New on the Horizon: Defined benefit plans · ED/2010/3 Defined Benefit Plans – Proposed Amendments to IAS 19 (the ED) which is the subject of this publication, does not include

New on the Horizon: Defined benefit plans

International Financial Reporting StandardsMay 2010

© 2010 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

ForewordIn 2006 the International Accounting Standards Board (IASB) added to its agenda a project for a fundamental review of all aspects of post-employment benefit accounting. Since then the IASB has been on a rollercoaster ride of post-employment benefit accounting considerations, including a discussion paper Preliminary Views on Amendments to IAS 19 Employee Benefits (the DP) issued in March 2008 with proposals for employee benefits to be based on “promises”, for the liability related to certain employee benefit promises to be measured at fair value and a new approach to accounting for cash-balance plans. Following the DP, the IASB also discussed proposals to put the full impact of defined benefit plan accounting in profit or loss. However, the recent exposure draft ED/2010/3 Defined Benefit Plans – Proposed Amendments to IAS 19 (the ED) which is the subject of this publication, does not include any of these proposals. Instead the ED focuses mostly on recurring costs, i.e. service costs and net interest income or expense, being recognised in profit or loss, and remeasurements being recognised in other comprehensive income.

One of the most significant proposals in the ED is for the elimination of the corridor method, which we expect to have a significant impact on those applying this method given that such entities would need to recognise all actuarial gains and losses immediately in other comprehensive income. However, even if an entity does not apply the corridor method, the ED proposals still should be given serious attention. This is because the ED also proposes a new approach to calculating and presenting the net interest income or expense on the net defined benefit asset (liability), which, if the proposals are finalised as drafted, would result in such amount being calculated as a single net interest figure, based on the discount rate that is used to measure the defined benefit obligation. As a consequence, an entity would no longer recognise the long-term expected return on plan assets in profit or loss and there would therefore be a reduction in net profit from that reported under current IAS 19 Employee Benefits.

The difference between actual asset returns and the amount included in net interest, together with actuarial gains and losses on the defined benefit obligation, would be reported in other comprehensive income, leaving profit or loss unaffected by these volatile amounts.

When considering the proposals in the ED, the wider practical impact that they might have, for example on compliance with debt covenant requirements and key performance measures, also may be a focus for entities. The ED’s proposals would alter both the timing and location of recognition of the changes in the net benefit asset (liability) and each entity should evaluate the impact from its own perspective. The ED proposals may result in entities needing to reconsider the way in which they monitor their position and performance via key performance measures or could even result in needing to renegotiate existing debt covenants and terms.

As a result, while the ED provides a comment period of four months, we believe that it includes some critical proposals that entities should consider sooner rather than later. This publication will help you obtain a better understanding of these proposals.

Lynn Pearcy (Leader) Annie Mersereau (Deputy leader) Regina CroucherBruce Darton Mary Tokar KPMG’s global IFRS Employee Benefits leadership teamKPMG International Standards Group


About this publicationThis publication has been produced by the KPMG International Standards Group (part of KPMG IFRG Limited).

We would like to acknowledge the efforts of the principal authors of this publication. Those authors include Regina Croucher, Hagit Keren and Lynn Pearcy of the KPMG International Standards Group.

ContentOur New on the Horizon publications are prepared upon the release of a new proposed IFRS or proposed amendment(s) to the requirements of existing IFRSs. They include a discussion of the key elements of the new proposals and highlight areas that may result in a change of practice.

This edition of New on the Horizon considers the proposed requirements of ED/2010/3 Defined Benefit Plans – Proposed Amendments to IAS 19, which was published on 29 April 2010.

The text of this publication is referenced to the ED and to selected other current IFRSs in issue at 30 April 2010. References in the left-hand margin identify the relevant paragraphs.

Further analysis and interpretation will be needed in order for an entity to consider the potential impact of the ED in light of its own facts, circumstances and individual transactions. The information contained in this publication is based on initial observations developed by the KPMG International Standards Group, and these observations may change.

Other ways KPMG member firms’ professionals can helpA more detailed discussion of the general accounting issues that arise from the application of IFRSs can be found in our publication Insights into IFRS.

In addition to Insights into IFRS, we have a range of publications that can assist you further, including:

¬¬ IFRS compared to US GAAP¬¬ Illustrative financial statements for interim and annual periods¬¬ IFRS Handbooks, which include extensive interpretative guidance and illustrative examples to elaborate or

clarify the practical application of a standard¬¬ New on the Horizon publications, which discuss consultation papers¬¬ Newsletters, which highlight recent developments¬¬ IFRS Practice Issue publications, which discuss specific requirements and pronouncements¬¬ First Impressions publications, which discuss new pronouncements¬¬ Disclosure checklist.

IFRS-related technical information also is available at www.kpmgifrg.com.

For access to an extensive range of accounting, auditing and financial reporting guidance and literature, visit KPMG’s Accounting Research Online. This web-based subscription service can be a valuable tool for anyone who wants to stay informed in today’s dynamic environment. For a free 15-day trial, go to www.aro.kpmg.com and register today.


Contents1. Executive summary 4

2. Introduction and background 5

2.1 Driversfortheproject 5

2.2 Projecttobedoneinstages 5

2.3 TheFASBparallelproject 5

2.4 TheIASBED 6

3. Principle proposals 7

3.1 Summaryofproposedchanges 7

3.2 Scope 9

3.3 Short-termvslong-termemployeebenefits 9

3.4 Post-employmentbenefitsvsotherlong-termbenefits 10

3.5 Recognition,includingeliminationofthecorridormethod 10

3.5.1 Actuarial gains and losses 11

3.5.2 Past service cost 11

3.5.3 Other implications 12

3.5.4 Summary 12

3.6 Measurement 13

3.6.1 The projected unit credit method 13

3.6.2 Actuarial assumptions 14

3.7 Presentation 16

3.7.1 Service costs 19

3.7.2 Finance costs 20

3.7.3 Remeasurements 22

3.7.4 The effect of settlements or curtailments 23

3.7.5 Illustrative examples of presentation under the ED’s proposals 24

3.8 Disclosure 27

3.8.1 Multi-employer plans 28

3.8.2 Settlements and curtailments 29

4. Other matters 31

4.1 Multi-employerplans 31

4.2 IncorporationofIFRIC14 31

4.3 ProposedamendmenttoIFRS1 31

5. Effective date and transition 32


New on the Horizon: Defined benefit plans May 2010

4

1. Executive summary

¬¬ TheexposuredraftED/2010/3Defined Benefit Plans – Proposed Amendments to IAS 19 (theED)ispartoftheInternationalAccountingStandardsBoard’s(IASBorBoard)broaderemployeebenefitsproject.Itproposessignificantchangestotherecognition,presentationanddisclosureofdefinedbenefitplans;italsoproposessomemeasurementchanges.

¬¬ TheEDproposesonecategoryoflong-termemployeebenefitsthatwouldcombinepost-employmentbenefitsandotherlong-termbenefits.

¬¬ TheEDproposestorecogniseallchangesinthevalueofthedefinedbenefitobligationandinthevalueofplanassetsinthefinancialstatementsintheperiodinwhichtheyoccur.

¬¬ TheEDproposesthatthechangesinthenetdefinedbenefitliability(asset)wouldbesplitintothefollowingcomponents:– servicecosts–toberecognisedinprofitorloss;– netinterestincomeorexpense–toberecognisedinprofitorlossaspartoffinance

costs;and– remeasurementsofthenetdefinedbenefitliability(asset),includingactuarialgains

andlosses–toberecognisedinothercomprehensiveincome.

¬¬ TheEDproposesthatindeterminingwhetherthebenefitformulaisback-endloadedanentitywouldconsiderestimatesofallfactorsthataffectthelevelofbenefits,includingexpectedfuturesalaryincreasesandthebestestimateofbenefitsthatarecontingentonperformancehurdles.

¬¬ TheEDproposesadditionalguidanceonadministrativecostsandtaxespayablebytheplanandwhetherthoseshouldbeincludedinthemeasurementofthedefinedbenefitliabilityordeductedfromthereturnonplanassets.

¬¬ TheEDproposesthatthenetinterestincomeorexpensecomponentwouldbedeterminedbyapplyingthediscountratethatisusedtodiscountthedefinedbenefitobligationtothenetdefinedbenefitliability(asset).

