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IFRS rejects ESMA demand on asset-ceiling measurement for pensions

The International Financial Reporting Standards Interpretations Committee (IFRS IC) has knocked back a demand from the European Securities and Markets Authority (ESMA) for it to issue guidance on the asset-ceiling test in International Accounting Standard 19, Employee Benefits (IAS 19).

Summing up the committee’s support for the staff analysis of the issue, chairman Wayne Upton said: “The [draft] agenda decision is basically right, but we need to make clear this notion of the ‘underlying principle of the negotiation’ or words to that effect.”

The market overseer wrote to the committee demanding “clarification of whether an entity with a contractually agreed future minimum funding requirement should assume this requirement will exist over the life of the pension plan when performing an asset ceiling test”.

In an analysis of the issue, IFRS IC staff argued: “On the basis of our assessment of the Interpretations Committee’s agenda criteria, we think the Interpretations Committee should not add this issue to its agenda.”

Staff said this was because “paragraphs 17, 21 and BC30 of IFRIC 14 provide sufficient guidance for this issue, as explained in the section for the staff conclusions”.

The guidance dealing with 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”.

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

When a defined benefit (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.

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.

Paragraph 64 of IAS 19 limits the net DB asset an entity can recognise in its accounts to the lower of the plan surplus or the asset ceiling.

IAS 19 defines the asset ceiling as “the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan”.

Among the jurisdictions potentially affected by the discussion are the UK – which ESMA referred to in its submission to the IFRS IC – Ireland and Canada.

Commenting on the discussion, Warren Singer, a consultant actuary with Mercer, said: “Most companies in the UK believe, under IFRIC 14, they can recognise a surplus as an asset because they have an unconditional right to a refund at the end of the life of the plan.

“If they agree that with their auditors, the question about future service contributions is irrelevant.

“If they don’t, the second route they can take in order to recognise an asset is to say they expect to derive an economic benefit as a reduction in future service contributions.

“However, IFRIC 14 says that, when an MFR means you won’t derive the full economic benefit from IAS 19 future service cost, you have to deduct the MFR future service contributions.”

He continued: “So then the next question is whether you should you be consistent in the time period you use for the calculation of the IAS 19 future service cost and the MFR future service contributions when applying IFRIC 14.

“There are mixed views. It is a rare issue in the UK because most people use the unconditional right to a refund argument. But where it has come up, it can be argued either way.”

Speaking during the 24 March discussion, IFRS IC member Tony Debell, a PwC audit partner, argued: “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.”

Meanwhile, Simon Robinson, a consultant actuary at Aon Hewitt, told IPE he was surprised the question had not been raised earlier.

“It is certainly something we in the UK have been talking about,” he said.

“When you look at recognising an additional liability under IFRIC 14, or for that matter contributions in respect of future service, the definition of ‘minimum funding requirement’ in the literature is unclear.

“In the UK, we have taken it to mean the schedule of contributions agreed between the trustees and the sponsor to make good any deficit.”

Typically, a sponsor will agree a schedule of contributions over a 10-year period or so. In practice, however, the schedule is likely to be reviewed every three years or so.

In addition, a sponsoring company might be prompted to prepare a new funding valuation and agree a new funding schedule with its trustees because it has benefited from positive investment returns.

“The challenge companies face in the UK,” Robinson said, “is the choice between, say, a three-year horizon and the longer timeline for the schedule of contributions.

“You could argue that both of those are ‘substantially enacted’. On the one hand, you know with some certainty you are going to carry out a new valuation after three years.

“On the other hand, you have a document in your hand at the balance sheet date that tells you that you have agreed a schedule of deficit contributions for the next 10 years.”

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