IFRIC Draft Interpretation D9, Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions, refuses to die. And breathing fresh life into pension accounting’s very own Nosferatu was a request from the German national standard-setter to the May meeting of the IFRS interpretation committee for guidance on the preferred accounting treatment for a pension promise bearing a minimum-return guarantee.
The submission from the Accounting Standards Committee of Germany assumes a pension promise of 1,000 currency units (CU) plus the higher of any investment return, subject to a two percent guarantee.
Under one possible approach - view 1 - a plan sponsor would apply projected unit credit accounting to the promise and book: current service cost of 1,534 CU in profit or loss; a net defined-benefit obligation of 534 CU, and operating cash outflows of 1,000 CU. An alternative approach - view 2 - takes an entirely different tack. Here the sponsor would report: current service cost of 1,000 CU in profit or loss; a net defined-benefit liability (asset) of 0 CU, and operating cash outflows of 1,000 CU.
In a post-pensions project environment, there are no prizes for guessing which accounting corporate sponsors might be expected to prefer. The lack of any appetite for change to IAS19 is no doubt equally obvious.
Although the interpretations committee took no further action on the German representations, members nonetheless agreed to have another look at IFRIC D9 and the wider issue of cash-balance type plans or so-called contribution-based promises. And so the issue returned to the July meeting of the committee.
To understand how we got here, it is necessary to revisit history. Work on D9 stalled when the International Accounting Standards Board announced in 2006 that it would mount a two-phase project to address contribution-based plans. Under the first phase, the board said it would both remove the deferral mechanisms from IAS19 and address the “troublesome” plan designs that it later dubbed cash-balance plans. One of the more curious legacies of the project is that although it gave the world a new name for an old problem, it failed to deliver a solution.
With phase one of the plan complete, the board planned to mount a phase one root-and-branch review of pensions with the US Financial Accounting Standards Board. Phase 1 resulted in a 2008 discussion paper that went down like a lead balloon. A stricture levelled against the new methodology was that it had suffered from scope creep because it snared a whole family of largely non-troublesome defined-benefit plans.
At that point the financial crisis intervened, David Tweedie embarked on his furtive mad dash to converge IFRSs and US GAAP, and pensions suddenly seemed less of an issue. Wayne Upton, then a director of research at the IASB, now the chairman of the interpretations committee, popped up and said he was “not convinced that the definitional integrity we were seeking is appropriate”, and the pensions project was scaled back.
Eventually in April 2010, the board issued a series of amendments to IAS19 that removed both the smoothing and deferral options in the standard, as well as the use of an expected rate of return in the calculation of the defined-benefit obligation. The changes also brought in the net-interest approach.
And so the pensions project, despite running for longer than the Manhattan project, left a ticking time-bomb. Indeed, the only surprise is that the German request took as long to reach the interpretations committee as it did.
Whether the committee will be able to address contribution-based promises is doubtful. The IASB, which has the ability to re-write entire standards, tried and failed. The committee is constrained by the need to work within the twin pillars of the defined-benefit and defined-contribution definitions in IAS19. The scale of the effort and scope creep will more than likely overwhelm the committee.
It all means that the standard-setter’s efforts to address cash-balance plans have now taken longer than the Apollo space programme needed to put man on the Moon.