¬¬ TheEDproposesthattheeffectofsettlementswouldberecognisedinothercomprehensiveincomeasremeasurements.

¬¬ TheEDproposesfurtherdisclosuresaboutdefinedbenefitplans,focusedonspecifiedobjectives.


5 New on the Horizon: Defined benefit plans May 2010

2. Introduction and background The overall objective of the IASB in its employee benefits project is to conduct a fundamental

review of all aspects of long-term benefit accounting and in particular post-employment benefit accounting. It issued a discussion paper Preliminary Views on Amendments to IAS 19 Employee Benefits (the DP) in 2008 and has now issued the ED discussed in this publication. The project forms part of the Memorandum of Understanding between the IASB and the US Financial Accounting Standards Board (FASB) which sets up a roadmap of convergence between IFRSs and US Generally Accepted Accounting Principles (US GAAP). However, currently the FASB is not working actively on its employee benefits project but is monitoring the work of the IASB to determine its next steps.

2.1 Drivers for the project The employee benefits project is driven in part by a widespread concern about the adequacy of

the accounting for post-employment benefit plans and evidence of difficulty in understanding the information entities provide about post-employment benefit plans. These factors were reinforced by the US Securities and Exchange Commission in its Recommendations pursuant to the Sarbanes-Oxley Act of 2002 that the FASB address “off-balance sheet” accounting, including accounting for defined benefit post-employment benefit plans. In its response to these Recommendations, the FASB noted that this was one of the subjects to be addressed jointly by the FASB and IASB.

2.2 Project to be done in stages The IASB split the project initially into two stages: a relatively short-term element and a longer-term

fundamental review. As part of the first stage, in March 2008 it published the DP. The DP proposed to amend the way in which so-called “contribution-based promises” are accounted for and also to introduce more general recognition, presentation and disclosure changes. Contribution-based promises are, in summary, those in which the benefit promised to the employee is made up of contributions and, potentially, a promised level of return on those contributions; the DP proposed that they should be accounted for, broadly, at fair value. Comments on the DP showed that such promises are widespread and concern was expressed that this was too fundamental a change to be introduced as part of a short-term project.

As a result, the IASB now proposes to take forward the first stage of its IAS 19 Employee Benefits project in two steps. The first step is the issuance of an amended standard, the objective of which is to introduce improvements primarily to the recognition, presentation and disclosure of an entity’s post-employment benefit obligations. Some measurement changes also are proposed. With these changes, which are the subject of this publication, the IASB aims to provide users of financial statements with better information about those plans.

The second step is intended to be a further exposure draft with respect to contribution-based promises, potentially as part of the comprehensive review of post-employment benefit accounting that will form the second stage of the IASB’s work. The IASB is not likely to discuss the future steps of its employee benefits project in detail until after mid-2011.

2.3 The FASB parallel project As noted above, post-employment benefit accounting forms part of the Memorandum of

Understanding between the IASB and the FASB (the Boards). At present, however, the two Boards are running parallel projects and the FASB has made changes to its post-employment benefit standards as the result of the first phase of its project. Under the proposals of the ED the statement of financial position would be aligned more closely between US GAAP and IFRS but significant differences would remain at this stage from the perspective of the statement of comprehensive income.



6

In running these parallel projects, each Board monitors the progress of the other Board’s post-employment benefits project but as yet there are no active joint discussions around the project. However, both Boards hope to benefit from comment letters received on the other’s consultation documents. The Boards plan to discuss how to achieve a common post-employment benefits standard once the IASB has completed the first step of its project.

2.4 The IASB ED The IASB believes that the proposals in the ED, if approved, should improve the ability of users

to understand entities’ post-employment benefit obligations through increased transparency, improved comparability and improved disclosures. The IASB’s objective is to finalise these short-term, targeted improvements to the accounting for defined benefit plans by the middle of 2011.

The purpose of this publication is to summarise the key features of the proposals in the ED, and

highlight potential impacts and conceptual and application issues identified to date so as to facilitate informed debate of, and comment on, the proposals.



3. Principle proposals

3.1 Summary of proposed changes The table below provides an overview of the amendments proposed in the ED with respect to

defined benefit plans. Sections 3.2 to 3.8 discuss the proposed amendments in detail.

Current requirements Proposed amendments

Classification The accounting for defined benefit post-employment benefits differs from the accounting for other long-term benefits, mainly in respect of the timing of recognition of actuarial gains and losses and past service costs; the disclosures also differ.

One category of long-term employee benefits that would combine defined benefit post-employment benefits and other long-term employee benefits, with the same accounting treatment and disclosure requirements for both.

See 3.4

Recognition For post-employment defined benefit plans, the deferral of actuarial gains and losses (the corridor method) is permitted and deferred recognition of unvested past service costs is required.

Recognition of all changes in the value of the defined benefit obligation and in the value of plan assets would be required in the period in which they occur.

See 3.5

Measurement General guidance on the accounting for benefit plans with a back-end loaded benefit formula.

In determining whether the benefit formula is back-end loaded an entity would consider estimates of all factors that affect the level of benefits, including expected future increase in salaries and the best estimate of benefits that are contingent on performance hurdles.

See 3.6.1

Guidance and examples are provided in respect of actuarial assumptions to be made when measuring the defined benefit liability and limited guidance on how to treat administrative costs and taxes payable by the plan.

Additional examples would be provided of actuarial assumptions that should be reflected in the measurement of a defined benefit obligation; there are detailed proposals on the split of administrative costs and taxes payable by the plan between return on plan assets and the defined benefit obligation.

See 3.6.2



8

Current requirements Proposed amendments

Presentation Service costs, interest expense on the defined benefit obligation and expected return on plan assets are presented in profit or loss for all entities; it is a policy choice in which line items they are presented.

The presentation of actuarial gains and losses depends on the policy choice adopted by the entity. The choices currently available for recognition and presentation of actuarial gains and losses in respect of post-employment defined benefit plans are:

¬¬ immediate recognition in other comprehensive income;

¬¬ deferred recognition in profit or loss under the corridor method; and

¬¬ a method that results in faster recognition in profit or loss e.g. immediate recognition.

The periodic change in the net defined benefit liability for all long-term employee benefits would be separated into the following components:

¬¬ service costs – to be recognised in profit or loss;

¬¬ net interest income or expense – to be recognised in profit or loss as part of finance costs; and

¬¬ remeasurements – to be recognised in other comprehensive income.

See 3.7

Expected long-term return on plan assets is presented in profit or loss, while the difference between the expected return and the actual return is an actuarial gain or loss recognised in accordance with the entity’s policy choice.

The net interest income or expense component would be determined by applying the discount rate that is used to discount the defined benefit obligation to the net defined benefit liability (asset). It therefore would include interest income on plan assets based on this discount rate, while the difference between that amount and the actual return is a remeasurement recognised in other comprehensive income.

See 3.7.2

Settlements and curtailments are recognised in profit or loss.

Settlements would be recognised in other comprehensive income as remeasurements. Curtailments would continue to be recognised in profit or loss.

See 3.7.4

Disclosure Detailed disclosure requirements.

Further disclosures about defined benefit plans, focused on specified objectives.

See 3.8



3.2 ScopeIAS 19.1 IAS 19 currently applies to an employer’s accounting for all employee benefits, except those to which

IFRS 2 Share-based Payment applies. The ED does not propose any amendments to the scope of the current version of IAS 19.

3.3 Short-term vs long-term employee benefitsED 4, 7, 8, The IASB is proposing to amend the definitions of ”short-term employee benefits” and ”long-term BC79 employee benefits” so that the distinction between the two depends on when the entity expects

the benefit to become due to be settled. According to the proposed definitions, short-term employee benefits would be those that the entity “expects to become due to be settled within 12 months after the end of the reporting period in which the employees render the related service” and long-term employee benefits those that it “expects to become due to be settled 12 months or more” after that time (in both cases excluding termination benefits). All benefits that the entity expects to become due to be settled after the completion of employment would be long-term benefits.

ED BC79 The ED provides the following example: an employee of Company A is entitled to a long-service leave benefit, which is vested at the reporting date. A’s management does not expect that the employee will require settlement of the benefit by taking the leave within 12 months of the reporting date. On that basis, the ED concludes that this benefit meets the definition of a long-term employee benefit.

