IAS 19 Employee Benefits

This version includes amendments resulting from IFRSs issued up to 31 December 2010 with an effective date no later than 1 January 2011. IAS 19 Employee Benefits was issued by the International Accounting Standards Committee in February 1998. In May 1999 IAS 19 was amended by IAS 10 (revised 1999) Events After the Balance Sheet Date, and it was again amended in 2000. In April 2001 the International Accounting Standards Board (IASB) resolved that all Standards and Interpretations issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn. The IASB has issued the following amendments to IAS 19: Employee Benefits: The Asset Ceiling (issued May 2002) Actuarial Gains and Losses, Group Plans and Disclosures (issued December 2004). IAS 1 Presentation of Financial Statements (as revised in December 2003) IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (issued December 2003) IAS 39 Financial Instruments: Recognition and Measurement (as revised in December 2003) IFRS 2 Share-based Payment (issued February 2004) IFRS 3 Business Combinations (issued March 2004) IFRS 4 Insurance Contracts (issued March 2004) IFRS 8 Operating Segments (issued November 2006)1 IAS 1 Presentation of Financial Statements (as revised in September 2007)2 Improvements to IFRSs (issued May 2008)3 IAS 24 Related Party Disclosures (as revised in November 2009).3A Amendments related to an effective date later than 1 January 2011 The Basis for Conclusions on IAS 19 has been amended for consistency with IFRS 9 Financial Instruments (issued November 2009 and October 2010).3B As the effective date of those IFRSs is after 1 January 2010 the amendments are not included in this edition. The following Interpretations refer to IAS 19: SIC-12 ConsolidationSpecial Purpose Entities (issued December 1998 and subsequently amended) IFRIC 14 IAS 19The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (issued July 2007 and subsequently amended).
International Accounting Standard 19 Employee Benefits (IAS 19) is set out in paragraphs 1 161 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 19 should be read in the context of its

IAS 19 and its accompanying documents have also been amended by the following IFRSs:

objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

Introduction
IN1 The Standard prescribes the accounting and disclosure by employers for employee benefits. It replaces IAS 19 Retirement Benefit Costs which was approved in 1993. The major changes from the old IAS 19 are set out in the Basis for Conclusions. The Standard does not deal with reporting by employee benefit plans (see IAS 26 Accounting and Reporting by Retirement Benefit Plans). The Standard identifies four categories of employee benefits: (a) short-term employee benefits, such as wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and nonmonetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees; post-employment benefits such as pensions, other retirement benefits, postemployment life insurance and post-employment medical care; other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are payable twelve months or more after the end of the period, profitsharing, bonuses and deferred compensation; and termination benefits.

IN2

(b) (c)

(d) IN3 IN4

The Standard requires an entity to recognise short-term employee benefits when an employee has rendered service in exchange for those benefits. Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans. The Standard gives specific guidance on the classification of multi-employer plans, state plans and plans with insured benefits. Under defined contribution plans, an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. The Standard requires an entity to recognise contributions to a defined contribution plan when an employee has rendered service in exchange for those contributions. All other post-employment benefit plans are defined benefit plans. Defined benefit plans may be unfunded, or they may be wholly or partly funded. The Standard requires an entity to: (a) (b) account not only for its legal obligation, but also for any constructive obligation that arises from the entity's practices; determine the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period; use the Projected Unit Credit Method to measure its obligations and costs;

IN5

IN6

(c)

(d)

attribute benefit to periods of service under the plan's benefit formula, unless an employee's service in later years will lead to a materially higher level of benefit than in earlier years; use unbiased and mutually compatible actuarial assumptions about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries, changes in medical costs and certain changes in state benefits). Financial assumptions should be based on market expectations, at the end of the reporting period, for the period over which the obligations are to be settled; determine the discount rate by reference to market yields at the end of the reporting period on high quality corporate bonds (or, in countries where there is no deep market in such bonds, government bonds) of a currency and term consistent with the currency and term of the post-employment benefit obligations; deduct the fair value of any plan assets from the carrying amount of the obligation. Certain reimbursement rights that do not qualify as plan assets are treated in the same way as plan assets, except that they are presented as a separate asset, rather than as a deduction from the obligation; limit the carrying amount of an asset so that it does not exceed the net total of: (i) (ii) any unrecognised past service cost and actuarial losses; plus the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan;

(e)

(f)

(g)

(h)

(i) (j)

recognise past service cost on a straight-line basis over the average period until the amended benefits become vested; recognise gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss should comprise any resulting change in the present value of the defined benefit obligation and of the fair value of the plan assets and the unrecognised part of any related actuarial gains and losses and past service cost; and recognise a specified portion of the net cumulative actuarial gains and losses that exceed the greater of: (i) (ii) 10% of the present value of the defined benefit obligation (before deducting plan assets); and 10% of the fair value of any plan assets.

(k)

The portion of actuarial gains and losses to be recognised for each defined benefit plan is the excess that fell outside the 10% 'corridor' at the end of the previous reporting period, divided by the expected average remaining working lives of the employees participating in that plan. The Standard also permits systematic methods of faster recognition, provided that the same basis is applied to both gains and losses and the basis is applied consistently from period to period. Such permitted methods include immediate recognition of all actuarial gains and losses in profit or loss. In addition, the Standard permits an entity to recognise all actuarial gains and losses in the period in which they occur in other comprehensive income.

IN7

The Standard requires a simpler method of accounting for other long-term employee benefits than for post-employment benefits: actuarial gains and losses and past service cost are recognised immediately. Termination benefits are employee benefits payable as a result of either: an entity's decision to terminate an employee's employment before the normal retirement date; or an employee's decision to accept voluntary redundancy in exchange for those benefits. The event which gives rise to an obligation is the termination rather than employee service. Therefore, an entity should recognise termination benefits when, and only when, the entity is demonstrably committed to either: (a) (b) terminate the employment of an employee or group of employees before the normal retirement date; or provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

IN8

IN9

An entity is demonstrably committed to a termination when, and only when, the entity has a detailed formal plan (with specified minimum contents) for the termination and is without realistic possibility of withdrawal. Where termination benefits fall due more than 12 months after the reporting period, they should be discounted. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits should be based on the number of employees expected to accept the offer. [Deleted] The Standard is effective for accounting periods beginning on or after 1 January 1999. Earlier application is encouraged. On first adopting the Standard, an entity is permitted to recognise any resulting increase in its liability for post-employment benefits over not more than five years. If the adoption of the standard decreases the liability, an entity is required to recognise the decrease immediately. [Deleted]

IN10

IN11 IN12

IN13

International Accounting Standard 19 Employee Benefits Objective

The objective of this Standard is to prescribe the accounting and disclosure for employee benefits. The Standard requires an entity to recognise: (a) (b) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.

Scope
1 2 3 This Standard shall be applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies. This Standard does not deal with reporting by employee benefit plans (see IAS 26 Accounting and Reporting by Retirement Benefit Plans). The employee benefits to which this Standard applies include those provided:

(a) (b)

under formal plans or other formal agreements between an entity and individual employees, groups of employees or their representatives; under legislative requirements, or through industry arrangements, whereby entities are required to contribute to national, state, industry or other multiemployer plans; or by those informal practices that give rise to a constructive obligation. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity's informal practices would cause unacceptable damage to its relationship with employees.

(c)

EY Q&A

Employee benefits include: (a) short-term employee benefits, such as wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and nonmonetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees; post-employment benefits such as pensions, other retirement benefits, postemployment life insurance and post-employment medical care; other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing, bonuses and deferred compensation; and termination benefits.

(b) (c)

(d)

Because each category identified in (a)(d) above has different characteristics, this Standard establishes separate requirements for each category.
EY Q&A

Employee benefits include benefits provided to either employees or their dependants and may be settled by payments (or the provision of goods or services) made either directly to the employees, to their spouses, children or other dependants or to others, such as insurance companies.

EY Q&A

An employee may provide services to an entity on a full-time, part-time, permanent, casual or temporary basis. For the purpose of this Standard, employees include directors and other management personnel.

Definitions
EY Q&A

The following terms are used in this Standard with the meanings specified: Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees. Short-term employee benefits are employee benefits (other than termination benefits) that are due to be settled within twelve months after the end of the period in which the employees render the related service. Post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of employment.

Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Defined benefit plans are post-employment benefit plans other than defined contribution plans. Multi-employer plans are defined contribution plans (other than state plans) or defined benefit plans (other than state plans) that: (a) (b) pool the assets contributed by various entities that are not under common control; and use those assets to provide benefits to employees of more than one entity, on the basis that contribution and benefit levels are determined without regard to the identity of the entity that employs the employees concerned.

Other long-term employee benefits are employee benefits (other than postemployment benefits and termination benefits) that are not due to be settled within twelve months after the end of the period in which the employees render the related service. Termination benefits are employee benefits payable as a result of either: (a) (b) an entity's decision to terminate an employee's employment before the normal retirement date; or an employee's decision to accept voluntary redundancy in exchange for those benefits.

Vested employee benefits are employee benefits that are not conditional on future employment. The present value of a defined benefit obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods. Current service cost is the increase in the present value of a defined benefit obligation resulting from employee service in the current period. Interest cost is the increase during a period in the present value of a defined benefit obligation which arises because the benefits are one period closer to settlement. Plan assets comprise: (a) (b) assets held by a long-term employee benefit fund; and qualifying insurance policies.

Assets held by a long-term employee benefit fund are assets (other than non-transferable financial instruments issued by the reporting entity) that:

(a)

are held by an entity (a fund) that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and are available to be used only to pay or fund employee benefits, are not available to the reporting entity's own creditors (even in bankruptcy), and cannot be returned to the reporting entity, unless either: (i) the remaining assets of the fund are sufficient to meet all the related employee benefit obligations of the plan or the reporting entity; or the assets are returned to the reporting entity to reimburse it for employee benefits already paid.

(b)

(ii)

A qualifying insurance policy is an insurance policy4 issued by an insurer that is not a related party (as defined in IAS 24 Related Party Disclosures) of the reporting entity, if the proceeds of the policy: (a) (b) can be used only to pay or fund employee benefits under a defined benefit plan; and are not available to the reporting entity's own creditors (even in bankruptcy) and cannot be paid to the reporting entity, unless either: (i) the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations; or the proceeds are returned to the reporting entity to reimburse it for employee benefits already paid.

(ii)

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction. The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself. Actuarial gains and losses comprise: (a) (b) experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred); and the effects of changes in actuarial assumptions.

Past service cost is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when existing benefits are changed so that the present value of the defined benefit obligation decreases).

1 effective date 1 January 2009 2 effective date 1 January 2009 3 effective date 1 January 2009 3A effective date 1 January 2011 3B effective date 1 January 2013 EY IFRS Q&As IAS 19.4-1 - Severance benefits EY IFRS Q&As IAS 19.5-1 - Sale of goods or services to employees at a discount EY IFRS Q&As IAS 19.6-1 and IAS 19.7-1 - Definition of employee for determining the scope of IAS 19 EY IFRS Q&As IAS 19.7-1 and IAS 19.6-1 - Definition of employee for determining the scope of IAS 19 IAS 19.7-2 - Definition of short-term employee benefits IAS 19.7-3 - Definition of employee benefits IAS 19.7-4 and IAS 19.128-1 - Bonuses with vesting conditions 4 A qualifying insurance policy is not necessarily an insurance contract, as defined in IFRS 4 Insurance Contracts.

Short-term employee benefits

8 Short-term employee benefits include items such as: (a) (b) wages, salaries and social security contributions; short-term compensated absences (such as paid annual leave and paid sick leave) where the compensation for the absences is due to be settled within twelve months after the end of the period in which the employees render the related employee service; profit-sharing and bonuses payable within twelve months after the end of the period in which the employees render the related service; and non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees.

(c) (d)
EY Q&A

Accounting for short-term employee benefits is generally straightforward because no actuarial assumptions are required to measure the obligation or the cost and there is no possibility of any actuarial gain or loss. Moreover, short-term employee benefit obligations are measured on an undiscounted basis.

Recognition and measurement

All short-term employee benefits
10 When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: (a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and as an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).

(b)

Paragraphs 11, 14 and 17 explain how an entity shall apply this requirement to short-term employee benefits in the form of compensated absences and profit-sharing and bonus plans.

Short-term compensated absences

11 An entity shall recognise the expected cost of short-term employee benefits in the form of compensated absences under paragraph 10 as follows: (a) in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and in the case of non-accumulating compensated absences, when the absences occur.

(b) 12

An entity may compensate employees for absence for various reasons including vacation, sickness and short-term disability, maternity or paternity, jury service and military service. Entitlement to compensated absences falls into two categories:

(a) (b) 13

accumulating; and non-accumulating.

Accumulating compensated absences are those that are carried forward and can be used in future periods if the current period's entitlement is not used in full. Accumulating compensated absences may be either vesting (in other words, employees are entitled to a cash payment for unused entitlement on leaving the entity) or non-vesting (when employees are not entitled to a cash payment for unused entitlement on leaving). An obligation arises as employees render service that increases their entitlement to future compensated absences. The obligation exists, and is recognised, even if the compensated absences are non-vesting, although the possibility that employees may leave before they use an accumulated non-vesting entitlement affects the measurement of that obligation. An entity shall measure the expected cost of accumulating compensated absences as the additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period. The method specified in the previous paragraph measures the obligation at the amount of the additional payments that are expected to arise solely from the fact that the benefit accumulates. In many cases, an entity may not need to make detailed computations to estimate that there is no material obligation for unused compensated absences. For example, a sick leave obligation is likely to be material only if there is a formal or informal understanding that unused paid sick leave may be taken as paid vacation.
Example illustrating paragraphs 14 and 15 An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current year's entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 30 December 20X1, the average unused entitlement is two days per employee. The entity expects, based on past experience which is expected to continue, that 92 employees will take no more than five days of paid sick leave in 20X2 and that the remaining eight employees will take an average of six and a half days each. The entity expects that it will pay an additional 12 days of sick pay as a result of the unused entitlement that has accumulated at 31 December 20X1 (one and a half days each, for eight employees). Therefore, the entity recognises a liability equal to 12 days of sick pay.

14

15

16

Non-accumulating compensated absences do not carry forward: they lapse if the current period's entitlement is not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not increase future entitlement), maternity or paternity leave and compensated absences for jury service or military service. An entity recognises no liability or expense until the time of the absence, because employee service does not increase the amount of the benefit. An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 10 when, and only when:

Profit-sharing and bonus plans

17

(a) (b)

the entity has a present legal or constructive obligation to make such payments as a result of past events; and a reliable estimate of the obligation can be made.

A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments. 18 Under some profit-sharing plans, employees receive a share of the profit only if they remain with the entity for a specified period. Such plans create a constructive obligation as employees render service that increases the amount to be paid if they remain in service until the end of the specified period. The measurement of such constructive obligations reflects the possibility that some employees may leave without receiving profit-sharing payments.
Example illustrating paragraph 18 A profit-sharing plan requires an entity to pay a specified proportion of its profit for the year to employees who serve throughout the year. If no employees leave during the year, the total profit-sharing payments for the year will be 3% of profit. The entity estimates that staff turnover will reduce the payments to 2.5% of profit. The entity recognises a liability and an expense of 2.5% of profit.

19

An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity has no realistic alternative but to pay the bonus. The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus. An entity can make a reliable estimate of its legal or constructive obligation under a profit-sharing or bonus plan when, and only when: (a) (b) (c) the formal terms of the plan contain a formula for determining the amount of the benefit; the entity determines the amounts to be paid before the financial statements are authorised for issue; or past practice gives clear evidence of the amount of the entity's constructive obligation.

20

21

An obligation under profit-sharing and bonus plans results from employee service and not from a transaction with the entity's owners. Therefore, an entity recognises the cost of profit-sharing and bonus plans not as a distribution of profit but as an expense. If profit-sharing and bonus payments are not due wholly within twelve months after the end of the period in which the employees render the related service, those payments are other long-term employee benefits (see paragraphs 126131).

22

Disclosure
23 Although this Standard does not require specific disclosures about short-term employee benefits, other Standards may require disclosures. For example, IAS 24 requires disclosures about employee benefits for key management personnel. IAS 1 Presentation of Financial Statements requires disclosure of employee benefits expense.

EY IFRS Q&As IAS 19.9-1 and IAS 37.2-1 - Special wage tax

Post-employment benefits: distinction between defined contribution plans and defined benefit plans
24 Post-employment benefits include, for example: (a) (b) retirement benefits, such as pensions; and other post-employment benefits, such as post-employment life insurance and post-employment medical care.

Arrangements whereby an entity provides post-employment benefits are postemployment benefit plans. An entity applies this Standard to all such arrangements whether or not they involve the establishment of a separate entity to receive contributions and to pay benefits. 25 Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions. Under defined contribution plans: (a) the entity's legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a postemployment benefit plan or to an insurance company, together with investment returns arising from the contributions; and in consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall on the employee.

(b)

26

Examples of cases where an entity's obligation is not limited to the amount that it agrees to contribute to the fund are when the entity has a legal or constructive obligation through: (a) (b) (c) a plan benefit formula that is not linked solely to the amount of contributions; a guarantee, either indirectly through a plan or directly, of a specified return on contributions; or those informal practices that give rise to a constructive obligation. For example, a constructive obligation may arise where an entity has a history of increasing benefits for former employees to keep pace with inflation even where there is no legal obligation to do so. the entity's obligation is to provide the agreed benefits to current and former employees; and

27

Under defined benefit plans: (a)

(b)

actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity's obligation may be increased.

