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IFRS Committee breaks ranks with ESMA over IAS 19 asset-ceiling test

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The International Financial Reporting Standards Interpretations Committee (IFRS IC) has confirmed it will not develop guidance dealing with the asset-ceiling test in International Accounting Standard 19, Employee Benefits (IAS 19).

The issue is of particular relevance to pension plan sponsors in the UK.

Experts say it could also affect scheme sponsors in Ireland and Canada.

According to a formal agenda decision published in its official journal, IFRIC Update, the committee said: “On the basis of [its] analysis, the Interpretations Committee determined that, in the light of the existing IFRS requirements … sufficient guidance exists, and neither an interpretation nor an amendment to a standard was necessary and therefore decided not to add this issue to its agenda.”

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The call for the committee to look at the issue came from the European Securities and Markets Authority (ESMA).

The decision confirms the position adopted by the committee’s staff at the March 2015 IFRS IC meeting that the committee should not add the issue to its agenda.

Any such move by the committee might have involved either the release of interpretive guidance or a change to pensions accounting rules that could have affected the size of a defined benefit (DB) sponsor’s pension liability.

Guidance on the application of the asset-ceiling test under International Financial Reporting Standards (IFRS) is set out in IFRIC 14, ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction’.

The document, issued in 2008, interprets the requirements of IAS 19.

When a DB plan sponsor applies IAS 19, it must first measure the DB obligation using the projected unit credit method and fair value any plan assets on the other to reach 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.

This might be as either a refund of contributions from the plan or a reduction in future contributions.

In the circumstances described by ESMA, neither a plan wind-up nor a plan closure to future accrual has been decided on at the end of the reporting period.

In the UK, practice has tended to be that a company will recognise a surplus under IFRIC 14 as an asset if it can agree with its auditors it has an unconditional right to a refund at the end of the life of the plan.

If not, the sponsor might be able to argue that it expects to derive an economic benefit as a reduction in future service contributions.

However, IFRIC 14 says that, when an MFR means a sponsor will not derive the full economic benefit from IAS 19 future service cost, it must deduct the MFR future service contributions.

The accounting challenge that this presents under IFRIC 14 and IAS 19 is whether the sponsor should book a liability representing, say, a three-year time horizon or the longer timeline for the schedule of contributions.

For example, UK sponsors will generally agree a schedule of contributions over a 10-year period or so, and then review the schedule every three years or so.

The sponsor might also prepare a new funding valuation and schedule with its trustees because it has benefited from positive investment returns.

Aon Hewitt consultant actuary Simon Robinson told IPE: “You could argue that the schedule of contributions says the company has agreed to pay contributions for the next X number of years. The problem is, we all know that is not going to happen.

“Although a sponsor might have reached a 10-year funding commitment, the reality of the cashflows under that agreement is that they will only happen until the next funding valuation is finalised. Equally, an employer could force a valuation.”

Speaking during a 24 March discussion of the topic, IFRS IC member Tony Debell, a PwC audit partner, said: “You can’t assume the minimum funding requirement disappears simply because the period of the agreement disappears.

“We are saying you should continue to apply the principle that underpins the minimum funding requirement to make assumptions that are consistent between the way you measure the DBO and the way you measure the minimum funding requirement.”

The IFRS IC noted in its agenda decision that paragraphs 21 and BC30 of IFRIC 14 explain that an entity’s estimate of future minimum funding requirement contributions should take no account of the effect of expected changes in the terms and conditions of the minimum funding basis that are

  • not substantively enacted or contractually agreed at the end of the reporting period; and
  • equivalent to a legal requirement or contractual agreement.

Simon Robinson added that IFRIC 14 is “not sophisticated enough to deal with the very complex situations that arise in practice and so can require a degree of interpretation”.

He added: “What it does say, however, rather sensibly, is that companies should consider whether they should recognise an additional liability in respect of additional contributions.”

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