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IFRS committee rules on DC refunds for plan sponsors

The International Financial Reporting Standards Interpretations Committee (IFRS IC) has provisionally ruled that the right to receive a discount following an earlier overpayment of contributions to a defined contribution (DC) pension scheme does not mean the plan is a defined benefit (DB) scheme.

According to the committee’s official decision wording: “The existence of the potential discount would not in itself result in classifying the plan as a defined benefit plan.”

Eight committee members voted in favour of the agenda decision earlier this month.

The ruling came despite warnings from some committee members that their actions could open the door to structuring by plan sponsors.

IFRS IC member Robert Uhl said: “The notion of the circumstances in which the employer is exposed to downside risk in my view requires a bit of a broader assessment of the substance of the overall arrangement.”

He argued it was possible to design a DC benefit promise that was exposed to downside risk “because the amount of refund you’re going to get in the future is dependent on future actuarial experience [and] investment return”.

The query concerned schemes classified as DC in which the sponsor had an obligation to pay fixed annual contributions to a separate fund – but also had the right to a discount if it paid any excess contributions.  

The discount would apply if the ratio of plan assets to plan liabilities exceeded a certain level, meaning it could fluctuate as a result of changes in actuarial assumptions or the return on plan assets.

At issue was whether the existence of the possibility of receiving a discount would mean that the plan had to be classified as a DB plan.

The decision also restated a principal within International Accounting Standard 19, Employee Benefits (IAS 19), namely that a DC plan was a pension plan into which a sponsor paid a fixed amount of contributions with no further obligations. 

Under the standard, any plan that is not a DC plan is automatically a DB plan. This means that a DC plan is one where there is “no possibility that future contributions could be set to cover shortfalls in funding employee benefits relating to employee service in the current and prior periods”.

The committee added that IAS 19 also specified that “actuarial risk and investment risk fall in substance on the employee” with a DC plan, in contrast to a DB plan where the same risks fell on the sponsor.

Not all committee members, however, were convinced that sponsors would structure benefit promises in order to achieve a particular accounting outcome. 

Bertrand Perrin said internal control processes made it unlikely that an entity would accept paying “more on a yearly basis just to structure the plan to become a defined contribution plan”.

However, he urged the committee to make it clear that additional future contributions related to past service cost meant a plan was DB, whereas future contributions in respect of future service cost made it DC. 

Interested parties have until 15 May to comment on the draft agenda decision. 

Meanwhile, the International Accounting Standards Board (IASB) has published an opinion piece by vice-chair Sue Lloyd dealing with the timely implementation IFRS IC agenda decisions. 

The IASB explained last December that companies should have “sufficient time” to implement changes to their accounting policies arising from the committee’s decisions. Since then a number of preparers have approached the board for further clarification.

Lloyd said that the IASB would normally expect preparers to implement accounting policy changes within “a matter of months rather than years”.

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