28

Paragraphs 2942 below explain the distinction between defined contribution plans and defined benefit plans in the context of multi-employer plans, state plans and insured benefits.

Multi-employer plans
29 An entity shall classify a multi-employer plan as a defined contribution plan or a defined benefit plan under the terms of the plan (including any constructive obligation that goes beyond the formal terms). Where a multiemployer plan is a defined benefit plan, an entity shall: (a) account for its proportionate share of the defined benefit obligation, plan assets and cost associated with the plan in the same way as for any other defined benefit plan; and disclose the information required by paragraph 120A.

(b)
EY Q&A

30

When sufficient information is not available to use defined benefit accounting for a multi-employer plan that is a defined benefit plan, an entity shall: (a) (b) account for the plan under paragraphs 4446 as if it were a defined contribution plan; disclose: (i) (ii) (c) the fact that the plan is a defined benefit plan; and the reason why sufficient information is not available to enable the entity to account for the plan as a defined benefit plan; and

to the extent that a surplus or deficit in the plan may affect the amount of future contributions, disclose in addition: (i) (ii) (iii) any available information about that surplus or deficit; the basis used to determine that surplus or deficit; and the implications, if any, for the entity.

31

One example of a defined benefit multi-employer plan is one where: (a) the plan is financed on a pay-as-you-go basis such that: contributions are set at a level that is expected to be sufficient to pay the benefits falling due in the same period; and future benefits earned during the current period will be paid out of future contributions; and employees' benefits are determined by the length of their service and the participating entities have no realistic means of withdrawing from the plan without paying a contribution for the benefits earned by employees up to the date of withdrawal. Such a plan creates actuarial risk for the entity: if the ultimate cost of benefits already earned at the end of the reporting period is more than expected, the entity will have to either increase its contributions or persuade employees to accept a reduction in benefits. Therefore, such a plan is a defined benefit plan.

(b)

32

Where sufficient information is available about a multi-employer plan which is a defined benefit plan, an entity accounts for its proportionate share of the defined benefit obligation, plan assets and post-employment benefit cost associated with the plan in the same way as for any other defined benefit plan. However, in some cases, an entity may not be able to identify its share of the underlying financial position and performance of the plan with sufficient reliability for accounting purposes. This may occur if: (a) (b) the entity does not have access to information about the plan that satisfies the requirements of this Standard; or the plan exposes the participating entities to actuarial risks associated with the current and former employees of other entities, with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and cost to individual entities participating in the plan.

In those cases, an entity accounts for the plan as if it were a defined contribution plan and discloses the additional information required by paragraph 30. 32A There may be a contractual agreement between the multi-employer plan and its participants that determines how the surplus in the plan will be distributed to the participants (or the deficit funded). A participant in a multi-employer plan with such an agreement that accounts for the plan as a defined contribution plan in accordance with paragraph 30 shall recognise the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss.
Example illustrating paragraph 32A An entity participates in a multi-employer defined benefit plan that does not prepare plan valuations on an IAS 19 basis. It therefore accounts for the plan as if it were a defined contribution plan. A non-IAS 19 funding valuation shows a deficit of 100 million in the plan. The plan has agreed under contract a schedule of contributions with the participating employers in the plan that will eliminate the deficit over the next five years. The entity's total contributions under the contract are 8 million. The entity recognises a liability for the contributions adjusted for the time value of money and an equal expense in profit or loss.

32B

IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires an entity to disclose information about some contingent liabilities. In the context of a multiemployer plan, a contingent liability may arise from, for example: (a) actuarial losses relating to other participating entities because each entity that participates in a multi-employer plan shares in the actuarial risks of every other participating entity; or any responsibility under the terms of a plan to finance any shortfall in the plan if other entities cease to participate.

(b) 33

Multi-employer plans are distinct from group administration plans. A group administration plan is merely an aggregation of single employer plans combined to allow participating employers to pool their assets for investment purposes and reduce investment management and administration costs, but the claims of different employers are segregated for the sole benefit of their own employees. Group administration plans pose no particular accounting problems because information is readily available to treat them in the same way as any other single employer plan and because such plans do not expose the participating entities to actuarial risks

associated with the current and former employees of other entities. The definitions in this Standard require an entity to classify a group administration plan as a defined contribution plan or a defined benefit plan in accordance with the terms of the plan (including any constructive obligation that goes beyond the formal terms).

Defined benefit plans that share risks between various entities under common control
34 34A Defined benefit plans that share risks between various entities under common control, for example, a parent and its subsidiaries, are not multi-employer plans. An entity participating in such a plan shall obtain information about the plan as a whole measured in accordance with IAS 19 on the basis of assumptions that apply to the plan as a whole. If there is a contractual agreement or stated policy for charging the net defined benefit cost for the plan as a whole measured in accordance with IAS 19 to individual group entities, the entity shall, in its separate or individual financial statements, recognise the net defined benefit cost so charged. If there is no such agreement or policy, the net defined benefit cost shall be recognised in the separate or individual financial statements of the group entity that is legally the sponsoring employer for the plan. The other group entities shall, in their separate or individual financial statements, recognise a cost equal to their contribution payable for the period. Participation in such a plan is a related party transaction for each individual group entity. An entity shall therefore, in its separate or individual financial statements, make the following disclosures: (a) (b) (c) the contractual agreement or stated policy for charging the net defined benefit cost or the fact that there is no such policy. the policy for determining the contribution to be paid by the entity. if the entity accounts for an allocation of the net defined benefit cost in accordance with paragraph 34A, all the information about the plan as a whole in accordance with paragraphs 120121. if the entity accounts for the contribution payable for the period in accordance with paragraph 34A, the information about the plan as a whole required in accordance with paragraphs 120A(b)(e), (j), (n), (o), (q) and 121. The other disclosures required by paragraph 120A do not apply.

34B

(d)

35

[Deleted]

State plans
36 37 An entity shall account for a state plan in the same way as for a multiemployer plan (see paragraphs 29 and 30). State plans are established by legislation to cover all entities (or all entities in a particular category, for example, a specific industry) and are operated by national or local government or by another body (for example, an autonomous agency created specifically for this purpose) which is not subject to control or influence by the reporting entity. Some plans established by an entity provide both compulsory benefits which substitute for benefits that would otherwise be covered under a state plan and additional voluntary benefits. Such plans are not state plans. State plans are characterised as defined benefit or defined contribution in nature based on the entity's obligation under the plan. Many state plans are funded on a pay-as-you-go basis: contributions are set at a level that is expected to be sufficient

38

to pay the required benefits falling due in the same period; future benefits earned during the current period will be paid out of future contributions. Nevertheless, in most state plans, the entity has no legal or constructive obligation to pay those future benefits: its only obligation is to pay the contributions as they fall due and if the entity ceases to employ members of the state plan, it will have no obligation to pay the benefits earned by its own employees in previous years. For this reason, state plans are normally defined contribution plans. However, in the rare cases when a state plan is a defined benefit plan, an entity applies the treatment prescribed in paragraphs 29 and 30.

Insured benefits
39 An entity may pay insurance premiums to fund a post-employment benefit plan. The entity shall treat such a plan as a defined contribution plan unless the entity will have (either directly, or indirectly through the plan) a legal or constructive obligation to either: (a) (b) pay the employee benefits directly when they fall due; or pay further amounts if the insurer does not pay all future employee benefits relating to employee service in the current and prior periods.

If the entity retains such a legal or constructive obligation, the entity shall treat the plan as a defined benefit plan. 40 The benefits insured by an insurance contract need not have a direct or automatic relationship with the entity's obligation for employee benefits. Post-employment benefit plans involving insurance contracts are subject to the same distinction between accounting and funding as other funded plans. Where an entity funds a post-employment benefit obligation by contributing to an insurance policy under which the entity (either directly, indirectly through the plan, through the mechanism for setting future premiums or through a related party relationship with the insurer) retains a legal or constructive obligation, the payment of the premiums does not amount to a defined contribution arrangement. It follows that the entity: (a) (b) 42 accounts for a qualifying insurance policy as a plan asset (see paragraph 7); and recognises other insurance policies as reimbursement rights (if the policies satisfy the criteria in paragraph 104A).

41

Where an insurance policy is in the name of a specified plan participant or a group of plan participants and the entity does not have any legal or constructive obligation to cover any loss on the policy, the entity has no obligation to pay benefits to the employees and the insurer has sole responsibility for paying the benefits. The payment of fixed premiums under such contracts is, in substance, the settlement of the employee benefit obligation, rather than an investment to meet the obligation. Consequently, the entity no longer has an asset or a liability. Therefore, an entity treats such payments as contributions to a defined contribution plan.

EY IFRS Q&As IAS 19.30-1 - Accounting of a defined benefit multi-employer plan previously accounted for as a defined contribution multi-employer plan

Post-employment benefits: defined contribution plans

43 Accounting for defined contribution plans is straightforward because the reporting entity's obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss. Moreover, the obligations are measured on an undiscounted basis, except where they do not fall due wholly within twelve months after the end of the period in which the employees render the related service.

Recognition and measurement

44 When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable to a defined contribution plan in exchange for that service: (a) as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and as an expense, unless another Standard requires or permits the inclusion of the contribution in the cost of an asset (see, for example, IAS 2 and IAS 16).

(b)

45

Where contributions to a defined contribution plan do not fall due wholly within twelve months after the end of the period in which the employees render the related service, they shall be discounted using the discount rate specified in paragraph 78.

Disclosure
46 47 An entity shall disclose the amount recognised as an expense for defined contribution plans. Where required by IAS 24 an entity discloses information about contributions to defined contribution plans for key management personnel.

Post-employment benefits: defined benefit plans

48 Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service.

Recognition and measurement

49 Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the

financial position and the investment performance of the fund but also on an entity's ability (and willingness) to make good any shortfall in the fund's assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognised for a defined benefit plan is not necessarily the amount of the contribution due for the period. 50 Accounting by an entity for defined benefit plans involves the following steps: (a) using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an entity to determine how much benefit is attributable to the current and prior periods (see paragraphs 6771) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit (see paragraphs 7291); discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost (see paragraphs 6466); determining the fair value of any plan assets (see paragraphs 102104); determining the total amount of actuarial gains and losses and the amount of those actuarial gains and losses to be recognised (see paragraphs 9295); where a plan has been introduced or changed, determining the resulting past service cost (see paragraphs 96101); and where a plan has been curtailed or settled, determining the resulting gain or loss (see paragraphs 109115).

(b)

(c) (d) (e) (f)

Where an entity has more than one defined benefit plan, the entity applies these procedures for each material plan separately. 51 In some cases, estimates, averages and computational short cuts may provide a reliable approximation of the detailed computations illustrated in this Standard. An entity shall account not only for its legal obligation under the formal terms of a defined benefit plan, but also for any constructive obligation that arises from the entity's informal practices. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity's informal practices would cause unacceptable damage to its relationship with employees. The formal terms of a defined benefit plan may permit an entity to terminate its obligation under the plan. Nevertheless, it is usually difficult for an entity to cancel a plan if employees are to be retained. Therefore, in the absence of evidence to the contrary, accounting for post-employment benefits assumes that an entity which is currently promising such benefits will continue to do so over the remaining working lives of employees. The amount recognised as a defined benefit liability shall be the net total of the following amounts:

Accounting for the constructive obligation

52

53

Statement of financial position

54

(a) (b) (c) (d)

the present value of the defined benefit obligation at the end of the reporting period (see paragraph 64); plus any actuarial gains (less any actuarial losses) not recognised because of the treatment set out in paragraphs 92 and 93; minus any past service cost not yet recognised (see paragraph 96); minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly (see paragraphs 102104).

55 56

The present value of the defined benefit obligation is the gross obligation, before deducting the fair value of any plan assets. An entity shall determine the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period. This Standard encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation before the end of the reporting period. Nevertheless, the results of that valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period. The amount determined under paragraph 54 may be negative (an asset). An entity shall measure the resulting asset at the lower of: (a) (b) the amount determined under paragraph 54; and the total of: (i) (ii) any cumulative unrecognised net actuarial losses and past service cost (see paragraphs 92, 93 and 96); and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The present value of these economic benefits shall be determined using the discount rate specified in paragraph 78.

57

58

58A

The application of paragraph 58 shall not result in a gain being recognised solely as a result of an actuarial loss or past service cost in the current period or in a loss being recognised solely as a result of an actuarial gain in the current period. The entity shall therefore recognise immediately under paragraph 54 the following, to the extent that they arise while the defined benefit asset is determined in accordance with paragraph 58(b): (a) net actuarial losses of the current period and past service cost of the current period to the extent that they exceed any reduction in the present value of the economic benefits specified in paragraph 58(b)(ii). If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period shall be recognised immediately under paragraph 54. net actuarial gains of the current period after the deduction of past service cost of the current period to the extent that they exceed any

(b)

increase in the present value of the economic benefits specified in paragraph 58(b)(ii). If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period shall be recognised immediately under paragraph 54. 58B Paragraph 58A applies to an entity only if it has, at the beginning or end of the accounting period, a surplus5 in a defined benefit plan and cannot, based on the current terms of the plan, recover that surplus fully through refunds or reductions in future contributions. In such cases, past service cost and actuarial losses that arise in the period, the recognition of which is deferred under paragraph 54, will increase the amount specified in paragraph 58(b)(i). If that increase is not offset by an equal decrease in the present value of economic benefits that qualify for recognition under paragraph 58(b)(ii), there will be an increase in the net total specified by paragraph 58(b) and, hence, a recognised gain. Paragraph 58A prohibits the recognition of a gain in these circumstances. The opposite effect arises with actuarial gains that arise in the period, the recognition of which is deferred under paragraph 54, to the extent that the actuarial gains reduce cumulative unrecognised actuarial losses. Paragraph 58A prohibits the recognition of a loss in these circumstances. For examples of the application of this paragraph, see part C of the implementation guidance accompanying this Standard. An asset may arise where a defined benefit plan has been overfunded or in certain cases where actuarial gains are recognised. An entity recognises an asset in such cases because: (a) (b) (c) the entity controls a resource, which is the ability to use the surplus to generate future benefits; that control is a result of past events (contributions paid by the entity and service rendered by the employee); and future economic benefits are available to the entity in the form of a reduction in future contributions or a cash refund, either directly to the entity or indirectly to another plan in deficit.

59

60

The limit in paragraph 58(b) does not override the delayed recognition of certain actuarial losses (see paragraphs 92 and 93) and certain past service cost (see paragraph 96), other than as specified in paragraph 58A. However, that limit does override the transitional option in paragraph 155(b). Paragraph 120A(f)(iii) requires an entity to disclose any amount not recognised as an asset because of the limit in paragraph 58(b).
Example illustrating paragraph 60 A defined benefit plan has the following characteristics: Present value of the obligation Fair value of plan assets 1,100 (1,190) (90) Unrecognised actuarial losses (110)

Unrecognised past service cost Unrecognised increase in the liability on initial adoption of the Standard under paragraph 155(b) Negative amount determined under paragraph 54 Present value of available future refunds and reductions in future contributions The limit under paragraph 58(b) is computed as follows: Unrecognised actuarial losses Unrecognised past service cost Present value of available future refunds and reductions in future contributions Limit

(70)

(50) (320)

90

110 70

90 270

270 is less than 320. Therefore, the entity recognises an asset of 270 and discloses that the limit reduced the carrying amount of the asset by 50 (see paragraph 120A(f)(iii)).

Profit or loss
61 An entity shall recognise the net total of the following amounts in profit or loss, except to the extent that another Standard requires or permits their inclusion in the cost of an asset: (a) (b) (c) (d) (e) (f) (g) 62 current service cost (see paragraphs 6391); interest cost (see paragraph 82); the expected return on any plan assets (see paragraphs 105107) and on any reimbursement rights (see paragraph 104A); actuarial gains and losses, as required in accordance with the entity's accounting policy (see paragraphs 9293D); past service cost (see paragraph 96); the effect of any curtailments or settlements (see paragraphs 109 and 110); and the effect of the limit in paragraph 58(b), unless it is recognised outside profit or loss in accordance with paragraph 93C.

Other Standards require the inclusion of certain employee benefit costs within the cost of assets such as inventories or property, plant and equipment (see IAS 2 and IAS 16). Any post-employment benefit costs included in the cost of such assets include the appropriate proportion of the components listed in paragraph 61.

Recognition and measurement: present value of defined benefit obligations and current service cost
63 The ultimate cost of a defined benefit plan may be influenced by many variables, such as final salaries, employee turnover and mortality, medical cost trends and, for a funded plan, the investment earnings on the plan assets. The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of time. In order to measure the present value of the post-employment benefit obligations and the related current service cost, it is necessary to: (a) (b) (c) apply an actuarial valuation method (see paragraphs 6466); attribute benefit to periods of service (see paragraphs 6771); and make actuarial assumptions (see paragraphs 7291).

Actuarial valuation method

64 An entity shall use the Projected Unit Credit Method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. The Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit entitlement (see paragraphs 67 71) and measures each unit separately to build up the final obligation (see paragraphs 7291).
Example illustrating paragraph 65 A lump sum benefit is payable on termination of service and equal to 1% of final salary for each year of service. The salary in year 1 is 10,000 and is assumed to increase at 7% (compound) each year. The discount rate used is 10% per year. The following table shows how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores the additional adjustment needed to reflect the probability that the employee may leave the entity at an earlier or later date.

65

Year

Benefit attributed to: prior years current year (1% of final salary) current and prior years 0 131 262 393 524

131

131

131

131

131

131

262

393

524

655

Opening obligation Interest at 10% Current service cost Closing obligation Note:

89 89

89 9 98 196

196 20 108 324

324 33 119 476

476 48 131 655

1.

