, while paragraphs 71–74 of the standard deal with how a sponsor applies that principle.

Applying those requirements, the issue is whether sponsors should attribute retirement benefit: 

View A – from the date the employee’s service begins;

View B – only to the employee’s first 16 years of service or to when their service begins if they have less than 16 years’ service open to them; or

View C – to just the last 16 years of service.

Staff explained that View C was not contained in the submission that they had received. 

They also explained that they had refined the fact patterns in the meeting paper based on information they had received during their outreach work to analyse the problem.

IASB member Mary Tokar said that, despite this, she “wanted to assure Interpretation Committee members that … the facts as set out about the terms of the plan are consistent with the original submission as clarified by the submitter”.

Staff’s outreach received 18 responses from a variety of sources, including six accounting firms, revealing that this type of pension promise is common in a number of European countries such as France, Greece and Austria. 

This outreach also revealed that View A is the predominant accounting treatment in France, whereas both View A and View B are evident in Greece and Austria. 

Capped-asset approach update

Meanwhile, the International Accounting Standards Board has received an update from staff on their work on the board’s project looking into an accounting treatment for DB promises linked to an asset return.

The approach under consideration has been dubbed the capped-asset approach. 

The board discussed a number of illustrative examples during the 16 December non-decision making session.

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