In another example, Company B has a cumulative vacation programme in which employees C and D have accrued but not taken 30 and 45 vacation days respectively during the reporting period. B does not expect C to take any of the vacation in the following twelve months and D is expected to take all of the vacation within that period. Based on the proposed definitions, it appears that C’s benefit would be a long-term employee benefit while D’s benefit would be a short-term employee benefit.

Observations The distinction between short-term and long-term employee benefits, which affects the

measurement of the obligation and not just its classification in the statement of financial position, is a difficult area and this is the IASB’s second proposed change. The definitions were amended in the annual improvement project (issued May 2008) and are now re-opened in the ED. Two changes are proposed: first to insert “expects to become” before “due to be settled” and second to change “period” to “reporting period”.

There may be a continuing lack of clarity in certain areas, however. For instance, the example given in the ED and set out above does not consider the classification of the benefit in the reporting periods prior to it becoming vested.

The proposal inserts “reporting” before “period”, implying that it is the 12 months after the end of the reporting period that should be considered, rather than the end of the period during which the benefit as a whole is earned, when determining short-term vs long-term classification. This proposal may resolve some of the practice issues around the meaning of “period of service” noted in our publication Insights into IFRS (4.4.30.10), although clarification may be required where benefits are earned over multiple reporting periods.

Insights into IFRS notes also our view that, under the current standard, whether a benefit is “due to be settled” within 12 months depends upon when the employee could require settlement; the ED would change the focus to the employer’s expectations for the timing of settlement.



10

We expect that these proposals would result in entities spending more time determining how to classify, and therefore how to measure, certain benefit plans, e.g. vacation accruals, as such benefits might be long-term employee benefits in one reporting period but then be short-term employee benefits in the next reporting period depending on when management expects the employee to take their vacation benefits. Also, it is not clear whether the IASB is intending to require entities to split benefit plans between short-term and long-term classifications at the employee-by-employee level, as illustrated in the example above, or even for an individual employee.

3.4 Post-employment benefits vs other long-term benefitsED 4, 7, BC77 The IASB is proposing to amend the definition of post-employment benefits and other long-term

employee benefits in order to remove any differences between the accounting for and disclosure of the two. In other words, the ED proposes one category of long-term employee benefits that would combine post-employment benefits and other long-term employee benefits.

Observations Currently, other long-term employee benefits are accounted for in a manner similar to defined

benefit post-employment benefits, except that all actuarial gains and losses and past service costs are recognised immediately in profit or loss; for actuarial gains and losses neither the corridor method nor immediate recognition in other comprehensive income may be applied. Under the proposal to have just a single category of long-term employee benefits, actuarial gains and losses on other long-term benefits would be recognised instead in other comprehensive income, which would be a significant change from current practice (see 3.5). Entities also would have to analyse the charge to profit or loss for such benefits into its service and interest components, which is not required currently under IAS 19 (see 3.7).

This change will interact with the revised definitions of short- and long-term employee benefits. Extending the example given in 3.3 above, Employee D’s vacation benefit would be a short-term benefit, with all changes in value recognised in profit or loss. Employee C’s vacation benefit would be a long-term benefit and related actuarial gains and losses therefore would be recognised in other comprehensive income under the proposed single category of long-term employee benefits, whereas actuarial gains and losses on other long-term benefits are recognised in profit or loss under the current version of IAS 19.

The disclosure requirements outlined in the ED also would apply in full to benefits currently classified as other long-term benefits that continue to be classified as long-term under the ED and would be more extensive than the current disclosure requirements for such benefits.

3.5 Recognition, including elimination of the corridor methodIAS 19.54 Currently under IAS 19, the defined benefit liability is recognised in the statement of financial

position as:

(a) the present value of the defined benefit obligation; (b) less the fair value of any plan assets; (c) less (plus) unrecognised actuarial losses (gains); (d) less (plus) unrecognised past service cost (negative past service cost); and (e) taking into account any effect of the limit to the defined benefit asset, including any additional

liability recognised for minimum funding requirements that relate to past service (together the effect of the asset ceiling).



The ED’s proposed amendments with respect to the recognition of net defined benefit liabilities (assets) are focused on items (c) and (d) above, as those items permit deferred recognition of gains and losses.

ED 61, 96A, The ED proposes to:BC9, BC12,

BC13 ¬ eliminate the corridor method, by requiring immediate recognition of actuarial gains and losses; and

¬ require immediate recognition of all past service costs, including unvested amounts.

As a result, all changes in the value of the defined benefit obligation, in the value of plan assets and in the effect of the asset ceiling would be recognised in the period in which they occur.

3.5.1 Actuarial gains and losses CurrentIAS19–actuarialgainsandlossesIAS 19.7, There are two types of actuarial gains and losses, those that arise from differences between the 92-93A previous actuarial assumptions and what has actually occurred (experience adjustments) and

those that result from changes in assumptions. Currently under IAS 19, an entity may choose an accounting policy of recognising actuarial gains and losses in profit or loss or alternatively immediately in other comprehensive income. If actuarial gains and losses are recognised in profit or loss, then an entity may choose to recognise such gains and losses using the corridor method which permits their recognition to be deferred.

IAS 19.92, 93 Under the corridor method, actuarial gains and losses are recognised when the cumulative unrecognised amount thereof at the beginning of the period exceeds a “corridor”. The corridor is 10 percent of the greater of the present value of the defined benefit obligation and the fair value of the plan assets, measured at the beginning of the period. The net cumulative unrecognised actuarial gain or loss at the beginning of the period in excess of the corridor is amortised on a straight-line basis over the expected remaining working lives of the employees participating in the plan. This represents the minimum amount of cumulative actuarial gains and losses that should be recognised, but an entity may use a method that results in faster recognition.

EDproposals–actuarialgainsandlossesIAS 19.BC38- IAS 19 currently permits a deferred recognition approach for actuarial gains and losses, even BC41 though immediate recognition of actuarial gains and losses would be consistent with the

Framework for the Preparation and Presentation of Financial Statements, as acknowledged in the Basis for Conclusions to the standard. Although the immediate recognition alternative was found attractive, it was believed not to be feasible to require that approach until substantial issues about performance reporting had been resolved. The deferral permitted by the corridor method has been subject to continuing criticism and the IASB now proposes its abolition.

ED BC9-BC13 The IASB explains in the Basis of Conclusions to the ED that it believes that immediate recognition provides the most useful information to users of financial statements and improves comparability by eliminating the options currently allowed under IAS 19. With its proposal that actuarial gains and losses are recognised outside profit or loss, in other comprehensive income, the Board notes that the additional volatility that this would introduce for those entities currently using the corridor method could be isolated by being reported as a remeasurement (see 3.7).

3.5.2 Past service cost ED BC13 The Board has also reassessed the accounting for past service cost. It believes that the attribution

of unvested benefits to past service results in a liability, which therefore should be recognised in full. The ED therefore proposes ending the deferral of unvested past service cost.



12

3.5.3 Other implications IAS 19.108 As a direct result of the IASB proposals to recognise actuarial gains and losses and past service

cost immediately:

¬¬ The asset ceiling calculation would be simplified, relating only to the benefit available in the form of refunds from the plan or reductions in future contributions to the plan.

¬¬ The guidance with respect to the recognition of post-employment benefit assets and liabilities upon a business combination would be deleted since it would be redundant. Currently under IAS 19, in a business combination the acquirer recognises the assets and liabilities arising from post-employment benefits at the present value of the obligation less the fair value of any plan assets even if the acquiree had deferred the recognition of amounts with respect to actuarial gains and losses and past service costs. The recognition of any net asset would be subject to the asset ceiling test.

3.5.4 Summary ED 54A In summary, under the ED, the net defined benefit liability would be recorded in the statement of

financial position as:

(a) the present value of the defined benefit obligation; (b) less the fair value of any plan assets; and (c) taking into account any effect of the limit to the defined benefit asset, including any additional

liability recognised for minimum funding requirements that relate to past service (together, the effect of the asset ceiling).

The table below summarises the potential effects of the ED’s recognition proposals on the net defined benefit plan liability (asset) in the statement of financial position.