The opening obligation is the present value of benefit attributed to prior years. The current service cost is the present value of benefit attributed to the current year. The closing obligation is the present value of benefit attributed to current and prior years.

2.

3.

66

An entity discounts the whole of a post-employment benefit obligation, even if part of the obligation falls due within twelve months after the reporting period.

Attributing benefit to periods of service

EY Q&A

67

In determining the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost, an entity shall attribute benefit to periods of service under the plan's benefit formula. However, if an employee's service in later years will lead to a materially higher level of benefit than in earlier years, an entity shall attribute benefit on a straight-line basis from: (a) the date when service by the employee first leads to benefits under the plan (whether or not the benefits are conditional on further service); until the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases.

(b)

68

The Projected Unit Credit Method requires an entity to attribute benefit to the current period (in order to determine current service cost) and the current and prior periods (in order to determine the present value of defined benefit obligations). An entity attributes benefit to periods in which the obligation to provide post-employment benefits arises. That obligation arises as employees render services in return for postemployment benefits which an entity expects to pay in future reporting periods. Actuarial techniques allow an entity to measure that obligation with sufficient reliability to justify recognition of a liability.
Examples illustrating paragraph 68

1.

A defined benefit plan provides a lump-sum benefit of 100 payable on retirement for each year of service. A benefit of 100 is attributed to each year. The current service cost is the present value of 100. The present value of the defined benefit obligation is the present value of 100, multiplied by the number of years of service up to the end of the reporting period. If the benefit is payable immediately when the employee leaves the entity, the current service cost and the present value of the defined benefit obligation reflect the date at which the employee is expected to leave. Thus, because of the effect of discounting, they are less than the amounts that would be determined if the employee left at the end of the reporting period.

2.

A plan provides a monthly pension of 0.2% of final salary for each year of service. The pension is payable from the age of 65. Benefit equal to the present value, at the expected retirement date, of a monthly pension of 0.2% of the estimated final salary payable from the expected retirement date until the expected date of death is attributed to each year of service. The current service cost is the present value of that benefit. The present value of the defined benefit obligation is the present value of monthly pension payments of 0.2% of final salary, multiplied by the number of years of service up to the end of the reporting period. The current service cost and the present value of the defined benefit obligation are discounted because pension payments begin at the age of 65.

69

Employee service gives rise to an obligation under a defined benefit plan even if the benefits are conditional on future employment (in other words they are not vested). Employee service before the vesting date gives rise to a constructive obligation because, at the end of each successive reporting period, the amount of future service that an employee will have to render before becoming entitled to the benefit is reduced. In measuring its defined benefit obligation, an entity considers the probability that some employees may not satisfy any vesting requirements. Similarly, although certain post-employment benefits, for example, post-employment medical benefits, become payable only if a specified event occurs when an employee is no longer employed, an obligation is created when the employee renders service that will provide entitlement to the benefit if the specified event occurs. The probability that the specified event will occur affects the measurement of the obligation, but does not determine whether the obligation exists.
Examples illustrating paragraph 69 1. A plan pays a benefit of 100 for each year of service. The benefits vest after ten years of service. A benefit of 100 is attributed to each year. In each of the first ten years, the current service cost and the present value of the obligation reflect the probability that the employee may not complete ten years of service.

2.

A plan pays a benefit of 100 for each year of service, excluding service before the age of 25. The benefits vest immediately. No benefit is attributed to service before the age of 25 because service before that date does not lead to benefits (conditional or unconditional). A benefit of 100 is attributed to each subsequent year.

70

The obligation increases until the date when further service by the employee will lead to no material amount of further benefits. Therefore, all benefit is attributed to periods ending on or before that date. Benefit is attributed to individual accounting periods under the plan's benefit formula. However, if an employee's service in later years will lead to a materially higher level of benefit than in earlier years, an entity attributes benefit on a straight-line basis until the date when further service by the employee will lead to no material amount of further benefits. That is because the employee's service throughout the entire period will ultimately lead to benefit at that higher level.
Examples illustrating paragraph 70 1. A plan pays a lump-sum benefit of 1,000 that vests after ten years of service. The plan provides no further benefit for subsequent service. A benefit of 100 (1,000 divided by ten) is attributed to each of the first ten years. The current service cost in each of the first ten years reflects the probability that the employee may not complete ten years of service. No benefit is attributed to subsequent years. 2. A plan pays a lump-sum retirement benefit of 2,000 to all employees who are still employed at the age of 55 after twenty years of service, or who are still employed at the age of 65, regardless of their length of service. For employees who join before the age of 35, service first leads to benefits under the plan at the age of 35 (an employee could leave at the age of 30 and return at the age of 33, with no effect on the amount or timing of benefits). Those benefits are conditional on further service. Also, service beyond the age of 55 will lead to no material amount of further benefits. For these employees, the entity attributes benefit of 100 (2,000 divided by 20) to each year from the age of 35 to the age of 55. For employees who join between the ages of 35 and 45, service beyond twenty years will lead to no material amount of further benefits. For these employees, the entity attributes benefit of 100 (2,000 divided by 20) to each of the first twenty years. For an employee who joins at the age of 55, service beyond ten years will lead to no material amount of further benefits. For this employee, the entity attributes benefit of 200 (2,000 divided by 10) to each of the first ten years. For all employees, the current service cost and the present value of the obligation reflect the probability that the

employee may not complete the necessary period of service. 3. A post-employment medical plan reimburses 40% of an employee's post-employment medical costs if the employee leaves after more than ten and less than twenty years of service and 50% of those costs if the employee leaves after twenty or more years of service. Under the plan's benefit formula, the entity attributes 4% of the present value of the expected medical costs (40% divided by ten) to each of the first ten years and 1% (10% divided by ten) to each of the second ten years. The current service cost in each year reflects the probability that the employee may not complete the necessary period of service to earn part or all of the benefits. For employees expected to leave within ten years, no benefit is attributed. 4. A post-employment medical plan reimburses 10% of an employee's post-employment medical costs if the employee leaves after more than ten and less than twenty years of service and 50% of those costs if the employee leaves after twenty or more years of service. Service in later years will lead to a materially higher level of benefit than in earlier years. Therefore, for employees expected to leave after twenty or more years, the entity attributes benefit on a straight-line basis under paragraph 68. Service beyond twenty years will lead to no material amount of further benefits. Therefore, the benefit attributed to each of the first twenty years is 2.5% of the present value of the expected medical costs (50% divided by twenty). FFor employees expected to leave between ten and twenty years, the benefit attributed to each of the first ten years is 1% of the present value of the expected medical costs. For these employees, no benefit is attributed to service between the end of the tenth year and the estimated date of leaving. For employees expected to leave within ten years, no benefit is attributed.

71

Where the amount of a benefit is a constant proportion of final salary for each year of service, future salary increases will affect the amount required to settle the obligation that exists for service before the end of the reporting period, but do not create an additional obligation. Therefore: (a) for the purpose of paragraph 67(b), salary increases do not lead to further benefits, even though the amount of the benefits is dependent on final salary; and the amount of benefit attributed to each period is a constant proportion of the salary to which the benefit is linked.
Example illustrating paragraph 71 Employees are entitled to a benefit of 3% of final salary for each year of service before the age of 55. Benefit of 3% of estimated final salary is attributed to each year up to the

(b)

age of 55. This is the date when further service by the employee will lead to no material amount of further benefits under the plan. No benefit is attributed to service after that age.

Actuarial assumptions
72 73 Actuarial assumptions shall be unbiased and mutually compatible. Actuarial assumptions are an entity's best estimates of the variables that will determine the ultimate cost of providing post-employment benefits. Actuarial assumptions comprise: (a) demographic assumptions about the future characteristics of current and former employees (and their dependants) who are eligible for benefits. Demographic assumptions deal with matters such as: (i) (ii) (iii) (iv) (b) (i) (ii) (iii) mortality, both during and after employment; rates of employee turnover, disability and early retirement; the proportion of plan members with dependants who will be eligible for benefits; and claim rates under medical plans; and the discount rate (see paragraphs 7882); future salary and benefit levels (see paragraphs 8387); in the case of medical benefits, future medical costs, including, where material, the cost of administering claims and benefit payments (see paragraphs 8891); and the expected rate of return on plan assets (see paragraphs 105107).

financial assumptions, dealing with items such as:

(iv) 74 75

Actuarial assumptions are unbiased if they are neither imprudent nor excessively conservative. Actuarial assumptions are mutually compatible if they reflect the economic relationships between factors such as inflation, rates of salary increase, the return on plan assets and discount rates. For example, all assumptions which depend on a particular inflation level (such as assumptions about interest rates and salary and benefit increases) in any given future period assume the same inflation level in that period. An entity determines the discount rate and other financial assumptions in nominal (stated) terms, unless estimates in real (inflation-adjusted) terms are more reliable, for example, in a hyperinflationary economy (see IAS 29 Financial Reporting in Hyperinflationary Economies), or where the benefit is index-linked and there is a deep market in index-linked bonds of the same currency and term. Financial assumptions shall be based on market expectations, at the end of the reporting period, for the period over which the obligations are to be settled.

76

77

Actuarial assumptions: discount rate

EY Q&A

78

The rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at the end

of the reporting period on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the end of the reporting period) on government bonds shall be used. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations. 79 One actuarial assumption which has a material effect is the discount rate. The discount rate reflects the time value of money but not the actuarial or investment risk. Furthermore, the discount rate does not reflect the entity-specific credit risk borne by the entity's creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions. The discount rate reflects the estimated timing of benefit payments. In practice, an entity often achieves this by applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments and the currency in which the benefits are to be paid. In some cases, there may be no deep market in bonds with a sufficiently long maturity to match the estimated maturity of all the benefit payments. In such cases, an entity uses current market rates of the appropriate term to discount shorter term payments, and estimates the discount rate for longer maturities by extrapolating current market rates along the yield curve. The total present value of a defined benefit obligation is unlikely to be particularly sensitive to the discount rate applied to the portion of benefits that is payable beyond the final maturity of the available corporate or government bonds. Interest cost is computed by multiplying the discount rate as determined at the start of the period by the present value of the defined benefit obligation throughout that period, taking account of any material changes in the obligation. The present value of the obligation will differ from the liability recognised in the statement of financial position because the liability is recognised after deducting the fair value of any plan assets and because some actuarial gains and losses, and some past service cost, are not recognised immediately. [Part A of the implementation guidance accompanying this Standard illustrates the computation of interest cost, among other things.] Post-employment benefit obligations shall be measured on a basis that reflects: (a) (b) estimated future salary increases; the benefits set out in the terms of the plan (or resulting from any constructive obligation that goes beyond those terms) at the end of the reporting period; and estimated future changes in the level of any state benefits that affect the benefits payable under a defined benefit plan, if, and only if, either: (i) (ii) those changes were enacted before the end of the reporting period; or past history, or other reliable evidence, indicates that those state benefits will change in some predictable manner, for example, in line with future changes in general price levels or general salary levels.

80

81

82

Actuarial assumptions: salaries, benefits and medical costs

83

(c)

84 85

Estimates of future salary increases take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market. If the formal terms of a plan (or a constructive obligation that goes beyond those terms) require an entity to change benefits in future periods, the measurement of the obligation reflects those changes. This is the case when, for example: (a) the entity has a past history of increasing benefits, for example, to mitigate the effects of inflation, and there is no indication that this practice will change in the future; or actuarial gains have already been recognised in the financial statements and the entity is obliged, by either the formal terms of a plan (or a constructive obligation that goes beyond those terms) or legislation, to use any surplus in the plan for the benefit of plan participants (see paragraph 98(c)).

(b)

86

Actuarial assumptions do not reflect future benefit changes that are not set out in the formal terms of the plan (or a constructive obligation) at the end of the reporting period. Such changes will result in: (a) (b) past service cost, to the extent that they change benefits for service before the change; and current service cost for periods after the change, to the extent that they change benefits for service after the change.

87

Some post-employment benefits are linked to variables such as the level of state retirement benefits or state medical care. The measurement of such benefits reflects expected changes in such variables, based on past history and other reliable evidence. Assumptions about medical costs shall take account of estimated future changes in the cost of medical services, resulting from both inflation and specific changes in medical costs. Measurement of post-employment medical benefits requires assumptions about the level and frequency of future claims and the cost of meeting those claims. An entity estimates future medical costs on the basis of historical data about the entity's own experience, supplemented where necessary by historical data from other entities, insurance companies, medical providers or other sources. Estimates of future medical costs consider the effect of technological advances, changes in health care utilisation or delivery patterns and changes in the health status of plan participants. The level and frequency of claims is particularly sensitive to the age, health status and sex of employees (and their dependants) and may be sensitive to other factors such as geographical location. Therefore, historical data is adjusted to the extent that the demographic mix of the population differs from that of the population used as a basis for the historical data. It is also adjusted where there is reliable evidence that historical trends will not continue. Some post-employment health care plans require employees to contribute to the medical costs covered by the plan. Estimates of future medical costs take account of any such contributions, based on the terms of the plan at the end of the reporting period (or based on any constructive obligation that goes beyond those terms). Changes in those employee contributions result in past service cost or, where applicable, curtailments. The cost of meeting claims may be reduced by benefits from state or other medical providers (see paragraphs 83(c) and 87).

88

89

90

91

Actuarial gains and losses

EY Q&A

92

In measuring its defined benefit liability in accordance with paragraph 54, an entity shall, subject to paragraph 58A, recognise a portion (as specified in paragraph 93) of its actuarial gains and losses as income or expense if the net cumulative unrecognised actuarial gains and losses at the end of the previous reporting period exceeded the greater of: (a) (b) 10% of the present value of the defined benefit obligation at that date (before deducting plan assets); and 10% of the fair value of any plan assets at that date.

These limits shall be calculated and applied separately for each defined benefit plan. 93 The portion of actuarial gains and losses to be recognised for each defined benefit plan is the excess determined in accordance with paragraph 92, divided by the expected average remaining working lives of the employees participating in that plan. However, an entity may adopt any systematic method that results in faster recognition of actuarial gains and losses, provided that the same basis is applied to both gains and losses and the basis is applied consistently from period to period. An entity may apply such systematic methods to actuarial gains and losses even if they are within the limits specified in paragraph 92. If, as permitted by paragraph 93, an entity adopts a policy of recognising actuarial gains and losses in the period in which they occur, it may recognise them in other comprehensive income, in accordance with paragraphs 93B93D, providing it does so for: (a) (b) 93B
EY Q&A

93A

EY Q&A

all of its defined benefit plans; and all of its actuarial gains and losses.

Actuarial gains and losses recognised in other comprehensive income as permitted by paragraph 93A shall be presented in the statement of comprehensive income. An entity that recognises actuarial gains and losses in accordance with paragraph 93A shall also recognise any adjustments arising from the limit in paragraph 58(b) in other comprehensive income. Actuarial gains and losses and adjustments arising from the limit in paragraph 58(b) that have been recognised in other comprehensive income shall be recognised immediately in retained earnings. They shall not be reclassified to profit or loss in a subsequent period. Actuarial gains and losses may result from increases or decreases in either the present value of a defined benefit obligation or the fair value of any related plan assets. Causes of actuarial gains and losses include, for example: (a) unexpectedly high or low rates of employee turnover, early retirement or mortality or of increases in salaries, benefits (if the formal or constructive terms of a plan provide for inflationary benefit increases) or medical costs; the effect of changes in estimates of future employee turnover, early retirement or mortality or of increases in salaries, benefits (if the formal or

93C

93D

EY Q&A

94

(b)

constructive terms of a plan provide for inflationary benefit increases) or medical costs; (c) (d) 95 the effect of changes in the discount rate; and differences between the actual return on plan assets and the expected return on plan assets (see paragraphs 105107).

In the long term, actuarial gains and losses may offset one another. Therefore, estimates of post-employment benefit obligations may be viewed as a range (or 'corridor') around the best estimate. An entity is permitted, but not required, to recognise actuarial gains and losses that fall within that range. This Standard requires an entity to recognise, as a minimum, a specified portion of the actuarial gains and losses that fall outside a 'corridor' of plus or minus 10%. [Part A of the implementation guidance accompanying this Standard illustrates the treatment of actuarial gains and losses, among other things.] The Standard also permits systematic methods of faster recognition, provided that those methods satisfy the conditions set out in paragraph 93. Such permitted methods include, for example, immediate recognition of all actuarial gains and losses, both within and outside the 'corridor'. Paragraph 155(b)(iii) explains the need to consider any unrecognised part of the transitional liability in accounting for subsequent actuarial gains.

Past service cost

EY Q&A

96

In measuring its defined benefit liability under paragraph 54, an entity shall, subject to paragraph 58A, recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, an entity shall recognise past service cost immediately.

EY Q&A

97

Past service cost arises when an entity introduces a defined benefit plan that attributes benefits to past service or changes the benefits payable for past service under an existing defined benefit plan. Such changes are in return for employee service over the period until the benefits concerned are vested. Therefore, the entity recognises past service cost over that period, regardless of the fact that the cost refers to employee service in previous periods. The entity measures past service cost as the change in the liability resulting from the amendment (see paragraph 64). Negative past service cost arises when an entity changes the benefits attributable to past service so that the present value of the defined benefit obligation decreases.
Example illustrating paragraph 97 An entity operates a pension plan that provides a pension of 2% of final salary for each year of service. The benefits become vested after five years of service. On 1 January 20X5 the entity improves the pension to 2.5% of final salary for each year of service starting from 1 January 20X1. At the date of the improvement, the present value of the additional benefits for service from 1 January 20X1 to 1 January 20X5 is as follows: Employees with more than five years' service at 1/1/X5

150

Employees with less than five years' service at 1/1/X5 (average period until vesting: three years)

120 270

The entity recognises 150 immediately because those benefits are already vested. The entity recognises 120 on a straight-line basis over three years from 1 January 20X5.

