Applying IAS 19, Employee Benefits to Switzerland has not been easy. The challenge of squeezing the round peg of Swiss contribution-based provision into the square hole of IAS 19’s binary classification model has started a drift back to Swiss GAAP for some listed entities.
The Swiss pension provision at the heart of Switzerland’s IAS 19 quandary typically gives plan members two legally stipulated guarantees – a government-determined market interest rate and a conversion rate guarantee on retirement.
Today’s politically charged conversion rate of 6.8% compares with a 5.8% rate among private insurers. Uniquely, these guarantees mean that all pension provision within Switzerland is accounted for under IAS 19 as defined benefit (DB). Moreover, although many smaller plan sponsors have opted to offload their risk to an insurer, that insurer might well walk away from the risk in the future.
In March 2012 the International Accounting Standards Board’s (IASB) interpretations committee embarked on a project to develop a new accounting approach for plans comparable with Swiss plans. But Martin Welser, a Swiss-based partner with advisers Deloitte, doubts whether the move to dust off the old IFRIC D9 model will provide relief:
“In Switzerland we are still hoping that the IASB will realise that we have a problem, but it looks unlikely that moves by the IFRS Interpretations Committee to breath fresh life in to the IFRIC D9 approach will get Swiss plans out of DB classification.” He blames the “narrow scope” of the proposed project.
Adam Casey, a Zurich-based pensions consultant with Towers Watson, also points a finger at the project’s scope. In fact, he warns, it might not cover any of them comprehensively. Nonetheless, he agrees that the project is “a step in the right direction” and believes it might address “one aspect of the complications of applying IAS 19 DB accounting to the prevalent cash balance plans in Switzerland.”
Where the IFRIC D9 project might bring relief, however, is around the treatment of contribution-based plans with a guaranteed interest component and the idea that you value the guarantee using a projected unit credit (PUC) methodology.
Casey believes that the committee’s September 2013 discussions hint at a solution where you might value the guarantee as if it were a fixed return using traditional DB methodology, and measure the benefits with a variable return type basis at current fair value (basically the assets). Where a plan has a higher-of feature, you would simply take the greater of the two as the liability.
Nonetheless, Casey warns, this approach will work only where this is the sole quirk in a contribution-based plan. The fact remains that Swiss plans have other complexities – one example is the fixed conversion rates on retirement – that preclude valuing variable return benefits at fair value.
Another challenge facing Swiss plan sponsors, says Welser, is the application of IFRIC 14, the interpretations committee’s guidance on the so-called asset ceiling, to the Swiss environment.
“Some plans may have more assets than liabilities, but in Switzerland an employer has no chance of getting money back from the plan. Nonetheless, IFRIC 14 requires you to capitalise assets under a strict formula, which doesn’t really make sense in the Swiss environment,” he explains.
Nonetheless, amendments to IFRIC 14 as part of the 2011 revisions to IAS 19 have brought some relief where a plan has an employer contribution reserve. Such a reserve might arise where employers make prepaid cash contributions for tax reasons.
“The original IFRIC 14 was written such that these payments could not be capitalised because the benefit formula didn’t allow this,” says Welser. “It took quite a while to convince the IFRIC that this interpretation had unintended consequences in Switzerland. The 2011 amendments now mean that sponsors can capitalise these prepayments. The main issue now is determining the asset and whether the formula in IFRIC 14 makes sense.”
Yet another challenge for Swiss entities is the treatment of risk sharing under the revised standard. Here the IASB has recently moved to clarify its proposed amendments to paragraph 93 of IAS 19.
Driving those amendments, Adam Casey explains, are the practical problems with the calculation, and the complexity of calculating what arguably in accounting terms is a better way of apportioning the employer’s liability.
“In Switzerland it was particularly relevant because most plans here provide higher levels of benefits in later years of service (age-related contributions) which already triggered straight-line attribution of the total benefit under IAS 19 (2008),” he says.
“Under IAS 19 (2011) paragraphs 70 and 93 taken together attribute only the employer part on the straight-line basis, which allocates future employer contribution increases into the past service cost (DBO) but not future expected increased contributions from the employee. This attribution results in a lower DBO.”
Welser says this amounts to a modest reduction in the DBO of 5-10%. The extent of any reduction depends on the age profile of the plan and other facts and, typically, it is far below 10%, he adds. Casey points to a reduction below 5%.
A further challenge thrown up by paragraph 93 is the so-called practical expedient and the treatment of age-based contributions. Fundamentally, Swiss contributions are age-based and increase with age.
Both Welser and Casey note that the latest amendments allow the new attribution under paragraphs 70 and 93 to be ignored and companies to revert to the old attribution if the employee contributions are not dependent on the service period.
Welser adds that where it is dependent on age, it is also excluded because age is not related to service – at least according to the latest draft of the IAS 19.93 amendments.
How the changes are applied will depend broadly on whether a plan sponsor is a bank or a corporate. Public companies, the Deloitte partner says, have already restated their half-year 2013 financial statements to take account of the 2011 amendments to IAS 19.
Any decision to ignore risk sharing – it is an accounting policy choice – means a further restatement. Equally, Welser says, they might conclude that the change is not material and apply paragraph 93 as it was before the amendment.
Summing up, Casey says: “I expect that companies with a focus on the balance sheet will prefer the new attribution approach because it will give a lower balance-sheet liability, but those with a greater focus on the profit and loss cost will prefer the old attribution approach.”
Ultimately, the challenge of applying IAS 19 to the Swiss environment has led some companies to vote with their feet. A drift away from IFRS, says Welser, is now evident: “Even large companies, such as Swatch, have gone to Swiss GAAP because, they argue, IFRS is too complicated. Other companies that have made the switch are Georg Fischer and Mayer Burger.
“Obviously, one of the reasons why companies might want to convert is because IAS 19 is just not suitable for Switzerland. There are other reasons for the move such as complexity associated with the new joint-ventures standard IFRS 11.”