Existing policy

Proposed amendment – long-term employee benefits

Post-employment benefits

Other long-term employee benefits

Actuarial gains and losses recognised in profit or loss on a deferred basis under the corridor method

Actuarial gains and losses recognised immediately in profit or loss/other comprehensive income

Immediate recognition of actuarial gains and losses

Expected change to the net defined benefit plan liability (asset).

No effect on the net defined benefit plan liability (asset).

Immediate recognition of past service costs

Expected change to the net defined benefit plan liability (asset).

No effect on the net defined benefit plan liability (asset).

Observations For entities that currently apply the corridor method, this proposed change would generally have

a significant effect. We expect that applying the immediate recognition approach would not introduce practical measurement difficulties, since the necessary information already is required to be prepared in order to calculate and disclose the effect of the corridor method. However, it might change substantially the net defined benefit liability (asset) in the statement of financial position and the amounts that are recognised in the statement of comprehensive income.



Furthermore, the proposals may cause a high level of volatility in reported net assets and performance, although we note that the proposal to report actuarial gains and losses in other comprehensive income would leave profit or loss unaffected by this volatility. This presentation may result in a greater prominence being given to the “other” section of the statement of comprehensive income. As a result, some entities may decide to change the financial ratios used to evaluate their position and/or performance.

Entities also may need to consider the impact of the ED proposals on their financing arrangements, including their ability to meet covenants, and may wish to discuss the impact of the proposals with their lenders.

In some jurisdictions the change may affect an entity’s ability to pay dividends, if there are legal restrictions based on the amounts recognised in the financial statements that are affected by the ED proposals.

3.6 MeasurementED 64A, 71A, The ED proposes additional guidance in respect of the projected unit credit method and actuarial 73, 85 assumptions, including on the allocation of administrative costs and taxes payable by the plan to

either the defined benefit obligation or the return on plan assets. Additionally, the ED proposes that contributions payable by the employees would be included in the determination of the employer’s defined benefit obligation and would reduce the amount of service cost recognised as an expense by the employer.

3.6.1 The projected unit credit methodED 71A, The ED does not discuss changing the attribution method of benefits to periods of service based BC87-BC90 on the benefit formula and also retains the requirement to recognise the cost of employee benefits

on a straight-line basis when the employee service in later years will lead to a materially higher level of benefit than in earlier years (i.e. a back-end loaded benefit formula). However, the Board has decided to propose in the ED that, in determining whether the benefit formula is back-end loaded, an entity would consider estimates of all factors that affect the level of benefits, including:

¬¬ expected future salary increases; and¬¬ the best estimate of benefits that are contingent on performance hurdles.

The ED proposes confirming, in particular, that expected future salary increases should be included in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit to later years. The Board’s basis for this proposal is that two economically similar plans, one expressed as being a current salary plan and the other as being a career average salary plan, should result in a similar benefit being attributed to periods of employee service – hence, a straight-line attribution for both.

Illustrative example – benefit formula of a current salary benefit plan Company B operates a defined benefit plan that provides a one-time payment on retirement

of 10 percent of current salary in each year of service. All the employees are expected to retire after 10 years of service and have worked for 5 years to date. The total annual salary of the employees for each of the last five years was 500,000. The entity expects the total annual salary for each of years 6 – 8 to be 600,000 and for each of years 9 – 10 to be 800,000.

The total expected benefit payment at the end of year 10 is 590,000 (calculated as 10% x ((5 x 500,000) + (3 x 600,000) + (2 x 800,000)).



14

Since salary in later periods is expected to be significantly higher than in earlier periods, service in later periods would lead to a materially higher level of benefit than service in earlier periods; the benefit formula is therefore back-end loaded and a straight-line attribution would be required. Attributing the benefit to periods of service on this basis would result in a gross defined benefit obligation (before discounting) of 295,000 (calculated as expected benefit payment of 590,000 / 10 years x 5 years of service provided).

Observation The proposed amendment might increase the number of plans that entities would consider to

be back-end loaded, although some already analyse plans in the way proposed by the ED. This issue is discussed in our publication Insights into IFRS (4.4.270.80). In addition, it would increase the defined benefit obligation of entities that do not currently consider expected salary increases when identifying whether the benefit formula is back-end loaded.

3.6.2 Actuarial assumptionsED 73, 85C The ED provides additional examples of actuarial assumptions that should be reflected in the

measurement of the defined benefit obligation, including those discussed below.

TheproportionofplanmembersthatwillselecteachoptionavailableundertheplantermsED BC78 The Board proposes introducing text to state that, when the employees are able to choose the

form of the benefit (e.g. lump sum payment versus annual pension), the employer would make an actuarial assumption about what proportion would make each choice. The Basis for Conclusions to the ED notes the consequence that settlement made under a settlement option envisaged by the terms of the plan, and about which an actuarial assumption would therefore have been made, would not be a “non-routine settlement” (see 3.7.4). Instead, the difference between the assumption made and the actual outcome would be an actuarial gain or loss.

ED 7 The ED proposes to define a non-routine settlement as “a transaction … that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan”.

Observation As discussed in our publication Insights into IFRS (4.4.280.40), in our experience an employer’s

expectation of an employee’s choice to receive a lump sum payment at retirement instead of ongoing payments generally is covered by the actuarial assumptions underlying the measurement of the defined benefit obligation. However, there may be circumstances in which settlement accounting may be more appropriate under the current standard, e.g. in a situation in which a large number of individuals choose the lump sum payment option at the same time in response to the employer’s action. Under the proposals of the ED it seems that even such cases would not be considered as settlements but that an actuarial gain or loss would result. The distinction will be less important under the proposals since both actuarial gains and losses and settlements would be classified as remeasurements.

Thecostofadministeringclaimsandbenefitpaymentsrelatingtoservicebeforethereportingdate

ED 73, The Board proposes to remove the current option in IAS 19 to include plan administration costs inBC84-BC86 either the return on plan assets or in the actuarial assumptions used to measure the defined benefit

obligation. Instead a single treatment would be required depending on the nature of the costs:



¬¬ When the benefit promise depends on the return on the plan assets less asset management costs, the asset management costs affect the amount of the obligation and therefore would be included in the measurement of the defined benefit obligation.

¬¬ When the benefit promise does not depend on the return on the plan assets (e.g. a salary-related promise), the asset management costs would be included in the return on plan assets. These are the only administration costs that would be included in the return on plan assets.

¬¬ All other administration costs, e.g. the cost of administering the payment of benefits earned by current or past service, would be included in the measurement of the defined benefit obligation.

As a result, under the proposals, other than when the benefit promise depends on the return on plan assets, asset management costs would be recognised as part of the return on plan assets; all other administration costs would be included in the defined benefit obligation and, therefore, current service cost.

Taxespayablebytheplanoncontributionsrelatingtoservicebeforethereportingdateoronbenefitsresultingfromthatservice

ED 73, BC83 The current definition of return on plan assets includes the deduction of any taxes payable by the plan itself. The Board proposes to require instead that the estimate of the defined benefit obligation

would include the present value of taxes payable by the plan on contributions relating to service before the reporting date or on benefits resulting from that service; those taxes would not be deducted from the return on plan assets. This is because the Board sees such contribution and benefit taxes as part of the cost of providing the benefits.

Observations The ED’s proposals with respect to administration costs and taxes may require a change in

practice for many entities. However, we note that classifying taxes payable by the plan according to their nature is consistent with the view that we take under the current standard: see our publication Insights into IFRS (4.4.480.10). Administration costs that are currently included in the return on plan assets on an annual basis might need to be included in the measurement of the defined benefit obligation under the proposals, by estimating the future costs relating to benefits earned in respect of past service. This could cause a significant increase in the defined benefit obligation and current service cost.

With regard to taxes payable by the plan, further clarification may be required about the treatment of taxes payable on contributions made when a plan is in surplus or that may relate in part to services not yet received. Clarification also may be required about taxes payable on the investment income of a plan, since these are not referred to specifically; however, the focus on the nature of the taxes suggests that they will be included in the return on plan assets.

The concept of “expected return on plan assets” would no longer exist under the ED’s proposals (see 3.7.2). Therefore, any administration costs and taxes that in future are treated as part of the return on plan assets would be recognised as remeasurements in other comprehensive income. This is because the return on plan assets recognised in profit or loss under the proposals would be calculated on a specified basis that would not reflect administration costs and taxes; remeasurements would include the return on plan assets, excluding amounts included in the net interest income or expense on the net defined benefit liability (asset) (see 3.7.3).