98

Past service cost excludes: (a) the effect of differences between actual and previously assumed salary increases on the obligation to pay benefits for service in prior years (there is no past service cost because actuarial assumptions allow for projected salaries); underestimates and overestimates of discretionary pension increases when an entity has a constructive obligation to grant such increases (there is no past service cost because actuarial assumptions allow for such increases); estimates of benefit improvements that result from actuarial gains that have been recognised in the financial statements if the entity is obliged, by either the formal terms of a plan (or a constructive obligation that goes beyond those terms) or legislation, to use any surplus in the plan for the benefit of plan participants, even if the benefit increase has not yet been formally awarded (the resulting increase in the obligation is an actuarial loss and not past service cost, see paragraph 85(b)); the increase in vested benefits when, in the absence of new or improved benefits, employees complete vesting requirements (there is no past service cost because the entity recognised the estimated cost of benefits as current service cost as the service was rendered); and the effect of plan amendments that reduce benefits for future service (a curtailment).

(b)

(c)

(d)

(e) 99

An entity establishes the amortisation schedule for past service cost when the benefits are introduced or changed. It would be impracticable to maintain the detailed records needed to identify and implement subsequent changes in that amortisation schedule. Moreover, the effect is likely to be material only where there is a curtailment or settlement. Therefore, an entity amends the amortisation schedule for past service cost only if there is a curtailment or settlement. Where an entity reduces benefits payable under an existing defined benefit plan, the resulting reduction in the defined benefit liability is recognised as (negative) past service cost over the average period until the reduced portion of the benefits becomes vested. Where an entity reduces certain benefits payable under an existing defined benefit plan and, at the same time, increases other benefits payable under the plan for the same employees, the entity treats the change as a single net change.

100

101

Recognition and measurement: plan assets

Fair value of plan assets
EY Q&A

102

The fair value of any plan assets is deducted in determining the amount recognised in the statement of financial position under paragraph 54. When no market price is available, the fair value of plan assets is estimated; for example, by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligation). Plan assets exclude unpaid contributions due from the reporting entity to the fund, as well as any non-transferable financial instruments issued by the entity and held by the fund. Plan assets are reduced by any liabilities of the fund that do not relate to employee benefits, for example, trade and other payables and liabilities resulting from derivative financial instruments. Where plan assets include qualifying insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan, the fair value of those insurance policies is deemed to be the present value of the related obligations, as described in paragraph 54 (subject to any reduction required if the amounts receivable under the insurance policies are not recoverable in full). When, and only when, it is virtually certain that another party will reimburse some or all of the expenditure required to settle a defined benefit obligation, an entity shall recognise its right to reimbursement as a separate asset. The entity shall measure the asset at fair value. In all other respects, an entity shall treat that asset in the same way as plan assets. In the statement of comprehensive income, the expense relating to a defined benefit plan may be presented net of the amount recognised for a reimbursement. Sometimes, an entity is able to look to another party, such as an insurer, to pay part or all of the expenditure required to settle a defined benefit obligation. Qualifying insurance policies, as defined in paragraph 7, are plan assets. An entity accounts for qualifying insurance policies in the same way as for all other plan assets and paragraph 104A does not apply (see paragraphs 3942 and 104). When an insurance policy is not a qualifying insurance policy, that insurance policy is not a plan asset. Paragraph 104A deals with such cases: the entity recognises its right to reimbursement under the insurance policy as a separate asset, rather than as a deduction in determining the defined benefit liability recognised under paragraph 54; in all other respects, the entity treats that asset in the same way as plan assets. In particular, the defined benefit liability recognised under paragraph 54 is increased (reduced) to the extent that net cumulative actuarial gains (losses) on the defined benefit obligation and on the related reimbursement right remain unrecognised under paragraphs 92 and 93. Paragraph 120A(f)(iv) requires the entity to disclose a brief description of the link between the reimbursement right and the related obligation.
Example illustrating paragraphs 104A104C Present value of obligation Unrecognised actuarial gains 1,241 17

103

104

Reimbursements
104A

104B

104C

Liability recognised in statement of financial position Rights under insurance policies that exactly match the amount and timing of some of the benefits payable under the plan. Those benefits have a present value of 1,092.

1,258

1,092

The unrecognised actuarial gains of 17 are the net cumulative actuarial gains on the obligation and on the reimbursement rights.

104D

If the right to reimbursement arises under an insurance policy that exactly matches the amount and timing of some or all of the benefits payable under a defined benefit plan, the fair value of the reimbursement right is deemed to be the present value of the related obligation, as described in paragraph 54 (subject to any reduction required if the reimbursement is not recoverable in full). The expected return on plan assets is one component of the expense recognised in profit or loss. The difference between the expected return on plan assets and the actual return on plan assets is an actuarial gain or loss; it is included with the actuarial gains and losses on the defined benefit obligation in determining the net amount that is compared with the limits of the 10% 'corridor' specified in paragraph 92. The expected return on plan assets is based on market expectations, at the beginning of the period, for returns over the entire life of the related obligation. The expected return on plan assets reflects changes in the fair value of plan assets held during the period as a result of actual contributions paid into the fund and actual benefits paid out of the fund.
Example illustrating paragraph 106 At 1 January 20X1, the fair value of plan assets was 10,000 and net cumulative unrecognised actuarial gains were 760. On 30 June 20X1, the plan paid benefits of 1,900 and received contributions of 4,900. At 31 December 20X1, the fair value of plan assets was 15,000 and the present value of the defined benefit obligation was 14,792. Actuarial losses on the obligation for 20X1 were 60. At 1 January 20X1, the reporting entity made the following estimates, based on market prices at that date: % Interest and dividend income, after tax payable by the fund Realised and unrealised gains on plan assets (after tax) Administration costs

Return on plan assets

105

106

9.25

2.00 (1.00)

Expected rate of return

10.25

For 20X1, the expected and actual return on plan assets are as follows: Return on 10,000 held for 12 months at 10.25% Return on 3,000 held for six months at 5% (equivalent to 10.25% annually, compounded every six months) Expected return on plan assets for 20X1 Fair value of plan assets at 31 December 20X1 Less fair value of plan assets at 1 January 20X1 Less contributions received Add benefits paid Actual return on plan assets 1,025

150 1,175 15,000 (10,000) (4,900) 1,900 2,000

The difference between the expected return on plan assets (1,175) and the actual return on plan assets (2,000) is an actuarial gain of 825. Therefore, the cumulative net unrecognised actuarial gains are 1,525 (760 plus 825 less 60). Under paragraph 92, the limits of the corridor are set at 1,500 (greater of: (i) 10% of 15,000 and (ii) 10% of 14,792). In the following year (20X2), the entity recognises in profit or loss an actuarial gain of 25 (1,525 less 1,500) divided by the expected average remaining working life of the employees concerned. The expected return on plan assets for 20X2 will be based on market expectations at 1/1/X2 for returns over the entire life of the obligation.

107

In determining the expected and actual return on plan assets, an entity deducts expected administration costs, other than those included in the actuarial assumptions used to measure the obligation.

Business combinations
108 In a business combination, an entity recognises assets and liabilities arising from post-employment benefits at the present value of the obligation less the fair value of any plan assets (see IFRS 3 Business Combinations). The present value of the

obligation includes all of the following, even if the acquiree had not yet recognised them at the acquisition date: (a) (b) (c) actuarial gains and losses that arose before the acquisition date (whether or not they fell inside the 10% 'corridor'); past service cost that arose from benefit changes, or the introduction of a plan, before the acquisition date; and amounts that, under the transitional provisions of paragraph 155(b), the acquiree had not recognised.

Curtailments and settlements

109 An entity shall recognise gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on a curtailment or settlement shall comprise: (a) (b)
EY Q&A

any resulting change in the present value of the defined benefit obligation; any resulting change in the fair value of the plan assets; any related actuarial gains and losses and past service cost that, under paragraphs 92 and 96, had not previously been recognised.

(c) 110

Before determining the effect of a curtailment or settlement, an entity shall remeasure the obligation (and the related plan assets, if any) using current actuarial assumptions (including current market interest rates and other current market prices). A curtailment occurs when an entity either: (a) (b) 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.

111

A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan, or a reduction in the extent to which future salary increases are linked to the benefits payable for past service. Curtailments are often linked with a restructuring. When this is the case, an entity accounts for a curtailment at the same time as for a related restructuring. 111A When a plan amendment reduces benefits, only the effect of the reduction for future service is a curtailment. The effect of any reduction for past service is a negative past service cost. A settlement occurs when an entity enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan, for example, when a lump-sum cash payment is made to, or on behalf of, plan participants in exchange for their rights to receive specified postemployment benefits. In some cases, an entity acquires an insurance policy to fund some or all of the employee benefits relating to employee service in the current and prior periods. The acquisition of such a policy is not a settlement if the entity retains a legal or constructive obligation (see paragraph 39) to pay further amounts if the insurer

112

113

does not pay the employee benefits specified in the insurance policy. Paragraphs 104A104D deal with the recognition and measurement of reimbursement rights under insurance policies that are not plan assets. 114 A settlement occurs together with a curtailment if a plan is terminated such that the obligation is settled and the plan ceases to exist. However, the termination of a plan is not a curtailment or settlement if the plan is replaced by a new plan that offers benefits that are, in substance, identical. Where a curtailment relates to only some of the employees covered by a plan, or where only part of an obligation is settled, the gain or loss includes a proportionate share of the previously unrecognised past service cost and actuarial gains and losses (and of transitional amounts remaining unrecognised under paragraph 155(b)). The proportionate share is determined on the basis of the present value of the obligations before and after the curtailment or settlement, unless another basis is more rational in the circumstances. For example, it may be appropriate to apply any gain arising on a curtailment or settlement of the same plan to first eliminate any unrecognised past service cost relating to the same plan.
Example illustrating paragraph 115 An entity discontinues an operating segment and employees of the discontinued segment will earn no further benefits. This is a curtailment without a settlement. Using current actuarial assumptions (including current market interest rates and other current market prices) immediately before the curtailment, the entity has a defined benefit obligation with a net present value of 1,000, plan assets with a fair value of 820 and net cumulative unrecognised actuarial gains of 50. The entity had first adopted the Standard one year before. This increased the net liability by 100, which the entity chose to recognise over five years (see paragraph 155(b)). The curtailment reduces the net present value of the obligation by 100 to 900. Of the previously unrecognised actuarial gains and transitional amounts, 10% (100/1,000) relates to the part of the obligation that was eliminated through the curtailment. Therefore, the effect of the curtailment is as follows: Before curtailment Net present value of obligation Fair value of plan assets Curtailment gain After curtailment

115

EY Q&A

1,000 (820) 180

(100) (100) (5)

900 (820) 80 45

Unrecognised actuarial gains Unrecognised transitional amount (100 4/5)

50

(80)

(72)

Net liability recognised in statement of financial position

150

(97)

53

Presentation
Offset
116 An entity shall offset an asset relating to one plan against a liability relating to another plan when, and only when, the entity: (a) (b) has a legally enforceable right to use a surplus in one plan to settle obligations under the other plan; and intends either to settle the obligations on a net basis, or to realise the surplus in one plan and settle its obligation under the other plan simultaneously.

117

The offsetting criteria are similar to those established for financial instruments in IAS 32 Financial Instruments: Presentation. Some entities distinguish current assets and liabilities from non-current assets and liabilities. This Standard does not specify whether an entity should distinguish current and non-current portions of assets and liabilities arising from postemployment benefits.

Current/non-current distinction
118

Financial components of post-employment benefit costs

119
EY Q&A

This Standard does not specify whether an entity should present current service cost, interest cost and the expected return on plan assets as components of a single item of income or expense in the statement of comprehensive income.

Disclosure
120 An entity shall disclose information that enables users of financial statements to evaluate the nature of its defined benefit plans and the financial effects of changes in those plans during the period. An entity shall disclose the following information about defined benefit (a) (b) (c) the entity's accounting policy for recognising actuarial gains and losses. a general description of the type of plan. a reconciliation of opening and closing balances of the present value of the defined benefit obligation showing separately, if applicable, the effects during the period attributable to each of the following: (i) (ii) (iii) (iv) (v) current service cost, interest cost, contributions by plan participants, actuarial gains and losses, foreign currency exchange rate changes on plans measured in a currency different from the entity's presentation currency,

120A plans:

(vi) (vii) (viii) (ix) (x) (d)

benefits paid, past service cost, business combinations, curtailments and settlements.

an analysis of the defined benefit obligation into amounts arising from plans that are wholly unfunded and amounts arising from plans that are wholly or partly funded. a reconciliation of the opening and closing balances of the fair value of plan assets and of the opening and closing balances of any reimbursement right recognised as an asset in accordance with paragraph 104A showing separately, if applicable, the effects during the period attributable to each of the following: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) expected return on plan assets, actuarial gains and losses, foreign currency exchange rate changes on plans measured in a currency different from the entity's presentation currency, contributions by the employer, contributions by plan participants, benefits paid, business combinations and settlements.

(e)

(f)

a reconciliation of the present value of the defined benefit obligation in (c) and the fair value of the plan assets in (e) to the assets and liabilities recognised in the statement of financial position, showing at least: (i) (ii) (iii) (iv) the net actuarial gains or losses not recognised in the statement of financial position (see paragraph 92); the past service cost not recognised in the statement of financial position (see paragraph 96); any amount not recognised as an asset, because of the limit in paragraph 58(b); the fair value at the end of the reporting period of any reimbursement right recognised as an asset in accordance with paragraph 104A (with a brief description of the link between the reimbursement right and the related obligation); and the other amounts recognised in the statement of financial position.

(v) (g)

the total expense recognised in profit or loss for each of the following, and the line item(s) in which they are included: (i) current service cost;

(ii) (iii) (iv) (v) (vi) (vii) (viii) (h)

interest cost; expected return on plan assets; expected return on any reimbursement right recognised as an asset in accordance with paragraph 104A; actuarial gains and losses; past service cost; the effect of any curtailment or settlement; and the effect of the limit in paragraph 58(b).

the total amount recognised in other comprehensive income for each of the following: (i) (ii) actuarial gains and losses; and the effect of the limit in paragraph 58(b).

(i)

for entities that recognise actuarial gains and losses in other comprehensive income in accordance with paragraph 93A, the cumulative amount of actuarial gains and losses recognised in other comprehensive income. for each major category of plan assets, which shall include, but is not limited to, equity instruments, debt instruments, property, and all other assets, the percentage or amount that each major category constitutes of the fair value of the total plan assets. the amounts included in the fair value of plan assets for: (i) (ii) each category of the entity's own financial instruments; and any property occupied by, or other assets used by, the entity.

(j)

(k)

(l)

a narrative description of the basis used to determine the overall expected rate of return on assets, including the effect of the major categories of plan assets. the actual return on plan assets, as well as the actual return on any reimbursement right recognised as an asset in accordance with paragraph 104A. the principal actuarial assumptions used as at the end of the reporting period, including, when applicable: (i) (ii) (iii) the discount rates; the expected rates of return on any plan assets for the periods presented in the financial statements; the expected rates of return for the periods presented in the financial statements on any reimbursement right recognised as an asset in accordance with paragraph 104A; the expected rates of salary increases (and of changes in an index or other variable specified in the formal or constructive terms of a plan as the basis for future benefit increases); medical cost trend rates; and

(m)

(n)

(iv)

(v)

(vi)

any other material actuarial assumptions used.

An entity shall disclose each actuarial assumption in absolute terms (for example, as an absolute percentage) and not just as a margin between different percentages or other variables. (o) the effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates on: (i) (ii) the aggregate of the current service cost and interest cost components of net periodic post-employment medical costs; and the accumulated post-employment benefit obligation for medical costs.

For the purposes of this disclosure, all other assumptions shall be held constant. For plans operating in a high inflation environment, the disclosure shall be the effect of a percentage increase or decrease in the assumed medical cost trend rate of a significance similar to one percentage point in a low inflation environment. (p) the amounts for the current annual period and previous four annual periods of: (i) (ii) the present value of the defined benefit obligation, the fair value of the plan assets and the surplus or deficit in the plan; and the experience adjustments arising on: (A) the plan liabilities expressed either as (1) an amount or (2) a percentage of the plan liabilities at the end of the reporting period and the plan assets expressed either as (1) an amount or (2) a percentage of the plan assets at the end of the reporting period.

(B)

(q)

the employer's best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the annual period beginning after the reporting period.

121

Paragraph 120A(b) requires a general description of the type of plan. Such a description distinguishes, for example, flat salary pension plans from final salary pension plans and from post-employment medical plans. The description of the plan shall include informal practices that give rise to constructive obligations included in the measurement of the defined benefit obligation in accordance with paragraph 52. Further detail is not required. When an entity has more than one defined benefit plan, disclosures may be made in total, separately for each plan, or in such groupings as are considered to be the most useful. It may be useful to distinguish groupings by criteria such as the following: (a) (b) the geographical location of the plans, for example, by distinguishing domestic plans from foreign plans; or whether plans are subject to materially different risks, for example, by distinguishing flat salary pension plans from final salary pension plans and from post-employment medical plans.

122

When an entity provides disclosures in total for a grouping of plans, such disclosures are provided in the form of weighted averages or of relatively narrow ranges. 123 124 Paragraph 30 requires additional disclosures about multi-employer defined benefit plans that are treated as if they were defined contribution plans. Where required by IAS 24 an entity discloses information about: (a) (b) 125 related party transactions with post-employment benefit plans; and post-employment benefits for key management personnel.

