‘This is a tricky issue and one that has taxed the minds of practitioners,” said Robert Garnett, chairman of the International Financial Reporting Interpretations Committee (IFRIC) as it unveiled its latest International Accounting Standard 19 interpretation, IFRIC D19, on 24 August last year.
IFRIC is responsible for publishing interpretive guidance on, International Financial Reporting Standards (IFRS), the accounting standards promulgated by the International Accounting Standards Board. The “tricky issue” is the interplay between the asset ceiling under IAS19 and a statutory minimum funding requirement.
The body comprises 12 voting
members, drawn from a variety of countries and professional backgrounds. Meeting six times each year, its principal role is to reach a consensus on appropriate accounting treatments for issues that are likely to resulting divergent practice.
IAS19 currently limits the measurement of the defined benefit pension asset to the “present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan”. At the same time, a statutory or contractual minimum funding requirement might specify a minimum level of contributions that a plan sponsor has to pay into a plan over a given period.
A minimum funding requirement would not normally affect the accounting for a pension plan under IAS19. However, it could mean that a pension plan sponsor has to pay contributions into a plan that it cannot subsequently access - either as a refund or as a reduction in future contributions.
In a bid to clarify how IAS19 addresses this accounting puzzle, IFRIC finally unveiled a draft interpretation in August 2006. The comment period on the draft closed on 30 October 2006. On 8 March, IFRIC members held their first substantive discussions on D19, since sending the draft to the IASB for clearance in July last year. Staff reported that a majority, running at over 80%, was “broadly supportive of the consensus reached in the draft interpretation”.
However, constituents also wanted clarification on issues as diverse as the scope of the interpretation, availability of economic benefits, the illustrative examples and transition requirements. lFRIC came down against making any changes to D19’s title, although it plans to clarify its scope in paragraph 5. This means
that in all likelihood the interpretat- ion will continue under the less than snappy title of ‘The Asset
Ceiling - Availability of Economic Benefits and Minimum Funding Requirements’.
One clarification in the pipeline concerns the definition of “contractual minimum funding requirements”. IFRIC staff plan to develop an amendment to D19 in a bid to clarify that a minimum funding requirement is distinct from the contractual obligation forming part of the benefit promise made to employees. Additionally, IFRIC intends to explain that only those minimum funding requirements that give rise to statutory or contractual contribution obligations are within the scope of D19.
Eric Steedman, a senior international consultant with Watson Wyatt, told IPE that there are three interesting features about IFRIC D19: “One is that they offer three different approaches to calculating the economic benefit that entities can draw from the plan, requiring the entity to use the most favourable of the three.
“Secondly, they have clarified that if there is a requirement to fund in excess of IAS19, if that excess will ultimately fall back to the entity, it can still be counted as an asset.” Thirdly, he adds: “IFRIC also seems to be saying that if such funds will not revert to the employer, not only should the balance sheet asset be reduced, but the balance sheet liability might equally have to be increased. Although there is an economic argument for that, it is not obvious to us how this is compatible with IAS19.”
IFRIC has said it will explain why this is compatible with paragraph 58 of IAS 19. “I’m looking forward to seeing the argument.” says Mr Steedman. His wait ends next month when the IFRIC picks up its discussion.