We note that, under the proposals, the more taxes and administration costs that are treated as part of the return on plan assets, the lower the current service cost. And the more taxes and administration costs that are treated as part of the measurement of the obligation, the higher the current service cost and interest expense.



16

Thebestestimateoftheeffectofrisk-sharingandconditionalindexationED 64A, 85(c), The current standard does not state specifically how to deal with risk-sharing and conditional BC92-BC96 indexation features (e.g. reduced benefits when plan assets are insufficient). The Board proposes to

clarify that they should be incorporated into the determination of the best estimate of the defined benefit obligation. In the Board’s view, features in a plan that result in sharing the risks between the entity and the plan participants (e.g. sharing the benefit of a surplus or the costs of a deficit) do not change the fact that the plan is a defined benefit plan as the entity is exposed to some risks. However, the shared risks feature would be taken into consideration when determining the best estimate of the defined benefit obligation.

Observations In November 2007 the IFRS Interpretations Committee (Interpretations Committee, previously

referred to as the IFRIC) published in its IFRIC Update a decision not to take onto its agenda the issue of the treatment of employee contributions when the cost of providing the benefits is shared between the employer and the employees. The proposed changes would codify into the standard the comments made by the Interpretations Committee in that Update. We address the accounting treatment to be adopted when a surplus is shared under the terms of the plan in our publication Insights into IFRS (4 4.325.10) and reach the same conclusion.

It will be important to ensure that there is substance to the risk-sharing arrangement before the employer’s defined benefit obligation is reduced to reflect this sharing of risk.

3.7 Presentation CurrentIAS19–presentationIAS 19.61, Currently under IAS 19, service costs, interest expense on the defined benefit obligation and 92, 93 expected return on plan assets are presented in profit or loss by all entities, although the standard

does not specify whether they should be presented in a single item of income or expense. The presentation of actuarial gains and losses depends on the accounting policy choice adopted by the entity. The choices currently available for recognition and presentation of actuarial gains and losses are:

¬¬ immediate recognition in other comprehensive income;¬¬ deferred recognition in profit or loss under the corridor method; or¬¬ a method that results in faster recognition in profit or loss, e.g. immediate recognition in profit or

loss.

The IASB staff published the following diagram summarising the current position:



Operating expense

Finance costs

Other comprehensiveincome

Not recognisedwithin corridor

Recognised infuture periods

Recognised in period

Not recognised in period

Actuarial gainsand losses fromprevious periods

Long-termemployee benefit

In accordance withaccounting policy

Service cost

Interest cost

Expected returnon plan assets

Actuarial gainsand losses

cost in period

EDproposals–presentationED 119A, 119B, The Board believes that disaggregated information about the components of defined benefit plan BC14-BC18 costs provides decision-useful information to users of financial statements. It believes that different

components of defined benefit plan costs have different predictive values, as reflected in the Board’s proposed presentation requirements. Further, it believes that both service cost and interest cost convey information about an entity’s recurring costs (although non-recurring past service cost and curtailments would be included) and the Board therefore proposes to require these costs to be presented in profit or loss. In contrast, the Board believes that the information about remeasurements provides little direct information about estimated amounts and timing of future cash flows (although it provides information about the uncertainty of those cash flows), leading the Board to propose that such amounts would be recognised in other comprehensive income.

The presentation approach proposed by the ED splits the changes in the net defined benefit liability (asset) into the following components, all recognised in the statement of comprehensive income and classified as noted below:

¬¬ service costs and gains and losses arising from curtailment – recognised in profit or loss;¬¬ net interest income or expense – recognised in profit or loss as part of finance costs; and¬¬ remeasurements of the defined benefit liability (asset) – recognised in other comprehensive

income. The IASB staff published the following diagram summarising the proposals in the ED:

Employment expense(Profit or loss)

Finance costs(Profit or loss)

Other comprehensiveincome

Recognised in period

RequiredService cost

Net interestincome (expense)

Remeasurement

Long-termemployee benefit

cost in period



18

The ED proposes amendments in the presentation of costs related mainly to the expected return on plan assets and the actuarial gains and losses by redefining what these components should include and how these should be presented.

The table below summarises the ED presentation proposals compared to the current requirements

of IAS 19.

Net defined benefit liability (asset)

IAS 19 ED proposals

Post-employment benefits

Other long-term employee benefits

Service costs – current service cost

Immediate recognition in profit or loss.



Service costs – past service cost

Recognition in profit or loss over vesting period.



Interest costs on the obligation

Immediate recognition in profit or loss (finance or operating).


Net interest income or expense on the net liability (asset); immediate recognition in profit or loss as finance costs, calculated on a different basis (see 3.7.2).

Expected return on plan assets



Curtailment Immediate recognition in profit or loss.



Settlement Immediate recognition in profit or loss.


Immediate recognition in other comprehensive income as part of remeasurement (see 3.7.4).

Effect of asset ceiling including minimum funding requirement liability for past service

Immediate recognition in profit or loss or other comprehensive income, depending on policy choice for actuarial gains and losses.


Immediate recognition, partly in net interest and the remainder in other comprehensive income as part of remeasurement (see 3.7.3).

}



Actuarial gains and losses/remeasurements, including difference between actual return on plan assets and amount recognised in profit or loss

Recognition in profit or loss under corridor method or faster recognition in profit or loss or immediate recognition in other comprehensive income, depending on policy choice.


Immediate recognition in other comprehensive income (see 3.5 and 3.7.3).

Observations For entities that currently apply the choice to recognise actuarial gains and losses immediately in

profit or loss under current IAS 19, the ED proposal effectively transfers the volatility giving rise to the actuarial gains and losses from profit or loss to other comprehensive income.

The Board had considered eliminating all references to curtailments from the revised standard but the ED proposes to retain the requirement that they be disclosed separately, although they would be accounted for and presented in the same way as past service costs under the proposals.

Settlements would be recognised in other comprehensive income under the proposals, rather than in profit or loss as at present, since the Board views them as a sub-set of actuarial gains and losses; effectively, the obligation has been discharged at a cost different from that estimated under the plan’s original actuarial assumptions.

At present, entities providing other long-term benefits do not need to analyse the change during the year in the related net defined benefit liability (asset). Under the proposals, the change would have to be broken down into service cost, interest cost and remeasurements in order to present the various elements in the way set out in the table above. The volatility currently reported in profit or loss would, under the proposals, be reported instead in other comprehensive income.

3.7.1 Service costs The ED does not propose to change the presentation of service costs.

ED 7, 61, 96A, However, the amount to be recognised in profit or loss for service costs often might be different 97A, 98A, from the amount determined under current IAS 19, due to other suggested amendments as follows: BC19

¬¬ Service costs would include past service costs recognised in full immediately according to the ED’s proposal, rather than only that part of the past service cost that has vested, as under current IAS 19 (see 3.5).

¬¬ Service costs for a period would include all expected costs of administering benefits earned in that period and, sometimes, asset management costs (see 3.6.2).

¬¬ Service costs for a period would include taxes payable by the plan in respect of contributions and benefits for service during the period (see 3.6.2).

¬¬ The amount of service costs according to the ED might differ from the amounts determined under current IAS 19, due to enhanced guidance on how to determine whether an entity has a back-end loaded defined benefit plan (see 3.6.2).



20

3.7.2 Finance costs The proposals in the ED would introduce a significant change to the way finance costs are

measured currently under IAS 19.

CurrentIAS19–financecostsIAS 19.61, 119 Under current IAS 19, entities are required to recognise in profit or loss the interest cost that is the

unwinding of the discount on the present value of the defined benefit obligation.

Additionally, entities currently are required to recognise in profit or loss an expected return on plan assets. The difference between the actual and expected return on assets forms part of actuarial gains and losses that are accounted for according to the entity’s policy choice as discussed in the previous sections.

Current IAS 19 is silent on the presentation of the interest cost and expected return on plan assets. As set out in our publication Insights into IFRS (4.4.1130.10), in our view they may be included with interest and other financial income respectively, or the net total may be shown as personnel expenses.