Where required by IAS 37 an entity discloses information about contingent liabilities arising from post-employment benefit obligations.

5 A surplus is an excess of the fair value of the plan assets over the present value of the defined benefit obligation. EY IFRS Q&As IAS 19.67-1 - Attributing benefit to periods of service EY IFRS Q&As IAS 19.78-1 - Choice of discount rate in actuarial assumptions IAS 19.78-2 - Discount rate: determining whether there is a deep market for high quality corporate bonds EY IFRS Q&As IAS 19.92-1 - Recognition of actuarial gains and losses EY IFRS Q&As IAS 19.93A-1 and IAS 19.127-1 - Recognition of actuarial gains and losses on other long-term employee benefits EY IFRS Q&As IAS 19.93C-1 - Recognising the return on plan asset in income when ceiling test applies EY IFRS Q&As IAS 19.94-1 and IAS 19.97-1 - Accounting for federal subsidy on retiree health-care benefit plans EY IFRS Q&As IAS 19.96-1 - Negative past service cost versus curtailment EY IFRS Q&As IAS 19.97-1 and IAS 19.94-1 - Accounting for federal subsidy on retiree health-care benefit plans IAS 19.97-2 - Treatment of surplus distribution from a defined benefit plan EY IFRS Q&As IAS 19.102-1 - Fair value of plan assets EY IFRS Q&As IAS 19.109(c)-1 and IAS 19.115-1 - Accounting for previously unrecognised actuarial gains and losses on a full curtailment of a defined benefit plan

EY IFRS Q&As IAS 19.115-1 and IAS 19.109(c)-1 - Accounting for previously unrecognised actuarial gains and losses on a full curtailment of a defined benefit plan EY IFRS Q&As IAS 19.119-1 - Presentation of defined benefit plan expense

Other long-term employee benefits

126 Other long-term employee benefits include, for example: (a) (b) (c) (d) (e)
EY Q&A

long-term compensated absences such as long-service or sabbatical leave; jubilee or other long-service benefits; long-term disability benefits; profit-sharing and bonuses payable twelve months or more after the end of the period in which the employees render the related service; and deferred compensation paid twelve months or more after the end of the period in which it is earned.

127

The measurement of other long-term employee benefits is not usually subject to the same degree of uncertainty as the measurement of post-employment benefits. Furthermore, the introduction of, or changes to, other long-term employee benefits rarely causes a material amount of past service cost. For these reasons, this Standard requires a simplified method of accounting for other long-term employee benefits. This method differs from the accounting required for post-employment benefits as follows: (a) (b) actuarial gains and losses are recognised immediately and no 'corridor' is applied; and all past service cost is recognised immediately.

Recognition and measurement

128
EY Q&A

The amount recognised as a liability for other long-term employee benefits shall be the net total of the following amounts: (a) (b) the present value of the defined benefit obligation at the end of the reporting period (see paragraph 64); minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly (see paragraphs 102104).

In measuring the liability, an entity shall apply paragraphs 4991, excluding paragraphs 54 and 61. An entity shall apply paragraph 104A in recognising and measuring any reimbursement right. 129 For other long-term employee benefits, an entity shall recognise the net total of the following amounts as expense or (subject to paragraph 58) income, except to the extent that another Standard requires or permits their inclusion in the cost of an asset:

(a) (b) (c)

current service cost (see paragraphs 6391); interest cost (see paragraph 82); the expected return on any plan assets (see paragraphs 105107) and on any reimbursement right recognised as an asset (see paragraph 104A); actuarial gains and losses, which shall all be recognised immediately; past service cost, which shall all be recognised immediately; and the effect of any curtailments or settlements (see paragraphs 109 and 110).

(d) (e) (f)

EY Q&A

130

One form of other long-term employee benefit is long-term disability benefit. If the level of benefit depends on the length of service, an obligation arises when the service is rendered. Measurement of that obligation reflects the probability that payment will be required and the length of time for which payment is expected to be made. If the level of benefit is the same for any disabled employee regardless of years of service, the expected cost of those benefits is recognised when an event occurs that causes a long-term disability.

Disclosure
131 Although this Standard does not require specific disclosures about other long-term employee benefits, other Standards may require disclosures, for example, where the expense resulting from such benefits is material and so would require disclosure in accordance with IAS 1. When required by IAS 24, an entity discloses information about other long-term employee benefits for key management personnel.

EY IFRS Q&As IAS 19.127-1 and IAS 19.93A-1 - Recognition of actuarial gains and losses on other long-term employee benefits EY IFRS Q&As IAS 19.128-1 and IAS 19.7-4 - Bonuses with vesting conditions EY IFRS Q&As IAS 19.130-1 - Long-term disability benefits

Termination benefits
132 This Standard deals with termination benefits separately from other employee benefits because the event which gives rise to an obligation is the termination rather than employee service.

Recognition
133
EY Q&A

An entity shall recognise termination benefits as a liability and an expense when, and only when, the entity is demonstrably committed to either:

(a) (b) 134

terminate the employment of an employee or group of employees before the normal retirement date; or provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

An entity is demonstrably committed to a termination when, and only when, the entity has a detailed formal plan for the termination and is without realistic possibility of withdrawal. The detailed plan shall include, as a minimum: (a) (b) (c) the location, function, and approximate number of employees whose services are to be terminated; the termination benefits for each job classification or function; and the time at which the plan will be implemented. Implementation shall begin as soon as possible and the period of time to complete implementation shall be such that material changes to the plan are not likely.

135

An entity may be committed, by legislation, by contractual or other agreements with employees or their representatives or by a constructive obligation based on business practice, custom or a desire to act equitably, to make payments (or provide other benefits) to employees when it terminates their employment. Such payments are termination benefits. Termination benefits are typically lump-sum payments, but sometimes also include: (a) (b) enhancement of retirement benefits or of other post-employment benefits, either indirectly through an employee benefit plan or directly; and salary until the end of a specified notice period if the employee renders no further service that provides economic benefits to the entity.

136

Some employee benefits are payable regardless of the reason for the employee's departure. The payment of such benefits is certain (subject to any vesting or minimum service requirements) but the timing of their payment is uncertain. Although such benefits are described in some countries as termination indemnities, or termination gratuities, they are post-employment benefits, rather than termination benefits and an entity accounts for them as post-employment benefits. Some entities provide a lower level of benefit for voluntary termination at the request of the employee (in substance, a post-employment benefit) than for involuntary termination at the request of the entity. The additional benefit payable on involuntary termination is a termination benefit. Termination benefits do not provide an entity with future economic benefits and are recognised as an expense immediately. Where an entity recognises termination benefits, the entity may also have to account for a curtailment of retirement benefits or other employee benefits (see paragraph 109).

137 138

Measurement
139 Where termination benefits fall due more than 12 months after the reporting period, they shall be discounted using the discount rate specified in paragraph 78.

140

In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits shall be based on the number of employees expected to accept the offer.

Disclosure
141 Where there is uncertainty about the number of employees who will accept an offer of termination benefits, a contingent liability exists. As required by IAS 37 an entity discloses information about the contingent liability unless the possibility of an outflow in settlement is remote. As required by IAS 1, an entity discloses the nature and amount of an expense if it is material. Termination benefits may result in an expense needing disclosure in order to comply with this requirement. Where required by IAS 24 an entity discloses information about termination benefits for key management personnel. [Deleted]

142

143

144-152

EY IFRS Q&As IAS 19.133-2 - Early retirement scheme

Transitional provisions
153 This section specifies the transitional treatment for defined benefit plans. Where an entity first adopts this Standard for other employee benefits, the entity applies IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. On first adopting this Standard, an entity shall determine its transitional liability for defined benefit plans at that date as: (a) (b) the present value of the obligation (see paragraph 64) at the date of adoption; minus the fair value, at the date of adoption, of plan assets (if any) out of which the obligations are to be settled directly (see paragraphs 102104); minus any past service cost that, under paragraph 96, shall be recognised in later periods.

154

(c) 155

If the transitional liability is more than the liability that would have been recognised at the same date under the entity's previous accounting policy, the entity shall make an irrevocable choice to recognise that increase as part of its defined benefit liability under paragraph 54: (a) (b) immediately, under IAS 8; or as an expense on a straight-line basis over up to five years from the date of adoption. If an entity chooses (b), the entity shall: (i) apply the limit described in paragraph 58(b) in measuring any asset recognised in the statement of financial position;

(ii)

disclose at the end of each reporting period: (1) the amount of the increase that remains unrecognised; and (2) the amount recognised in the current period; limit the recognition of subsequent actuarial gains (but not negative past service cost) as follows. If an actuarial gain is to be recognised under paragraphs 92 and 93, an entity shall recognise that actuarial gain only to the extent that the net cumulative unrecognised actuarial gains (before recognition of that actuarial gain) exceed the unrecognised part of the transitional liability; and include the related part of the unrecognised transitional liability in determining any subsequent gain or loss on settlement or curtailment.

(iii)

(iv)

If the transitional liability is less than the liability that would have been recognised at the same date under the entity's previous accounting policy, the entity shall recognise that decrease immediately under IAS 8. 156 On the initial adoption of the Standard, the effect of the change in accounting policy includes all actuarial gains and losses that arose in earlier periods even if they fall inside the 10% 'corridor' specified in paragraph 92.
Example illustrating paragraphs 154 to 156 At 31 December 1998, an entity's statement of financial position includes a pension liability of 100. The entity adopts the Standard as of 1 January 1999, when the present value of the obligation under the Standard is 1,300 and the fair value of plan assets is 1,000. On 1 January 1993, the entity had improved pensions (cost for non-vested benefits: 160; and average remaining period at that date until vesting: 10 years). The transitional effect is as follows: Present value of the obligation Fair value of plan assets Less: past service cost to be recognised in later periods (160 4/10) Transitional liability Liability already recognised Increase in liability The entity may choose to recognise the increase of 136 either immediately or over up to 5 years. The choice is irrevocable. 1,300 (1,000)

(64) 236 100 136

At 31 December 1999, the present value of the obligation under the Standard is 1,400 and the fair value of plan assets is 1,050. Net cumulative unrecognised actuarial gains since the date of adopting the Standard are 120. The expected average remaining working life of the employees participating in the plan was eight years. The entity has adopted a policy of recognising all actuarial gains and losses immediately, as permitted by paragraph 93. The effect of the limit in paragraph 155(b)(iii) is as follows. Net cumulative unrecognised actuarial gains Unrecognised part of transitional liability (136 4/5) Maximum gain to be recognised (paragraph 155(b)(iii)) 120 (109)

11

Effective date
157 This Standard becomes operative for financial statements covering periods beginning on or after 1 January 1999, except as specified in paragraphs 159159C. Earlier adoption is encouraged. If an entity applies this Standard to retirement benefit costs for financial statements covering periods beginning before 1 January 1999, the entity shall disclose the fact that it has applied this Standard instead of IAS 19 Retirement Benefit Costs approved in 1993. This Standard supersedes IAS 19 Retirement Benefit Costs approved in 1993. The following become operative for annual financial statements 6 covering periods beginning on or after 1 January 2001: (a) the revised definition of plan assets in paragraph 7 and the related definitions of assets held by a long-term employee benefit fund and qualifying insurance policy; and the recognition and measurement requirements for reimbursements in paragraphs 104A, 128 and 129 and related disclosures in paragraphs 120A(f)(iv), 120A(g)(iv), 120A(m) and 120A(n)(iii).

158 159

(b)

Earlier adoption is encouraged. If earlier adoption affects the financial statements, an entity shall disclose that fact. 159A The amendment in paragraph 58A becomes operative for annual financial statements covering periods ending on or after 31 May 2002. Earlier adoption is encouraged. If earlier adoption affects the financial statements, an entity shall disclose that fact.

159B

An entity shall apply the amendments in paragraphs 32A, 3434B, 61 and 120121 for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies these amendments for a period beginning before 1 January 2006, it shall disclose that fact. The option in paragraphs 93A93D may be used for annual periods ending on or after 16 December 2004. An entity using the option for annual periods beginning before 1 January 2006 shall also apply the amendments in paragraphs 32A, 34 34B, 61 and 120121. Paragraphs 7, 8(b), 32B, 97, 98 and 111 were amended and paragraph 111A was added by Improvements to IFRSs issued in May 2008. An entity shall apply the amendments in paragraphs 7, 8(b) and 32B for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact. An entity shall apply the amendments in paragraphs 97, 98, 111 and 111A to changes in benefits that occur on or after 1 January 2009. IAS 8 applies when an entity changes its accounting policies to reflect the changes specified in paragraphs 159159D. In applying those changes retrospectively, as required by IAS 8, the entity treats those changes as if they had been applied at the same time as the rest of this Standard. The exception is that an entity may disclose the amounts required by paragraph 120A(p) as the amounts are determined for each annual period prospectively from the first annual period presented in the financial statements in which the entity first applies the amendments in paragraph 120A. IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraphs 93A93D, 106 (Example) and 120A. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period.

159C

159D

160

161

Appendix Amendments to other Standards

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2006. If an entity applies the amendments to IAS 19 for an earlier period, these amendments shall be applied for that earlier period. ***** The amendments contained in this appendix when this amended Standard was issued in 2004 have been incorporated into the text of IFRS 1 and IASs 1 and 24 published in this volume. 2011 IFRS Foundation

6 Paragraphs 159 and 159A refer to 'annual financial statements' in line with more explicit language for writing effective dates adopted in 1998. Paragraph 157 refers to 'financial statements'.

Basis for Conclusions on IAS 19 Employee Benefits

The original text has been marked up to reflect the revision of IAS 39 Financial Instruments: Recognition and Measurement in 2003 and the issue of IFRS 2 Share-based Payment in 2004 and Improvements to IFRSs in May 2008; new text is underlined and deleted text is struck through. The terminology has not been amended to reflect the changes made by IAS 1 Presentation of Financial Statements (as revised in 2007). For greater clarity and for consistency with other IFRSs, paragraph numbers have been prefixed BC. This Basis for Conclusions gives the Board's reasons for rejecting certain alternative solutions. Individual Board members gave greater weight to some factors than to others. Paragraphs BC9ABC9D, BC10ABC10K, BC48ABC48EE and BC85ABC85E were added in relation to the amendment to IAS 19 issued in December 2004. Paragraphs BC4ABC4C, BC62A, BC62B and BC97 were added by Improvements to IFRSs issued in May 2008. References to the Framework are to IASCs Framework for the Preparation and Presentation of Financial Statements, adopted by the IASB in 2001. In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting.

Background
BC1 The IASC Board (the 'Board') approved IAS 19 Accounting for Retirement Benefits in the Financial Statements of Employers, in 1983. Following a limited review, the Board approved a revised Standard IAS 19 Retirement Benefit Costs ('the old IAS 19'), in 1993. The Board began a more comprehensive review of IAS 19 in November 1994. In August 1995, the IASC Staff published an Issues Paper on Retirement Benefit and Other Employee Benefit Costs. In October 1996, the Board approved E54 Employee Benefits, with a comment deadline of 31 January 1997. The Board received more than 130 comment letters on E54 from over 20 countries. The Board approved IAS 19 Employee Benefits ('the new IAS 19') in January 1998. The Board believes that the new IAS 19 is a significant improvement over the old IAS 19. Nevertheless, the Board believes that further improvement may be possible in due course. In particular, several Board members believe that it would be preferable to recognise all actuarial gains and losses immediately in a statement of financial performance. However, the Board believes that such a solution is not feasible for actuarial gains and losses until the Board makes further progress on various issues relating to the reporting of financial performance. When the Board makes further progress with those issues, it may decide to revisit the treatment of actuarial gains and losses.

BC2

Summary of changes to IAS 19

BC3 The most significant feature of the new IAS 19 is a market-based approach to measurement. The main consequences are that the discount rate is based on market yields at the balance sheet date and any plan assets are measured at fair value. In summary, the main changes from the old IAS 19 are the following: (a) there is a revised definition of defined contribution plans and related guidance (see paragraphs BC5 and BC6 below), including more detailed guidance than the old IAS 19 on multi-employer plans and state plans (see paragraphs BC7 BC10 below) and on insured plans; there is improved guidance on the balance sheet treatment of liabilities and assets arising from defined benefit plans (see paragraphs BC11BC14 below).

(b)

(c)

defined benefit obligations should be measured with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the balance sheet date (see paragraphs BC15 and BC16 below); projected benefit methods are eliminated and there is a requirement to use the accrued benefit method known as the Projected Unit Credit Method (see paragraphs BC17BC22 below). The use of an accrued benefit method makes it essential to give detailed guidance on the attribution of benefit to individual periods of service (see paragraphs BC23BC25 below); the rate used to discount post-employment benefit obligations and other longterm employee benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the balance sheet date) on government bonds should be used. The currency and term of the corporate bonds or government bonds should be consistent with the currency and estimated term of the postemployment benefit obligations (see paragraphs BC26BC34 below); defined benefit obligations should consider all benefit increases that are set out in the terms of the plan (or result from any constructive obligation that goes beyond those terms) at the balance sheet date (see paragraphs BC35 BC37 below); an entity should recognise, as a minimum, a specified portion of those actuarial gains and losses (arising from both defined benefit obligations and any related plan assets) that fall outside a 'corridor'. An entity is permitted, but not required, to adopt certain systematic methods of faster recognition. Such methods include, among others, immediate recognition of all actuarial gains and losses (see paragraphs BC38BC48 below); an entity should recognise past service cost on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately, an entity should recognise past service cost immediately (see paragraphs BC49BC62 below); plan assets should be measured at fair value. Fair value is estimated by discounting expected future cash flows only if no market price is available (see paragraphs BC66BC75 below); amounts recognised by the reporting entity as an asset should not exceed the net total of: (i) (ii) any unrecognised actuarial losses and past service cost; and the present value of any economic benefits available in the form of refunds from the plan or reductions in contributions to the plan (see paragraphs BC76BC78 below);

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

curtailment and settlement losses should be recognised not when it is probable that the settlement or curtailment will occur, but when the settlement or curtailment occurs (see paragraphs BC79 and BC80 below); improvements have been made to the disclosure requirements (see paragraphs BC81BC85 below);

(l)

(m)

the new IAS 19 deals with all employee benefits, whereas IAS 19 deals only with retirement benefits and certain similar post-employment benefits (see paragraphs BC86BC94 below); and the transitional provisions for defined benefit plans are amended (see paragraphs BC95 and BC96 below).

