Staff at the International Financial Reporting Standards Interpretations Committee (IFRSIC), the body responsible for developing guidance on the application of IFRSs, have recommended that the committee should approve an amendment to its asset-ceiling guidance. 

The move has been prompted by doubts over whether defined-benefit plan sponsors should factor in possible future actions by a scheme’s trustees ahead of recognising a balance-sheet asset.

The IFRS Interpretations Committee had received a request to clarify whether the right of pension plan trustees to increase member benefits or wind up a plan affect an employer’s unconditional right to a refund of plan contributions. 

The committee’s staff wrote in a meeting paper: “We think that the fact that any surplus could be decreased or extinguished by uncertain future events is not relevant to the recognition of an asset, because this fact may affect the amount of the right but does not affect the existence of the right.” 

The original guidance, IFRIC 14, says that a plan sponsor can benefit from a refund where it has ‘an unconditional right’ to that asset. 

Critics of IFRIC 14 argue, however, that puts too much focus on recognition of an asset and not enough on measurement issues. 

“There is almost a step missing in its logic,” Simon Robinson, a principal at consultancy Aon Hewitt, said. “It is quite binary. Once you have the right to a refund, that’s it. 

“It doesn’t consider the amount of a refund. Rather it just tells you to recognise the present value of the surplus using the IAS 19 methodology, which is a big leap. I’m not sure that logic hangs together.” 

The lack of an explicit formula or mechanism for calculating a pension scheme’s minimum funding requirement has proved challenging in the UK environment for businesses applying IFRIC 14. 

Clive Fortes, a pensions accounting expert with consultancy Hymans Robertson, told IPE: “A lot of auditors have taken the view that you can recognise a surplus if there is a theoretical possibility that the company can access the surplus – even if it needs to wait for the last member to die to do so,” he said. 

“You don’t see many companies restricting any IAS19 surplus an asset. In our experience, companies are looking for a mechanism that means they aren’t precluded from recognising a surplus.

I suppose it boils down to asking the question: does this feel like an asset?”  

Fortes added that because financial statements are prepared on the basis that a business is a going concern, auditors tend to apply IFRIC 14 in the context of an ongoing scheme. 

“This has tended to push the focus away from what happens on a winding-up of the scheme so that surpluses are typically recognised unless it isn’t blindingly clear that the company can access the surplus,” he said.