EDproposals–financecostsDP 3.11, 12 The Board considered at one stage not dividing the actual return on plan assets into an expected

return on plan assets and actuarial gain or loss. However, during the redeliberation of the proposals set out in its DP, the Board decided, as reflected in the ED, that the net interest income or expense for a defined benefit plan should be calculated as a net amount on the net defined benefit liability (asset).

ED 7, 119B, The ED proposes to define net interest income or expense on the net defined benefit liability BC23 (asset) as “the change during the period in the net defined benefit liability (asset) that arises from

the time value of money”. Specifically, under the ED proposals, the net interest income or expense on the net defined benefit liability (asset) would be determined by applying the discount rate used to measure the defined benefit obligation at the start of the period to the net defined benefit liability (asset) throughout that period, taking into account any material changes in the net defined benefit liability (asset). Illustrative example 1 in 3.7.5 below shows the effect this might have.

ED BC23-BC32 The proposed approach for recognising and measuring the net interest income or expense is based on the logic that the growth in the plan assets offsets the growth in the defined benefit obligation over time and that the part of the change in the plan assets that arises from the time value of money offsets the interest costs that arises on the defined benefit obligation due to the passage of time.

In effect the ED proposal is to divide the change in the value of the plan assets into two parts, one being the change that arises from the passage of time, reflecting the time value of money and the other being all other changes.

The calculation of the change that arises from the passage of time is based on the discount rate

used to measure the defined benefit obligation: this is based on the view that the interest cost should be calculated on the net position of the defined benefit plan (as reported in the statement of financial position), as it would be if the plan were seen as a financing amount owed by the entity to the plan or the employees. Another way to explain this approach is to consider the net position of the defined benefit plan as the part of the plan that is not funded (defined benefit liability) or is overfunded (defined benefit asset). The interest expense on an unfunded part of a plan would be calculated using the discount rate according to IAS 19’s current requirements and the interest income on an over-funded part of a plan would use the same discount rate according to revised IAS 19’s requirements with respect to benefits available in the form of refunds and reductions in



future contributions (set out currently in IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction). The ED does not propose to change how the discount rate is determined.

The ED proposes that the net interest income or expense amount would be presented in the same way as other finance costs.

Observation The proposed amendment would affect all entities that provide benefits to their employees

through funded defined benefit plans. The major effect is that management’s expectations about the long-term return on plan assets of a post-employment benefit plan would no longer be reflected in profit or loss under the ED’s proposal. Since this long-term return generally is higher than the rate used to discount the obligation, net profit would therefore be reduced. The inclusion of this long-term return within profit or loss under current IAS 19 has, however, been subject to some criticism, both by those who view it as taking the reward for holding riskier assets before that reward is achieved and by those who believe that the expected returns estimated might in some cases have been unduly optimistic.

The following table summarises the possible impacts of the proposals. It relates to both post-employment benefits and other long-term benefits, since the ED proposes that they be accounted for in the same way (see 3.4).

Aspectofthestatementofcomprehensiveincomeaffected

Observation

Amount of net profit or loss

Actuarial gains and losses on other long-term benefits would be excluded, as would settlements. The impact could be material, depending on both the changes to interest costs (see the immediately following point) and, for post-employment benefits, the policy choice that is applied under current IAS 19 with respect to actuarial gains and losses.

Finance costs – revised The impact on entities’ net finance costs would be greater when basis of calculation the gap between the expected rate of return on plan assets (assuming the net interest and the rate used to discount the obligation is greater. This will figure is presented depend on the risk level of the plan assets of the defined benefit currently within financing) plan. When plan assets include mostly low-risk investments with

a rate of return that is close to the rate on a high-quality corporate bond or government bond, the effect of the ED’s proposals on the net finance costs would be less. This is because the calculation of net interest income or expense would be based on the discount rate as required by current IAS 19; the closer the return on investments is to that discount rate, the lesser the impact of the ED’s proposals.

Finance costs – presentation as personnel expenses

The policy choice currently available to present the net finance costs as personnel expenses would not be available under the ED’s proposals.



22

Aspect of the statement of comprehensive income affected

Observation

Finance costs – presentation in two line items

The net interest income or expense would be presented in one line item, interest or other finance income, as opposed to the presentation sometimes adopted currently of including the gross amounts of interest cost and expected return on plan assets with interest and other financial income respectively.

3.7.3 Remeasurements While the ED specifies what would constitute service cost (including curtailments) and interest

cost, and how such amounts should be presented, everything else that results in a change to the net defined benefit liability (asset) would be a remeasurement.

ED 7, BC33, The ED proposes that remeasurements of a defined benefit liability (asset) would comprise:BC34

¬¬ actuarial gains and losses on the defined benefit obligation (including the effect of settlements) (see sections 3.5 and 3.7.4);

¬¬ the return on plan assets, excluding amounts included in the net interest income or expense on the net defined benefit asset (liability) (see 3.7.2); and

¬¬ any changes in the effect of the asset ceiling (either to limit a net defined asset or to recognise an additional liability), excluding any effect included in the net interest income or expense on the net defined benefit liability (asset).

ED 119A(c), The ED proposes that remeasurements be recognised immediately in other comprehensive BC45 income and would not be reclassified to profit or loss. In the Board’s view the information about

remeasurements provides little direct information about estimated amounts and timing of future cash flows (as opposed to service and finance costs); therefore, recognising remeasurements in other comprehensive income would provide the most transparent way of reporting those amounts. This thinking draws on the Board’s forthcoming exposure draft on the presentation of items of other comprehensive income, in which it is expected to propose mandating a single continuous statement of comprehensive income. The Board plans to finalise amendments to the presentation of the remeasurement component as proposed in the ED in conjunction with amendments resulting from the pending statement of comprehensive income exposure draft.

ED 7 Similarly to current IAS 19, the ED proposes that the definition of the return on plan assets include interest, dividend and other income derived from the plan assets, together with realised and unrealised gains and losses on the plan assets less administrative costs and taxes payable by the plan.

Section 3.6.2 discusses the changes proposed regarding the types of administrative costs and taxes payable by the plan that would in future be offset against the return on assets.

Observation Remeasurements would not be reclassified (“recycled”) to profit or loss. Some users of

accounts may be uncomfortable with this and, although it does not refer specifically to recycling, the principle underlying the alternative view of one Board member published with the ED appears to be that all costs of providing a defined benefit to employees should at some stage pass through profit or loss. However, other users may welcome the separation of these more volatile amounts, which have a different predictive value, from the other elements of the overall cost of providing the benefit.



3.7.4 The effect of settlements or curtailments SettlementsED 7, 119D, As the ED proposals would eliminate the potential for the deferral of unrecognised actuarial gains BC46-BC49, and losses and past service costs, the measurement guidance included in current IAS 19 with IAS 19.109-115 respect to settlements would no longer be necessary. Settlements would be accounted for as

remeasurements (see 3.7.3).

ED 7, BC78 The ED introduces the term non-routine settlement and disclosures would have to be made about such settlements (see 3.8). As noted above in 3.6.2, these would be only non-routine transactions, not settlements made under benefit options envisaged by the terms of the benefit plan.

CurtailmentsIAS 19.109-115, Also, some of the guidance on curtailments would be deleted under the ED proposals, as they too ED 7, 96A, 98A, would no longer be affected by previously unrecognised amounts. They would be accounted for in 119A(a), the same manner as negative past service cost, meaning immediate recognition in profit or loss. BC46-BC49 The ED does not change the current IAS 19 requirement that gains or losses on curtailments would

be recognised in the period in which the curtailment occurs. It also does not change the current IAS 19 requirement that, when the curtailment is linked with a restructuring, it would be accounted for at the same time as the related restructuring.

However, the ED proposes a change to the description of a curtailment under current IAS 19,

which states that a curtailment occurs when an entity either is demonstrably committed to make a significant reduction in the number of employees covered by a plan or amends the terms of a defined benefit plan so that a significant element of future service by current employees will no longer qualify for benefits or will qualify only for reduced benefits. The ED defines curtailment explicitly using wording almost identical to the above but no longer refers to the entity becoming “demonstrably committed” in determining when curtailment occurs, i.e. it refers to the first type of curtailment as being a significant reduction in the number of employees covered by a plan.