(n)

The Board rejected a proposal to require recognition of an 'additional minimum liability' in certain cases (see paragraphs BC63BC65 below).

Summary of changes to E54

BC4 The new IAS 19 makes the following principal changes to the proposals in E54: (a) an entity should attribute benefit to periods of service following the plan's benefit formula, but the straight-line basis should be used if employee service in later years leads to a materially higher level of benefit than in earlier years (see paragraphs BC23BC25 below); actuarial assumptions should include estimates of benefit increases not if there is reliable evidence that they will occur, but only if the increases are set out in the terms of the plan (or result from any constructive obligation that goes beyond those terms) at the balance sheet date (see paragraphs BC35 BC37 below); actuarial gains and losses that fall outside the 10% 'corridor' need not be recognised immediately as proposed in E54. The minimum amount that an entity should recognise for each defined benefit plan is the part that fell outside the 'corridor' as at the end of the previous reporting period, divided by the expected average remaining working lives of the employees participating in that plan. The new IAS 19 also permits certain systematic methods of faster recognition. Such methods include, among others, immediate recognition of all actuarial gains and losses (see paragraphs BC38BC48 below); E54 set out two alternative treatments for past service cost and indicated that the Board would eliminate one of these treatments after considering comments on the Exposure Draft. One treatment was immediate recognition of all past service cost. The other treatment was immediate recognition for former employees, with amortisation for current employees over the remaining working lives of the current employees. The new IAS 19 requires that an entity should recognise past service cost on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately an entity should recognise past service cost immediately (see paragraphs BC49BC59 below); the effect of 'negative plan amendments' should not be recognised immediately (as proposed in E54) but treated in the same way as past service cost (see paragraphs BC60BC62 below); non-transferable securities issued by the reporting entity have been excluded from the definition of plan assets (see paragraphs BC67 and BC68 below); plan assets should be measured at fair value rather than market value, as defined in E54 (see paragraphs BC69 and BC70 below); plan administration costs (not just investment administration costs, as proposed in E54) are to be deducted in determining the return on plan assets (see paragraph BC75 below);

(b)

(c)

(d)

(e)

(f) (g) (h)

(i)

the limit on the recognition of plan assets has been changed in two respects from the proposals in E54. The limit does not override the corridor for actuarial losses or the deferred recognition of past service cost. Also, the limit refers to available refunds or reductions in future contributions. E54 referred to the expected refunds or reductions in future contributions (see paragraphs BC76BC78 below); unlike E54, the new IAS 19 does not specify whether an income statement should present interest cost and the expected return on plan assets in the same line item as current service cost. The new IAS 19 requires an entity to disclose the line items in which they are included; improvements have been made to the disclosure requirements (see paragraphs BC81BC85 below); the guidance in certain areas (particularly termination benefits, curtailments and settlements, profit-sharing and bonus plans and various references to constructive obligations) has been conformed to the proposals in E59 Provisions, Contingent Liabilities and Contingent Assets. Also, the Board has added explicit guidance on the measurement of termination benefits, requiring discounting for termination benefits not payable within one year (see paragraphs BC91BC93 below); and on initial adoption of the new IAS 19, there is a transitional option to recognise an increase in defined benefit liabilities over not more than five years. The new IAS 19 is operative for financial statements covering periods beginning on or after 1 January 1999, rather than 2001 as proposed in E54 (see paragraphs BC95 and BC96 below).

(j)

(k) (l)

(m)

Definitions
BC4A The IASB identified a perceived inconsistency in the definitions when a compensated absence that is due to the employee but is not expected to occur for more than twelve months is neither an 'other long-term employee benefit' nor a 'short-term compensated absence' as previously defined in paragraphs 7 and 8(b). The IASB decided to amend those definitions and replace the term 'fall due' to remove this potential gap as part of the Improvements to IFRSs issued in May 2008. Noting respondents' comments on the exposure draft of proposed Improvements to International Financial Reporting Standards published in 2007, the IASB concluded that the critical factor in distinguishing between long-term and shortterm benefits is the timing of the expected settlement. Therefore, the IASB clarified that other long-term benefits are those that are not due to be settled within twelve months after the end of the period in which the employees rendered the service. The IASB noted that this distinction between short-term and long-term benefits is consistent with the current/non-current liability distinction in IAS 1 Presentation of Financial Statements. However, the fact that for presentation purposes a long-term benefit may be split into current and non-current portions does not change how the entire long-term benefit would be measured.

BC4B

BC4C

Defined contribution plans (paragraphs 2447 of the Standard)

BC5 The old IAS 19 defined:

(a)

defined contribution plans as retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to contributions to a fund together with investment earnings thereon; and defined benefit plans as retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to a formula usually based on employees' remuneration and/or years of service.

(b)

The Board considers these definitions unsatisfactory because they focus on the benefit receivable by the employee, rather than on the cost to the entity. The definitions in paragraph 7 of the new IAS 19 focus on the downside risk that the cost to the entity may increase. The definition of defined contribution plans does not exclude the upside potential that the cost to the entity may be less than expected. BC6 The new IAS 19 does not change the accounting for defined contribution plans, which is straightforward because there is no need for actuarial assumptions and an entity has no possibility of any actuarial gain or loss. The new IAS 19 gives no guidance equivalent to paragraphs 20 (past service costs in defined contribution plans) and 21 (curtailment of defined contribution plans) of the old IAS 19. The Board believes that these issues are not relevant to defined contribution plans.

Multi-employer plans and state plans (paragraphs 2938 of the Standard)

BC7 An entity may not always be able to obtain sufficient information from multiemployer plans to use defined benefit accounting. The Board considered three approaches to this problem: (a) (b) use defined contribution accounting for some and defined benefit accounting for others; use defined contribution accounting for all multi-employer plans, with additional disclosure where the multi-employer plan is a defined benefit plan; or use defined benefit accounting for those multi-employer plans that are defined benefit plans. However, where sufficient information is not available to use defined benefit accounting, an entity should disclose that fact and use defined contribution accounting.

(c)

BC8

The Board believes that there is no conceptually sound, workable and objective way to draw a distinction so that an entity could use defined contribution accounting for some multi-employer defined benefit plans and defined benefit accounting for others. Also, the Board believes that it is misleading to use defined contribution accounting for multi-employer plans that are defined benefit plans. This is illustrated by the case of French banks that used defined contribution accounting for defined benefit pension plans operated under industry-wide collective agreements on a payas-you-go basis. Demographic trends made these plans unsustainable and a major reform in 1993 replaced these by defined contribution arrangements for future service. At this point, the banks were compelled to quantify their obligations. Those obligations had previously existed, but had not been recognised as liabilities. The Board concluded that an entity should use defined benefit accounting for those multi-employer plans that are defined benefit plans. However, where sufficient information is not available to use defined benefit accounting, an entity should disclose that fact and use defined contribution accounting. The Board agreed to

BC9

apply the same principle to state plans. The new IAS 19 notes that most state plans are defined contribution plans.

Multi-employer plans: amendment issued by the IASB in December 2004

BC9A In April 2004 the International Financial Reporting Interpretations Committee (IFRIC) published a draft Interpretation, D6 Multi-employer Plans, which proposed the following guidance on how multi-employer plans should apply defined benefit accounting, if possible: (a) (b) the plan should be measured in accordance with IAS 19 using assumptions appropriate for the plan as a whole the plan should be allocated to plan participants so that they recognise an asset or liability that reflects the impact of the surplus or deficit on the future contributions from the participant.

BC9B

The concerns raised by respondents to D6 about the availability of the information about the plan as a whole, the difficulties in making an allocation as proposed and the resulting lack of usefulness of the information provided by defined benefit accounting were such that the IFRIC decided not to proceed with the proposals. The International Accounting Standards Board (IASB), when discussing group plans (see paragraphs BC10ABC10K) noted that, if there were a contractual agreement between a multi-employer plan and its participants on how a surplus would be distributed or deficit funded, the same principle that applied to group plans should apply to multi-employer plans, ie the participants should recognise an asset or liability. In relation to the funding of a deficit, the IASB regarded this principle as consistent with the recognition of a provision in accordance with IAS 37. The IASB therefore decided to clarify in IAS 19 that, if a participant in a defined benefit multi-employer plan: (a) accounts for that participation on a defined contribution basis in accordance with paragraph 30 of IAS 19 because it had insufficient information to apply defined benefit accounting but has a contractual agreement that determined how a surplus would be distributed or a deficit funded,

BC9C

BC9D

(b)

it recognises the asset or liability arising from that contractual agreement. BC10 In response to comments on E54, the Board considered a proposal to exempt wholly owned subsidiaries (and their parents) participating in group defined benefit plans from the recognition and measurement requirements in their individual nonconsolidated financial statements, on cost-benefit grounds. The Board concluded that such an exemption would not be appropriate.

Application of IAS 19 in the separate or individual financial statements of entities in a consolidated group: amendment issued by the IASB in December 2004
BC10A Some constituents asked the IASB to consider whether entities participating in a group defined benefit plan should, in their separate or individual financial statements, either have an unqualified exemption from defined benefit accounting or be able to treat the plan as a multi-employer plan.

BC10B

In developing the exposure draft, the IASB did not agree that an unqualified exemption from defined benefit accounting for group defined benefit plans in the separate or individual financial statements of group entities was appropriate. In principle, the requirements of International Financial Reporting Standards (IFRSs) should apply to separate or individual financial statements in the same way as they apply to any other financial statements. Following that principle would mean amending IAS 19 to allow group entities that participate in a plan that meets the definition of a multi-employer plan, except that the participants are under common control, to be treated as participants in a multi-employer plan in their separate or individual financial statements. However, in the exposure draft, the IASB concluded that entities within a group should always be presumed to be able to obtain the necessary information about the plan as a whole. This implies that, in accordance with the requirements for multi-employer plans, defined benefit accounting should be applied if there is a consistent and reliable basis for allocating the assets and obligations of the plan. In the exposure draft, the IASB acknowledged that entities within a group might not be able to identify a consistent and reliable basis for allocating the plan that results in the entity recognising an asset or liability that reflects the extent to which a surplus or deficit in the plan would affect their future contributions. This is because there may be uncertainty in the terms of the plan about how surpluses will be used or deficits funded across the consolidated group. However, the IASB concluded that entities within a group should always be able to make at least a consistent and reasonable allocation, for example on the basis of a percentage of pensionable pay. The IASB then considered whether, for some group entities, the benefits of defined benefit accounting using a consistent and reasonable basis of allocation were worth the costs involved in obtaining the information. The IASB decided that this was not the case for entities that meet criteria similar to those in IAS 27 Consolidated and Separate Financial Statements for the exemption from preparing consolidated financial statements. The exposure draft therefore proposed that: (a) entities that participate in a plan that would meet the definition of a multiemployer plan except that the participants are under common control, and that meet the criteria set out in paragraph 34 of IAS 19 as proposed to be amended in the exposure draft, should be treated as if they were participants in a multi-employer plan. This means that if there is no consistent and reliable basis for allocating the assets and liabilities of the plan, the entity should use defined contribution accounting and provide additional disclosures. all other entities that participate in a plan that would meet the definition of a multi-employer plan except that the participants are under common control should be required to apply defined benefit accounting by making a consistent and reasonable allocation of the assets and liabilities of the plan.

BC10C

BC10D

BC10E

BC10F

(b)

BC10G

Respondents to the exposure draft generally supported the proposal to extend the requirements in IAS 19 on multi-employer plans to group entities. However, many disagreed with the criteria proposed in the exposure draft, for the following reasons: (a) the proposed amendments and the interaction with D6 were unclear.

(b) (c) (d) (e) BC10H

the provisions for multi-employer accounting should be extended to a listed parent company. the provisions for multi-employer accounting should be extended to group entities with listed debt. the provisions for multi-employer plan accounting should be extended to all group entities, including partly-owned subsidiaries. there should be a blanket exemption from defined benefit accounting for all group entities.

The IASB agreed that the proposed requirements for group plans were unnecessarily complex. The IASB also concluded that it would be better to treat group plans separately from multi-employer plans because of the difference in information available to the participants: in a group plan information about the plan as a whole should generally be available. The IASB further noted that, if the parent wishes to comply with IFRSs in its separate financial statements or wishes its subsidiaries to comply with IFRSs in their individual financial statements, then it must obtain and provide the necessary information for the purposes of disclosure, at least. The IASB noted that, if there were a contractual agreement or stated policy on charging the net defined benefit cost to group entities, that agreement or policy would determine the cost for each entity. If there is no such contractual agreement or stated policy, the entity that is the sponsoring employer by default bears the risk relating to the plan. The IASB therefore concluded that a group plan should be allocated to the individual entities within a group in accordance with any contractual agreement or stated policy. If there is no such agreement or policy, the net defined benefit cost is allocated to the sponsoring employer. The other group entities recognise a cost equal to any contribution collected by the sponsoring employer. This approach has the advantages of (a) all group entities recognising the cost they have to bear for the defined benefit promise and (b) being simple to apply. The IASB also noted that participation in a group plan is a related party transaction. As such, disclosures are required to comply with IAS 24 Related Party Disclosures. IAS 24 requires an entity to disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements. The IASB noted that information about each of (a) the policy on charging the defined benefit cost, (b) the policy on charging current contributions and (c) the status of the plan as a whole was required to give an understanding of the potential effect of the participation in the group plan on the entity's separate or individual financial statements.

BC10I

BC10J BC10K

Defined benefit plans

Recognition and measurement: balance sheet (paragraphs 49 60 of the Standard)
BC11 Paragraph 54 of the new IAS 19 summarises the recognition and measurement of liabilities arising from defined benefit plans and paragraphs 55107 of the new IAS 19 describe various aspects of recognition and measurement in greater detail. Although the old IAS 19 did not deal explicitly with the recognition of retirement benefit obligations as a liability, it is likely that most entities would recognise a

liability for retirement benefit obligations at the same time under both Standards. However, the two Standards differ in the measurement of the resulting liability. BC12 Paragraph 54 of the new IAS 19 is based on the definition of, and recognition criteria for, a liability in IASC's Framework for the Preparation and Presentation of Financial Statements (the 'Framework'). The Framework defines a liability as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. The Framework states that an item which meets the definition of a liability should be recognised if: (a) (b) BC13 (a) it is probable that any future economic benefit associated with the item will flow from the entity; and the item has a cost or value that can be measured with reliability. an entity has an obligation under a defined benefit plan when an employee has rendered service in return for the benefits promised under the plan. Paragraphs 6771 of the new IAS 19 deal with the attribution of benefit to individual periods of service in order to determine whether an obligation exists; an entity should use actuarial assumptions to determine whether the entity will pay those benefits in future reporting periods (see paragraphs 7291 of the Standard); and actuarial techniques allow an entity to measure the obligation with sufficient reliability to justify recognition of a liability.

The Board believes that:

(b)

(c) BC14

The Board believes that an obligation exists even if a benefit is not vested, in other words if the employee's right to receive the benefit is conditional on future employment. For example, consider an entity that provides a benefit of 100 to employees who remain in service for two years. At the end of the first year, the employee and the entity are not in the same position as at the beginning of the first year, because the employee will only need to work for one year, instead of two, before becoming entitled to the benefit. Although there is a possibility that the benefit may not vest, that difference is an obligation and, in the Board's view, should result in the recognition of a liability at the end of the first year. The measurement of that obligation at its present value reflects the entity's best estimate of the probability that the benefit may not vest. Some national standards permit entities to measure the present value of defined benefit obligations at a date up to three months before the balance sheet date. However, the Board decided that entities should measure the present value of defined benefit obligations, and the fair value of any plan assets, at the balance sheet date. Therefore, if an entity carries out a detailed valuation of the obligation at an earlier date, the results of that valuation should be updated to take account of any significant transactions and other significant changes in circumstances up to the balance sheet date. In response to comments on E54, the Board has clarified that full actuarial valuation is not required at the balance sheet date, provided that an entity determines the present value of defined benefit obligations and the fair value of any plan assets with sufficient regularity that the amounts recognised in the

Measurement date (paragraphs 56 and 57 of the Standard)

BC15

BC16

financial statements do not differ materially from the amounts that would be determined at the balance sheet date.

Actuarial valuation method (paragraphs 6466 of the Standard)

BC17 The old IAS 19 permitted both accrued benefit valuation methods (benchmark treatment) and projected benefit valuation methods (allowed alternative treatment). The two groups of methods are based on fundamentally different, and incompatible, views of the objectives of accounting for employee benefits: (a) accrued benefit methods (sometimes known as 'benefit', 'unit credit' or 'single premium' methods) determine the present value of employee benefits attributable to service to date; but projected benefit methods (sometimes described as 'cost', 'level contribution' or 'level premium' methods) project the estimated total obligation at retirement and then calculate a level funding cost, taking into account investment earnings, that will provide the total benefit at retirement.