Observations The ED’s proposals with respect to settlements and curtailments may be difficult to apply

in practice in situations in which a curtailment and settlement occur at the same time, since a detailed analysis would be required in order to split the effects of the two. Although this difficulty exists already under current IAS 19, the ED’s proposals heighten the importance of distinguishing between the two. At present the effects of both are recognised in profit or loss: under the proposals, the effects of curtailments would be recognised within profit or loss and the effects of settlements within other comprehensive income, giving greater importance to the need for a reliable sub-analysis of the overall effect.

At first sight, the proposals would remove the need to distinguish curtailments from negative past service cost which, under current IAS 19, can be complex in practice (see our publication Insights into IFRS (4.4.620)). However, the distinction would still need to be made because curtailments would have to be disclosed separately from past service cost.

As noted above, the ED carries through the existing IAS 19 comment that a curtailment will be accounted for at the same time as a related restructuring. We consider this linkage in our publication Insights into IFRS (4.4.900.20). However, the exclusion from the ED of the reference to demonstrable commitment suggests that the ED is proposing to amend the timing of recognition of some curtailments. It may be necessary for the IASB to provide more clarity as to how a curtailment and a related restructuring still may be accounted for at the same time.



24

3.7.5 Illustrative examples of presentation under the ED’s proposals

Example 1 – Elimination of the corridor method for post-employment benefits This example illustrates a possible effect on entities currently applying the corridor method.

It shows the difference between the calculation of the cumulative actuarial gains and losses at 31 December 2010 for Company W’s defined benefit plan (assuming W applies the corridor method and that, for purposes of illustration, there are no unrecognised actuarial gains and losses at 31 December 2009) and the calculation of the remeasurement amount as proposed by the ED:1

Plan assets IAS 19 EDFair value at 31 December 2009 (actual market values at 31 December 2009) 14,000 14,000Expected return (based on market return at 1 January 2010 and expected long-term rate of return; 7% x 14,000) 980 N/ACalculated return on plan assets (based on market value at 1 January 2010 and discount rate used to measure the defined benefit obligation; 6% x 14,000) N/A 840Contributions for the period (actual amounts received by the fund) 1,050 1,050Employee benefits paid during the period (actual benefits paid by the fund) (1,500) (1,500)Expected fair value of assets at 31 December 2010 14,530 14,390Actual fair value at 31 December 2010 (actual market values at 31 December 2010) 14,920 14,920Cumulative (unrecognised) actuarial gain on plan assets at 31 December 2010 390 N/ARemeasurements recognised in OCI2 in respect of plan assets at 31 December 2010 N/A 530

Defined benefit obligation IAS 19 EDObligation at 31 December 2009 (based on actuarial calculation at 31 December 2009) 15,000 15,000Interest cost (based on interest rates and obligation at 1 January 20103 6% x 15,000) 900 900Current service cost (based on actuarial calculation at 1 January 2010) 800 8004

Employee benefits paid during the period (actual benefits paid by the fund) (1,500) (1,500)Expected obligation at 31 December 2010 15,200 15,200Obligation at 31 December 2010 (based on actuarial calculation at 31 December 2010) 17,410 17,410Cumulative (unrecognised) actuarial loss on plan obligations at 31 December 2010 2,210 N/ARemeasurements recognised in OCI in respect of plan obligation at 31 December 2010 N/A 2,210

1 Tax implications are ignored.

2 Other comprehensive income.

3 The interest cost is based on the obligation at the beginning of the year assuming that there are no material changes

during the year. For purposes of this example the expected return on plan assets is based only on plan assets at the

beginning of the period and does not take into account contributions made into and benefits paid out of the plan

during the period.

4 Excluding the effect of including administrative costs and taxes payable by the plan not already included, which are

ignored for the purposes of the example but may increase current service cost.



Under current IAS 19, W recognised finance income of 980 in respect of plan assets and no actuarial gain or loss in profit or loss or the statement of other comprehensive income. Under the ED, W would recognise finance income of only 840 (as part of a net interest cost of 60) and a remeasurement loss of 1,680 (2,210 - 530) in other comprehensive income.

This example assumes that there are no unrecognised actuarial gains or losses at 31 December 2009. If there was an amount of unrecognised actuarial gains or losses at 31 December 2009, part of it may have been recognised in 2010 according to the corridor method.

Example 2 – The effect on other long-term benefits (not post-employment benefits) This example illustrates a possible effect on other long-term benefits accounting for an unfunded

arrangement:1 Defined benefit obligation IAS 19 EDObligation at 31 December 2009 (based on actuarial calculation at 31 December 2009) 15,000 15,000Interest cost (based on interest rates and obligation at 1 January 20102; 6% x 15,000) 900 900Current service cost (based on actuarial calculation at 1 January 2010) 800 8003

Employee benefits paid during the period (1,500) (1,500)Expected obligation at 31 December 2010 15,200 15,200Obligation at 31 December 2010 (based on actuarial calculation at 31 December 2010) 17,410 17,410Actuarial loss on plan obligations at 31 December 2010 recognised in profit or loss 2,210 N/ARemeasurements recognised in OCI in respect of plan obligation at 31 December 2010 N/A 2,210


2 The interest cost is based on the obligation at the beginning of the year assuming that there are no material changes

during the year.

3 Excluding the effect of including administrative costs and taxes payable by the plan not already included, which are

ignored for the purposes of the example but may increase current service cost.

Currently under IAS 19, Company Y recognised an actuarial loss in profit or loss of 2,210. Under the ED, Y would recognise a remeasurement loss of 2,210 in other comprehensive income.



26

Example 3 – Accounting for defined benefit plans including past service costs The following information pertains to Company K’s pension plan:1

Plan assets at 1 January 2010 95,000 Defined benefit obligation at 1 January 2010 100,000 Unrecognised net actuarial loss at 1 January 2010 20,000 Average remaining working life of employees at 1 January 2010 10 years Service cost for 2010 9,000 Discount rate at 1 January 2010 10% Expected return on plan assets at 1 January 2009 10,000 Net actuarial loss arising in 2010 (IAS 19) 2,000 Remeasurement loss arising in 2010 (ED) 1,500 Past service cost arising on 1 January 2010 3,000 Vesting period for past service cost 3 years

Under current IAS 19, K chooses to recognise the minimum amount of actuarial gains and losses under the corridor method.

Under current IAS 19, the pension cost recognised for the year will be made up as follows:

Current service cost 9,000 Interest cost (10% x 100,000) 10,000 Expected return on plan assets (10,000) Past service cost (3,000/3) 1,000 Actuarial loss recognised ((20,000 - (100,000 x 10%))/10) 1,000 Net cost for the year recognised in profit or loss 11,000

Under the ED the pension cost recognised for the year would be made up as follows:

Current service cost 9,000 Net interest cost2 (10% x 5,000) 500 Past service cost 3,000 Net cost for the year recognised in profit or loss 12,500 Remeasurements recognised in other comprehensive income 1,500 Net cost for the year recognised in total comprehensive income 14,000


2 The interest cost is based on the net defined benefit liability at the beginning of the year assuming that there are no

material changes during the year (100,000 - 95,000).



The following illustrates one possible way of presenting the amounts calculated based on the ED in the statement of comprehensive income:

Profit or loss 2010

Revenue XXX Cost of goods sold1 12,000 Gross margin XXX

Other business expenses XXX Total operating income XXX

Finance costs 500 Profit before tax XXX

Tax expenses XXX Profit for the year XXX

Other comprehensive income Remeasurements of defined benefit plan 1,500 Tax on remeasurements XXX Total other comprehensive income XXX

Total comprehensive income XXX

1 Assuming the benefits are attributable wholly to production employees and that no amounts are capitalised. This

amount includes current service cost of 9,000 and past service cost of 3,000.

3.8 DisclosureED BC50, In the DP the Board indicated that it planned to review the disclosures required for defined benefit BC51 promises. In performing its review the Board considered, among other things, the need to

update the disclosure requirements in current IAS 19 to reflect current developments in IFRSs on disclosures, in particular IFRS 7 Financial Instruments: Disclosures and IFRS 4 Insurance Contracts and the disclosures proposed in the exposure draft ED/2009/5 Fair Value Measurement.

IFRS 7.3(b) IFRS 7 currently excludes from its scope employer’s rights and obligations within the scope of IAS 19 and, according to a recent Board decision, the future standard on fair value measurement (currently an exposure draft) also would not be applied to employer’s rights and obligations within the scope of IAS 19.