(b)

The differences between the two groups of methods were discussed in more detail in the Issues Paper published in August 1995. BC18 The two methods may have similar effects on the income statement, but only by chance or if the number and age distribution of participating employees remains relatively stable over time. There can be significant differences in the measurement of liabilities under the two groups of methods. For these reasons, the Board believes that a requirement to use a single group of methods will significantly enhance comparability. The Board considered whether it should continue to permit projected benefit methods as an allowed alternative treatment while introducing a new requirement to disclose information equivalent to the use of an accrued benefit method. However, the Board believes that disclosure cannot rectify inappropriate accounting in the balance sheet and income statement. The Board concluded that projected benefit methods are not appropriate, and should be eliminated, because such methods: (a) (b) (c) focus on future events (future service) as well as past events, whereas accrued benefit methods focus only on past events; generate a liability which does not represent a measure of any real amount and can be described only as the result of cost allocations; and do not attempt to measure fair value and cannot, therefore, be used in a business combination, as required by IAS 22 Business Combinations.11 If an entity uses an accrued benefit method in a business combination, it would not be feasible for the entity to use a projected benefit method to account for the same obligation in subsequent periods.

BC19

BC20

The old IAS 19 did not specify which forms of accrued benefit valuation method should be permitted under the benchmark treatment. The new IAS 19 requires a single accrued benefit method: the most widely used accrued benefit method, which is known as the Projected Unit Credit Method (sometimes known as the 'accrued benefit method pro-rated on service' or as the 'benefit/years of service method'). The Board acknowledges that the elimination of projected benefit methods, and of accrued benefit methods other than the Projected Unit Credit Method, has cost

BC21

implications. However, with modern computing power, it will be only marginally more expensive to run a valuation on two different bases and the advantages of improved comparability will outweigh the additional cost. BC22 An actuary may sometimes, for example, in the case of a closed fund, recommend a method other than the Projected Unit Credit Method for funding purposes. Nevertheless, the Board agreed to require the use of the Projected Unit Credit Method in all cases because that method is more consistent with the accounting objectives laid down in the new IAS 19.

Attributing benefit to periods of service (paragraphs 6771 of the Standard)

BC23 As explained in paragraph BC13 above, the Board believes that an entity has an obligation under a defined benefit plan when an employee has rendered service in return for the benefits promised under the plan. The Board considered three alternative methods of accounting for a defined benefit plan which attributes different amounts of benefit to different periods: (a) apportion the entire benefit on a straight-line basis over the entire period to the date when further service by the employee will lead to no material amount of further benefits under the plan, other than from further salary increases; apportion benefit under the plan's benefit formula. However, a straight-line basis should be used if the plan's benefit formula attributes a materially higher benefit to later years; or apportion the benefit that vests at each interim date on a straight-line basis over the period between that date and the previous interim vesting date.

(b)

(c)

The three methods are illustrated by the following two examples.

Example 1 A plan provides a benefit of 400 if an employee retires after more than ten and less than twenty years of service and a further benefit of 100 (500 in total) if an employee retires after twenty or more years of service. The amounts attributed to each year are as follows: Years 110 Method (a) Method (b) Method (c) Example 2 A plan provides a benefit of 100 if an employee retires after more than ten and less than twenty years of service and a further benefit of 400 (500 in total) if an employee retires after twenty or more years of service. 25 40 40 Years 1120 25 10 10

The amounts attributed to each year are as follows: Years 110 Method (a) Method (b) Method (c) 25 25 10 Years 1120 25 25 40

Note: this plan attributes a higher benefit to later years, whereas the plan in Example 1 attributes a higher benefit to earlier years.

BC24

In approving E54, the Board adopted method (a) on the grounds that this method was the most straightforward and that there were no compelling reasons to attribute different amounts of benefit to different years, as would occur under either of the other methods. A significant minority of commentators on E54 favoured following the benefit formula (or alternatively, if the final Standard were to retain straight-line attribution, the recognition of a minimum liability based on the benefit formula). The Board agreed with these comments and decided to require method (b).

BC25

Actuarial assumptions: discount rate (paragraphs 7882 of the Standard)

BC26 One of the most important issues in measuring defined benefit obligations is the selection of the criteria used to determine the discount rate. According to the old IAS 19, the discount rate assumed in determining the actuarial present value of promised retirement benefits reflected the long-term rates, or an approximation thereto, at which such obligations are expected to be settled. The Board rejected the use of such a rate because it is not relevant for an entity that does not contemplate settlement and it is an artificial construct, as there may be no market for settlement of such obligations. Some believe that, for funded benefits, the discount rate should be the expected rate of return on the plan assets actually held by a plan, on the grounds that the return on plan assets represents faithfully the expected ultimate cash outflow (ie future contributions). The Board rejected this approach because the fact that a fund has chosen to invest in certain kinds of asset does not affect the nature or amount of the obligation. In particular, assets with a higher expected return carry more risk and an entity should not recognise a smaller liability merely because the plan has chosen to invest in riskier assets with a higher expected return. Therefore, the measurement of the obligation should be independent of the measurement of any plan assets actually held by a plan. The most significant decision is whether the discount rate should be a risk-adjusted rate (one that attempts to capture the risks associated with the obligation). Some argue that the most appropriate risk-adjusted rate is given by the expected return on an appropriate portfolio of plan assets that would, over the long term, provide an effective hedge against such an obligation. An appropriate portfolio might include:

BC27

BC28

(a) (b) (c)

fixed-interest securities for obligations to former employees to the extent that the obligations are not linked, in form or in substance, to inflation; index-linked securities for index-linked obligations to former employees; and equity securities for benefit obligations towards current employees that are linked to final pay. This is based on the view that the long-term performance of equity securities is correlated with general salary progression in the economy as a whole and hence with the final-pay element of a benefit obligation.

It is important to note that the portfolio actually held need not necessarily be an appropriate portfolio in this sense. Indeed, in some countries, regulatory constraints may prevent plans from holding an appropriate portfolio. For example, in some countries, plans are required to hold a certain proportion of their assets in the form of fixed-interest securities. Furthermore, if an appropriate portfolio is a valid reference point, it is equally valid for both funded and unfunded plans. BC29 Those who support using the interest rate on an appropriate portfolio as a riskadjusted discount rate argue that: (a) portfolio theory suggests that the expected return on an asset (or the interest rate inherent in a liability) is related to the undiversifiable risk associated with that asset (or liability). Undiversifiable risk reflects not the variability of the returns (payments) in absolute terms but the correlation of the returns (or payments) with the returns on other assets. If cash inflows from a portfolio of assets react to changing economic conditions over the long term in the same way as the cash outflows of a defined benefit obligation, the undiversifiable risk of the obligation (and hence the appropriate discount rate) must be the same as that of the portfolio of assets; an important aspect of the economic reality underlying final salary plans is the correlation between final salary and equity returns that arises because they both reflect the same long-term economic forces. Although the correlation is not perfect, it is sufficiently strong that ignoring it will lead to systematic overstatement of the liability. Also, ignoring this correlation will result in misleading volatility due to short-term fluctuations between the rate used to discount the obligation and the discount rate that is implicit in the fair value of the plan assets. These factors will deter entities from operating defined benefit plans and lead to switches from equities to fixed interest investments. Where defined benefit plans are largely funded by equities, this could have a serious impact on share prices. This switch will also increase the cost of pensions. There will be pressure on companies to remove the apparent (but nonexistent) shortfall; if an entity settled its obligation by purchasing an annuity, the insurance company would determine the annuity rates by looking to a portfolio of assets that provides cash inflows that substantially offset all the cash flows from the benefit obligation as those cash flows fall due. Therefore, the expected return on an appropriate portfolio measures the obligation at an amount that is close to its market value. In practice, it is not possible to settle a final pay obligation by buying annuities since no insurance company would insure a final pay decision that remained at the discretion of the person insured. However, evidence can be derived from the purchase/sale of businesses that include a final salary pension scheme. In this situation the vendor and

(b)

(c)

purchaser would negotiate a price for the pension obligation by reference to its present value, discounted at the rate of return on an appropriate portfolio; (d) although investment risk is present even in a well-diversified portfolio of equity securities, any general decline in securities would, in the long term, be reflected in declining salaries. Since employees accepted that risk by agreeing to a final salary plan, the exclusion of that risk from the measurement of the obligation would introduce a systematic bias into the measurement; and time-honoured funding practices in some countries use the expected return on an appropriate portfolio as the discount rate. Although funding considerations are distinct from accounting issues, the long history of this approach calls for careful scrutiny of any other proposed approach. it is incorrect to look at returns on assets in determining the discount rate for liabilities; if a sufficiently strong correlation between asset returns and final pay actually existed, a market for final salary obligations would develop, yet this has not happened. Furthermore, where any such apparent correlation does exist, it is not clear whether the correlation results from shared characteristics of the portfolio and the obligations or from changes in the contractual pension promise; the return on equity securities does not correlate with other risks associated with defined benefit plans, such as variability in mortality, timing of retirement, disability and adverse selection; in order to evaluate a liability with uncertain cash flows, an entity would normally use a discount rate lower than the risk-free rate, yet the expected return on an appropriate portfolio is higher than the risk-free rate; the assertion that final salary is strongly correlated with asset returns implies that final salary will tend to decrease if asset prices fall, yet experience shows that salaries tend not to decline; the notion that equities are not risky in the long term, and the associated notion of long-term value, are based on the fallacious view that the market always bounces back after a crash. Shareholders do not get credit in the market for any additional long-term value if they sell their shares today. Even if some correlation exists over long periods, benefits must be paid as they become due. An entity that funds its obligations with equity securities runs the risk that equity prices may be down when benefits must be paid. Also, the hypothesis that the real return on equities is uncorrelated with inflation does not mean that equities offer a risk-free return, even in the long term; and the expected long-term rate of return on an appropriate portfolio cannot be determined sufficiently objectively in practice to provide an adequate basis for an accounting standard. The practical difficulties include specifying the characteristics of the appropriate portfolio, selecting the time horizon for estimating returns on the portfolio and estimating those returns.

(e)

BC30

Those who oppose a risk-adjusted rate argue that: (a) (b)

(c)

(d)

(e)

(f)

(g)

BC31

The Board has not identified clear evidence that the expected return on an appropriate portfolio of assets provides a relevant and reliable indication of the risks associated with a defined benefit obligation, or that such a rate can be determined with reasonable objectivity. Therefore, the Board decided that the

discount rate should reflect the time value of money but should not attempt to capture those risks. Furthermore, the discount rate should not reflect the entity's own credit rating, as otherwise an entity with a lower credit rating would recognise a smaller liability. The rate that best achieves these objectives is the yield on high quality corporate bonds. In countries where there is no deep market in such bonds, the yield on government bonds should be used. BC32 Another issue is whether the discount rate should be the long-term average rate, based on past experience over a number of years, or the current market yield at the balance sheet date for an obligation of the appropriate term. Those who support a long-term average rate argue that: (a) a long-term approach is consistent with the transaction-based historical cost approach that is either required or permitted in other International Accounting Standards; point in time estimates pursue a level of precision that is not attainable in practice and lead to volatility in reported profit that may not be a faithful representation of changes in the obligation but may simply reflect an unavoidable inability to predict accurately the future events that are anticipated in making period-to-period measures; for an obligation based on final salary, neither market annuity prices nor simulation by discounting expected future cash flows can determine an unambiguous annuity price; and over the long term, a suitable portfolio of plan assets may provide a reasonably effective hedge against an employee benefit obligation that increases in line with salary growth. However, there is much less assurance that, at a given measurement date, market interest rates will match the salary growth built into the obligation.

(b)

(c)

(d)

BC33

The Board decided that the discount rate should be determined by reference to market yields at the balance sheet date as: (a) there is no rational basis for expecting efficient market prices to drift towards any assumed long-term average, because prices in a market of sufficient liquidity and depth incorporate all publicly available information and are more relevant and reliable than an estimate of long-term trends by any individual market participant; the cost of benefits attributed to service during the current period should reflect prices of that period; if expected future benefits are defined in terms of projected future salaries that reflect current estimates of future inflation rates, the discount rate should be based on current market interest rates (in nominal terms), as these also reflect current market expectations of inflation rates; and if plan assets are measured at a current value (ie fair value), the related obligation should be discounted at a current discount rate in order to avoid introducing irrelevant volatility through a difference in the measurement basis.

(b) (c)

(d)

BC34

The reference to market yields at the balance sheet date does not mean that shortterm discount rates should be used to discount long-term obligations. The new IAS 19 requires that the discount rate should reflect market yields (at the balance sheet date) on bonds with an expected term consistent with the expected term of the obligations.

Actuarial assumptions: salaries, benefits and medical costs (paragraphs 8391 of the Standard)
BC35 Some argue that estimates of future increases in salaries, benefits and medical costs should not affect the measurement of assets and liabilities until they are granted, on the grounds that: (a) (b) BC36 future increases are future events; and such estimates are too subjective.

The Board believes that the assumptions are used not to determine whether an obligation exists, but to measure an existing obligation on a basis which provides the most relevant measure of the estimated outflow of resources. If no increase is assumed, this is an implicit assumption that no change will occur and it would be misleading to assume no change if an entity expects a change. The new IAS 19 maintains the existing requirement that measurement should take account of estimated future salary increases. The Board also believes that increases in future medical costs can be estimated with sufficient reliability to justify incorporation of those estimated increases in the measurement of the obligation. E54 proposed that measurement should also assume future benefit increases if there is reliable evidence that those benefit increases will occur. In response to comments, the Board concluded that future benefit increases do not give rise to a present obligation and that there would be no reliable or objective way of deciding which future benefit increases were reliable enough to be incorporated in actuarial assumptions. Therefore, the new IAS 19 requires that future benefit increases should be assumed only if they are set out in the terms of the plan (or result from any constructive obligation that goes beyond the formal terms) at the balance sheet date.

BC37

Actuarial gains and losses (paragraphs 9295 of the Standard)

BC38 The Board considered five methods of accounting for actuarial gains and losses: (a) deferred recognition in both the balance sheet and the income statement over the average expected remaining working life of the employees concerned (see paragraph BC39 below); immediate recognition both in the balance sheet and outside the income statement in equity (IAS 1 Presentation of Financial Statements sets out requirements for the presentation or disclosure of such movements in equity)12 (see paragraphs BC40 and BC41 below); a 'corridor' approach, with immediate recognition in both the balance sheet and the income statement for amounts falling outside a 'corridor' (see paragraph BC42 below); a modified 'corridor' approach with deferred recognition of items within the 'corridor' and immediate recognition for amounts falling outside the 'corridor' (see paragraph BC43 below); and deferred recognition for amounts falling outside a 'corridor' (see paragraphs BC44BC46 below).

(b)

(c)

(d)

(e) BC39

The old IAS 19 required a deferred recognition approach: actuarial gains and losses were recognised as an expense or as income systematically over the expected remaining working lives of those employees. Arguments for this approach are that:

(a)

immediate recognition (even when reduced by a 'corridor') can cause volatile fluctuations in liability and expense and implies a degree of accuracy which can rarely apply in practice. This volatility may not be a faithful representation of changes in the obligation but may simply reflect an unavoidable inability to predict accurately the future events that are anticipated in making period-toperiod measures; and in the long term, actuarial gains and losses may offset one another. Actuarial assumptions are projected over many years, for example, until the expected date of death of the last pensioner, and are, accordingly, long-term in nature. Departures from the assumptions do not normally denote definite changes in the underlying assets or liability, but are indicators which, if not reversed, may accumulate to denote such changes in the future. They are not a gain or loss of the period but a fine tuning of the cost that emerges over the long term; and the immediate recognition of actuarial gains and losses in the income statement would cause unacceptable volatility. deferred recognition and 'corridor' approaches are complex, artificial and difficult to understand. They add to cost by requiring entities to keep complex records. They also require complex provisions to deal with curtailments, settlements and transitional matters. Also, as such approaches are not used for other uncertain assets and liabilities, it is not clear why they should be used for post-employment benefits; it requires less disclosure because all actuarial gains and losses are recognised; it represents faithfully the entity's financial position. An entity will report an asset only when a plan is in surplus and a liability only when a plan has a deficit. Paragraph 95 of the Framework12A notes that the application of the matching concept does not allow the recognition of items in the balance sheet which do not meet the definition of assets or liabilities. Deferred actuarial losses do not represent future benefits and hence do not meet the Framework's definition of an asset, even if offset against a related liability. Similarly, deferred actuarial gains do not meet the Framework's definition of a liability; the balance sheet treatment is consistent with the proposals in the Financial Instruments Steering Committee's March 1997 Discussion Paper Accounting for Financial Assets and Liabilities; it generates income and expense items that are not arbitrary and that have information content; it is not reasonable to assume that all actuarial gains or losses will be offset in future years; on the contrary, if the original actuarial assumptions are still valid, future fluctuations will, on average, offset each other and thus will not offset past fluctuations; deferred recognition attempts to avoid volatility. However, a financial measure should be volatile if it purports to represent faithfully transactions and other events that are themselves volatile. Moreover, concerns about volatility could be addressed adequately by using a second performance statement or a statement of changes in equity;

(b)

(c) BC40

Arguments for an immediate recognition approach are that: (a)

(b) (c)

(d)

(e) (f)

(g)

(h)

immediate recognition is consistent with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Under IAS 8, the effect of changes in accounting estimates should be included in profit or loss for the period if the change affects the current period only but not future periods. Actuarial gains and losses are not an estimate of future events, but result from events before the balance sheet date that resolve a past estimate (experience adjustments) or from changes in the estimated cost of employee service before the balance sheet date (changes in actuarial assumptions); any amortisation period (or the width of a 'corridor') is arbitrary. In addition, the amount of benefit remaining at a subsequent date is not objectively determinable and this makes it difficult to carry out an impairment test on any expense that is deferred; and in some cases, even supporters of amortisation or the 'corridor' may prefer immediate recognition. One possible example is where plan assets are stolen. Another possible example is a major change in the basis of taxing pension plans (such as the abolition of dividend tax credits for UK pension plans in 1997). However, although there might be agreement on extreme cases, it would prove very difficult to develop objective and non-arbitrary criteria for identifying such cases.