ED BC53 The Board seeks an approach that would provide users with sufficient disclosures about defined benefit plans when they are material to the operations of the entity and with relevant information that is not obscured by excessive detail.

ED 125A, Therefore, the disclosure objectives in the ED are focused on the matters the Board believes are BC59 the most relevant to users, i.e. on information that:

¬¬ explains the characteristics of the defined benefit plans;¬¬ identifies and explains the amounts in the financial statements from the defined benefit plans;

and



28

¬¬ describes how involvement in defined benefit plans affects the amount, timing and uncertainty of the entity’s future cash flows.

The ED proposes improved disclosures about defined benefit plans, focused on achieving the above objectives. These disclosures include:

¬¬ enhanced disclosures about the characteristics of an entity’s defined benefit plans and the amounts in the financial statements resulting from those plans;

¬¬ requirements to disclose risk information, both narrative and quantitative, including sensitivity analyses; and

¬¬ enhanced disclosures about participation in multi-employer plans. ED 125C(b), The table below provides an overview of the most significant additional disclosures proposed in 125F, 125G the ED.

Characteristics of the Narrative description of exposure to risks arising from participating in a defined benefit plans plan in order to provide information about the risks inherent in a defined

benefit plan and the risks associated with plan assets held to fund the benefit.

Amounts in the ¬¬ Disaggregation of actuarial gains and losses in the period into financial statements amounts arising from changes in demographic assumptions arising from the and amounts arising from changes in financial assumptions, and defined benefit plans

¬¬

¬¬

¬¬

showing separately the effects of non-routine settlements.Focus on risk and liquidity characteristics in the disaggregation of the fair value of plan assets, showing instruments that have a quoted market price in an active market and those that do not.Indication of present value of the defined benefit obligation, modified to exclude the effect of projected salary growth (sometimes referred to as the Accumulated Benefit Obligation).Information about the process used to determine demographic actuarial assumptions.

How the defined benefit plans may affect the amount, timing and uncertainty of the entity’s future cash flows

¬¬

¬¬

¬¬

¬¬

Sensitivity analysis for each significant assumption, based on the reasonably possible changes in actuarial assumptions at the beginning and at the end of the reporting period and their effect on service cost and on the defined benefit obligation.Methods and assumptions used to prepare the sensitivity analysis.Information about asset-liability matching strategies.Narrative discussion about factors that could cause contributions over the next five years to differ significantly from service costs over that period.

The proposals to require immediate recognition of actuarial gains and losses and past service cost result in the ED’s proposals to eliminate disclosures about deferred recognition of those items. Additionally, the ED proposes to remove some of the other disclosure requirements currently in IAS 19, for instance the five-year historical information about the present value of the defined benefit obligation, the fair value of plan assets, the surplus or deficit in the plan and experience adjustments.

3.8.1 Multi-employerplansED 33A, The ED proposes additional disclosures about entities’ participation in a multi-employer plan in order BC67-BC69 to provide the users of financial statements with sufficient information about the risks associated

with participation and the potential effect on the amount, timing and uncertainty of future cash flows. These disclosure requirements include:



¬¬ a description of funding requirements;¬¬ the extent of the entity’s exposure to other entities’ obligations; and¬¬ agreed surplus or deficit allocation.

Other disclosures for multi-employer plans would follow the accounting for the plan so that the

disclosure requirements for defined benefit plans proposed in the ED would be applied when the multi-employer plan is accounted for as such, and when the multi-employer plan is accounted for as a defined contribution plan, the disclosure would include information regarding contributions expected to the plan, amongst other disclosures.

The FASB added a new project to its agenda in March 2010 to review the disclosures about an employer’s participation in a multi-employer plan. The proposed standard is expected to be published in the second quarter of 2010, with the final standard expected to be published early in the fourth quarter of 2010. The IASB plans to consider the work of the FASB when it reviews the responses to its ED.

ED 36, 38, As the accounting for state plans is similar to the accounting for multi-employer plans, the new BC70 disclosure requirements described above would be applied to state plans in a similar manner.

3.8.2 Settlements and curtailmentsED 7, BC49, The ED retains similar quantitative disclosures as those currently in IAS 19 for settlements and BC78 curtailments. However, a narrative description would now be required under the proposals

in respect of plan amendments, curtailments and non-routine settlements (see definition at 3.6.2 above).

Observations As a result of the newly-proposed disclosure objectives described above, the ED proposes

amendments that would considerably increase the level of both qualitative and quantitative disclosures required for defined benefit obligations.

The impact would be particularly significant for entities offering benefits currently classified as other long-term benefits. As discussed in 3.4, the ED proposes a single category of long-term employee benefits, which would include the existing other long-term benefits. As a result, rather than the limited disclosures required by the current standard, these benefits would in future be subject to the full range of disclosures proposed in the ED.

New narrative information proposed about risk, asset-liability matching strategies and identification of factors that could cause contributions over the next five years to differ significantly from service costs over that period would represent a considerable change for entities.

We also expect that some of the quantitative disclosures proposed in the ED might prove to be difficult for entities. For instance, the disaggregation of actuarial gains and losses arising from demographic assumptions and financial assumptions might be complex as the assumptions may be interrelated in some cases, and providing sensitivity analyses would be new for some entities.

Particularly when defined benefit plans are provided to employees in various countries, it might

be a challenging task for entities to ensure that this information is produced in a consistent manner in the different countries and to gather it at a group level.



30

In order to present the appropriate amount of information about their defined benefit arrangements – neither so much that important details are lost nor so little that a user cannot get a full understanding – it will be important for entities to bear in mind the materiality considerations of IAS 1 Presentation of Financial Statements discussed by the Board in the Basis for Conclusions to the ED. In particular, IAS 1 states that a specific disclosure required by a standard need not be provided if it is not material but that additional disclosures should be provided if they are necessary to a user’s understanding of particular transactions, events or conditions.



4. Other matters

4.1 Multi-employer plansED BC68, Q14 The IASB does not propose any change to the accounting for multi-employer plans, although it does

propose additional disclosures (see 3.8). However, the ED asks constituents to provide details of any situation in which a defined benefit multi-employer plan has a consistent and reliable basis for allocating the obligation, plan assets and costs of the plan to the individual entities participating in it, and asks for comments on whether the participants in such plans should apply defined benefit accounting.

4.2 Incorporation of IFRIC 14 ED 7, The ED proposes that IAS 19 should incorporate, without substantive change, the requirements of BC115A-K, IFRIC 14 as amended in November 2009. In addition, the ED proposes to clarify that a minimum BC80 funding requirement is any enforceable requirement for the entity to make contributions to fund a

long-term employee benefit plan. The Board is proposing this clarification due to diversity in how entities are interpreting the definition of “minimum funding requirement” in IFRIC 14.

4.3 Proposed amendment to IFRS 1ED BC99 The ED proposes to amend IFRS 1 First-time Adoption of International Financial Reporting

Standards by deleting the exemption that is provided to a first-time adopter that uses the corridor method and the exemption with respect to a disclosure requirement that would no longer be required under the proposals in the ED.



32

5. Effective date and transitionED 162 The Board has not proposed an effective date for the application of the final standard at this point.

However, it is proposing to allow early application once the ED becomes a final standard.

In the Basis for Conclusions to the ED, the Board explains that it plans to consider collectively the effective dates for the considerable number of standards scheduled to be completed by June 2011. However, it notes its general policy that new requirements should become effective for periods starting on or after either 1 January or 1 July and that the effective date for major projects completed in 2011 should generally not be earlier than 1 January 2013.

ED BC97, BC98 The Board proposes that the amendments would be applied retrospectively, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The Board proposal is based on the view that entities would not have to recalculate amounts for dates earlier than the beginning of the first period presented in the financial statements.

kpmgifrg.com

KPMG International Standards Group is part of KPMG IFRG Limited.

KPMG International Cooperative (“KPMG International”) is a Swiss entity that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMG International (including sublicensees and subsidiaries) in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind any member firm, in any manner whatsoever.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.


KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative

Publication name: New on the Horizon: Defined benefit plans

Publication number: 314424

Publication date: May 2010

Documents

New on the Horizon: Defined benefit plans · ED/2010/3 Defined Benefit Plans – Proposed Amendments to IAS 19 (the ED) which is the subject of this publication, does not include