(i)

(j)

BC41

The Board found the immediate recognition approach attractive. However, the Board believes that it is not feasible to use this approach for actuarial gains and losses until the Board resolves substantial issues about performance reporting. These issues include: (a) (b) (c) (d) whether financial performance includes those items that are recognised directly in equity; the conceptual basis for determining whether items are recognised in the income statement or directly in equity; whether net cumulative actuarial losses should be recognised in the income statement, rather than directly in equity; and whether certain items reported initially in equity should subsequently be reported in the income statement ('recycling').

When the Board makes further progress with those issues, it may decide to revisit the treatment of actuarial gains and losses. BC42 E54 proposed a 'corridor approach'. Under this approach, an entity does not recognise actuarial gains and losses to the extent that the cumulative unrecognised amounts do not exceed 10% of the present value of the obligation (or, if greater, 10% of the fair value of plan assets). Arguments for such approaches are that they: (a) acknowledge that estimates of post-employment benefit obligations are best viewed as a range around the best estimate. As long as any new best estimate of the liability stays within that range, it would be difficult to say that the liability has really changed. However, once the new best estimate moves outside that range, it is not reasonable to assume that actuarial gains or losses will be offset in future years. If the original actuarial assumptions are still valid, future fluctuations will, on average, offset each other and thus will not offset past fluctuations;

(b)

are easy to understand, do not require entities to keep complex records and do not require complex provisions to deal with settlements, curtailments and transitional matters; result in the recognition of an actuarial loss only when the liability (net of plan assets) has increased in the current period and an actuarial gain only when the (net) liability has decreased. By contrast, amortisation methods sometimes result in the recognition of an actuarial loss even if the (net) liability is unchanged or has decreased in the current period, or an actuarial gain even if the (net) liability is unchanged or has increased; represent faithfully transactions and other events that are themselves volatile. Paragraph 34 of the Framework12B notes that it may be relevant to recognise items and to disclose the risk of error surrounding their recognition and measurement despite inherent difficulties either in identifying the transactions and other events to be measured or in devising and applying measurement and presentation techniques that can convey messages that correspond with those transactions and events; and are consistent with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Under IAS 8, the effect of changes in accounting estimates is included in profit or loss for the period if the change affects the current period only but not future periods. Actuarial gains and losses are not an estimate of future events, but arise from events before the balance sheet date that resolve a past estimate (experience adjustments) or from changes in the estimated cost of employee service before the balance sheet date (changes in actuarial assumptions).

(c)

(d)

(e)

BC43

Some commentators on E54 argued that an entity should, over a period, recognise actuarial gains and losses within the 'corridor'. Otherwise, certain gains and losses would be deferred permanently, even though it would be more appropriate to recognise them (for example, to recognise gains and losses that persist for a number of years without reversal or to avoid a cumulative effect on the income statement where the net liability returns ultimately to the original level). However, the Board concluded that such a requirement would add complexity for little benefit. The 'corridor' approach was supported by fewer than a quarter of the commentators on E54. In particular, the vast majority of preparers argued that the resulting volatility would not be a realistic portrayal of the long-term nature of post-employment benefit obligations. The Board concluded that there was not sufficient support from its constituents for such a significant change in current practice. Approximately one third of the commentators on E54 supported the deferred recognition approach. Approximately another third of the respondents proposed a version of the corridor approach which applies deferred recognition to amounts falling outside the corridor. It results in less volatility than the corridor alone or deferred recognition alone. In the absence of any compelling conceptual reasons for choosing between these two approaches, the Board concluded that the latter approach would be a pragmatic means of avoiding a level of volatility that many of its constituents consider to be unrealistic. In approving the final Standard, the Board decided to specify the minimum amount of actuarial gains or losses to be recognised, but permit any systematic method of faster recognition, provided that the same basis is applied to both gains and losses

BC44

BC45

BC46

and the basis is applied consistently from period to period. The Board was persuaded by the following arguments: (a) both the extent of volatility reduction and the mechanism adopted to effect it are essentially practical issues. From a conceptual point of view, the Board found the immediate recognition approach attractive. Therefore, the Board saw no reason to preclude entities from adopting faster methods of recognising actuarial gains and losses. In particular, the Board did not wish to discourage entities from adopting a consistent policy of recognising all actuarial gains and losses immediately. Similarly, the Board did not wish to discourage national standard-setters from requiring immediate recognition; and where mechanisms are in place to reduce volatility, the amount of actuarial gains and losses recognised during the period is largely arbitrary and has little information content. Also, the new IAS 19 requires an entity to disclose both the recognised and unrecognised amounts. Therefore, although there is some loss of comparability in allowing entities to use different mechanisms, the needs of users are not likely to be compromised if faster (and systematic) recognition methods are permitted.

(b)

BC47

The Board noted that changes in the fair value of any plan assets are, in effect, the results of changing estimates by market participants and are, therefore, inextricably linked with changes in the present value of the obligation. Consequently, the Board decided that changes in the fair value of plan assets are actuarial gains and losses and should be treated in the same way as the changes in the related obligation. The width of a 'corridor' (ie the point at which it becomes necessary to recognise gains and losses) is arbitrary. To enhance comparability, the Board decided that the width of the 'corridor' should be consistent with the current requirement in those countries that have already adopted a 'corridor' approach, notably the USA. The Board noted that a significantly narrower 'corridor' would suffer from the disadvantages of the 'corridor', without being large enough to generate the advantages. On the other hand, a significantly wider 'corridor' would lack credibility.

BC48

An additional option for the recognition of actuarial gains and losses: amendment adopted by the IASB in December 2004
BC48A In 2004 the IASB published an exposure draft proposing an additional option for the recognition of actuarial gains and losses. The proposed option allowed an entity that recognised actuarial gains and losses in full in the period in which they occurred to recognise them outside profit or loss in a statement of recognised income and expense. The argument for immediate recognition of actuarial gains and losses is that they are economic events of the period. Recognising them when they occur provides a faithful representation of those events. It also results in a faithful representation of the plan in the balance sheet. In contrast, when recognition is deferred, the information provided is partial and potentially misleading. Furthermore, any net cumulative deferred actuarial losses can give rise to a debit item in the balance sheet that does not meet the definition of an asset. Similarly, any net cumulative deferred actuarial gains can give rise to a credit item in the balance sheet that does not meet the definition of a liability.

BC48B

BC48C

The arguments put forward for deferred recognition of actuarial gains and losses are, as noted above: (a) immediate recognition can cause volatile fluctuations in the balance sheet and income statement. It implies a degree of accuracy of measurement that rarely applies in practice. As a result, the volatility may not be a faithful representation of changes in the defined benefit asset or liability, but may simply reflect an unavoidable inability to predict accurately the future events that are anticipated in making period-to-period measurements. in the long term, actuarial gains and losses may offset one another. whether or not the volatility resulting from immediate recognition reflects economic events of the period, it is too great to be acceptable in the financial statements. It could overwhelm the profit or loss and financial position of other business operations.

(b) (c)

BC48D

The IASB does not accept arguments (a) and (b) as reasons for deferred recognition. It believes that the defined benefit asset or liability can be measured with sufficient reliability to justify its recognition. Recognition in a transparent manner of the current best estimate of the events of the period and the resulting asset and liability provides better information than non-recognition of an arbitrary amount of that current best estimate. Further, it is not reasonable to assume that existing actuarial gains and losses will be offset in future years. This implies an ability to predict future market prices. The IASB also does not accept argument (c) in relation to the balance sheet. If the post-employment benefit amounts are large and volatile, the postemployment plan must be large and risky compared with other business operations. However, the IASB accepts that requiring actuarial gains and losses to be recognised in full in profit or loss in the period in which they occur is not appropriate at this time because the IASB has yet to develop fully the appropriate presentation of profit or loss and other items of recognised income and expense. The IASB noted that the UK standard FRS 17 Retirement Benefits requires recognition of actuarial gains and losses in full as they occur outside profit or loss in a statement of total recognised gains and losses. The IASB does not believe that immediate recognition of actuarial gains and losses outside profit or loss is necessarily ideal. However, it provides more transparent information than deferred recognition. The IASB therefore decided to propose such an option pending further developments on the presentation of profit or loss and other items of recognised income and expense. IAS 1 (as revised in 2003) requires income and expense recognised outside profit or loss to be presented in a statement of changes in equity.13 The statement of changes in equity must present the total income and expense for the period, being the profit or loss for the period and each item of income and expense for the period that, as required or permitted by other IFRSs, is recognised directly in equity. IAS 1 also permits these items, together with the effect of changes in accounting policies and the correction of errors, to be the only items shown in the statement of changes in equity. To emphasise its view that actuarial gains and losses are items of income or expense, the IASB decided that actuarial gains and losses that are recognised outside profit or loss must be presented in the form of a statement of changes in equity that excludes transactions with equity holders acting in their capacity as

BC48E

BC48F

BC48G

BC48H

BC48I

equity holders. The IASB decided that this statement should be titled 'the statement of recognised income and expense'. BC48J The responses from the UK to the exposure draft strongly supported the proposed option. The responses from outside the UK were divided. The main concerns expressed were: (a) (b) (c) (d) (e) (f) BC48K the option is not a conceptual improvement compared with immediate recognition of actuarial gains and losses in profit or loss. the option prejudges issues relating to IAS 1 that should be resolved in the project on reporting comprehensive income. adding options to Standards is not desirable and obstructs comparability. the IASB should not tinker with IAS 19 before undertaking a comprehensive review of the Standard. the option could lead to divergence from US GAAP. deferred recognition is preferable to immediate recognition.

The IASB agrees that actuarial gains and losses are items of income and expense. However, it believes that it would be premature to require their immediate recognition in profit or loss before a comprehensive review of both accounting for post-employment benefits and reporting comprehensive income. The requirement that actuarial gains and losses that are recognised outside profit or loss must be recognised in a statement of recognised income and expense does not prejudge any of the discussions the IASB is yet to have on reporting comprehensive income. Rather, the IASB is allowing an accounting treatment currently accepted by a national standard-setter (the UK ASB) to continue, pending the comprehensive review of accounting for post-employment benefits and reporting comprehensive income. The IASB also agrees that adding options to Standards is generally undesirable because of the resulting lack of comparability between entities. However, IAS 19 permits an entity to choose any systematic method of recognition for actuarial gains and losses that results in faster recognition than the minimum required by the Standard. Furthermore, the amount to be recognised under any deferral method will depend on when that method was first applied, ie when an entity first adopted IAS 19 or started a defined benefit plan. There is, therefore, little or no comparability because of the existing options in IAS 19. The IASB further agrees that a fundamental review of accounting for postemployment benefits is needed. However, such a review is likely to take some time to complete. In the meantime, the IASB believes that it would be wrong to prohibit a method of recognising actuarial gains and losses that is accepted by a national standard-setter and provides more transparent information about the costs and risks of running a defined benefit plan. The IASB agrees that the new option could lead to divergence from US GAAP. However, although IAS 19 and US GAAP share the same basic approach, they differ in several respects. The IASB has decided not to address these issues now. Furthermore, the option is just that. No entity is obliged to create such divergence. Lastly, as discussed above, the IASB does not agree that deferred recognition is better than immediate recognition of actuarial gains and losses. The amounts

BC48L

BC48M

BC48N

BC48O

recognised under a deferral method are opaque and not representationally faithful, and the inclusion of deferral methods creates a complex difficult standard. BC48P The IASB considered whether actuarial gains and losses that have been recognised outside profit or loss should be recognised in profit or loss in a later period (ie recycled). The IASB noted that there is not a consistent policy on recycling in IFRSs and that recycling in general is an issue to be resolved in its project on reporting comprehensive income. Furthermore, it is difficult to see a rational basis on which actuarial gains and losses could be recycled. The exposure draft therefore proposed prohibiting recycling of actuarial gains and losses that have been recognised in the statement of recognised income and expense. Most respondents supported not recycling actuarial gains and losses. However, many argued in favour of recycling, for the following reasons: (a) (b) (c) BC48R all income and expense should be recognised in profit or loss at some time. a ban on recycling is a new approach in IFRSs and should not be introduced before a fundamental review of reporting comprehensive income. to ban recycling could encourage abuse in setting over-optimistic actuarial assumptions.

BC48Q

The IASB notes that most items under IFRSs that are recognised outside profit or loss are recycled, but not all. Revaluation gains and losses on property, plant and equipment and intangibles are not recycled. The question of recycling therefore remains open in IFRSs. The IASB does not believe that a general decision on the matter should be made in the context of these amendments. The decision in these amendments not to recycle actuarial gains and losses is made because of the pragmatic inability to identify a suitable basis and does not prejudge the wider debate that will take place in the project on reporting comprehensive income. In the meantime, the IASB acknowledges the concern of some respondents that some items of income or expense will not be recognised in profit or loss in any period. The IASB has therefore required disclosure of the cumulative amounts recognised in the statement of recognised income and expense so that users of the financial statements can assess the effect of this policy. The IASB also notes the argument that to ban recycling could lead to abuse in setting over-optimistic assumptions. A lower cost could be recognised in profit or loss with resulting experience losses being recognised in the statement of recognised income and expense. Some of the new disclosures help to counter such concerns, for example, the narrative description of the basis for the expected rate of return and the five-year history of experience gains and losses. The IASB also notes that under a deferred recognition approach, if over-optimistic assumptions are used, a lower cost is recognised immediately in profit or loss and the resulting experience losses are recognised only gradually over the next 1015 years. The incentive for such abuse is just as great under deferred recognition as it is under immediate recognition outside profit or loss. The IASB also considered whether actuarial gains and losses recognised outside profit or loss should be recognised immediately in a separate component of equity and transferred to retained earnings at a later period. Again the IASB concluded that there is no rational basis for a transfer to retained earnings in later periods. Hence, the exposure draft proposed that actuarial gains and losses that are recognised outside profit or loss should be recognised in retained earnings immediately.

BC48S

BC48T

BC48U

BC48V

A small majority of the respondents supported this proposal. The arguments put forward against immediate recognition in retained earnings were: (a) (b) (c) (d) (e) the IASB should not set requirements on the component of equity in which items should be recognised before a fundamental review of the issue. retained earnings should be the cumulative total of profit or loss less amounts distributed to owners. the volatility of the amounts means that separate presentation would be helpful. the impact on distributions needs to be considered. actuarial gains and losses are temporary in nature and hence should be excluded from retained earnings.

BC48W

In IFRSs, the phrase 'retained earnings' is not defined and the IASB has not discussed what it should mean. In particular, retained earnings is not defined as the cumulative total of profit or loss less amounts distributed to owners. As with recycling, practice varies under IFRSs. Some amounts that are recognised outside profit or loss are required to be presented in a separate component of equity, for example exchange gains and losses on foreign subsidiaries. Other such amounts are not, for example gains and losses on available-for-sale financial assets. The IASB does not believe that it is appropriate to introduce a definition of retained earnings in the context of these amendments to IAS 19. The proposal in the exposure draft was based on practical considerations. As with recycling, there is no rational basis for transferring actuarial gains and losses from a separate component in equity into retained earnings at a later date. As discussed above, the IASB has added a requirement to disclose the cumulative amount recognised in the statement of recognised income and expense to provide users with further information. Consideration of the implications of IFRSs on the ability of an entity to make distributions to equity holders is not within the IASB's remit. In addition, the IASB does not agree that even if actuarial gains and losses were temporary in nature this would justify excluding them from retained earnings. Finally, the IASB considered whether, if actuarial gains and losses are recognised when they occur, entities should be required to present separately in retained earnings an amount equal to the defined benefit asset or liability. Such a presentation is required by FRS 17. The IASB noted that such a presentation is not required by IFRSs for any other item, however significant its size or volatility, and that entities can provide the information if they wish. The IASB therefore decided not to require such a presentation. IAS 19 limits the amount of a surplus that can be recognised as an asset ('the asset ceiling') to the present value of any economic benefits available to an entity in the form of refunds from the plan or reductions in future contributions to the plan.14 The IASB considered whether the effect of this limit should be recognised outside profit or loss, if that is the entity's accounting policy for actuarial gains and losses, or treated as an adjustment of the other components of the defined benefit cost and recognised in profit or loss. The IASB decided that the effect of the limit is similar to an actuarial gain or loss because it arises from a remeasurement of the benefits available to an entity from a surplus in the plan. The IASB therefore concluded that, if the entity's

BC48X

BC48Y

BC48Z

BC48AA

BC48BB

accounting policy is to recognise actuarial gains and losses as they occur outside profit or loss, the effect of the limit should also be recognised outside profit or loss in the statement of recognised income and expense. BC48CC Most respondents supported this proposal. The arguments opposing the proposal were: the adjustment arising from the asset ceiling is not necessarily caused by actuarial gains and losses and should not be treated in the same way. it is not consistent with FRS 17, which allocates the change in the recoverable surplus to various events and hence to different components of the defined benefit cost.

(a) (b)

BC48DD

The IASB agrees that the adjustment from the asset ceiling is not necessarily caused by actuarial gains and losses. The asset ceiling effectively imposes a different measurement basis for the asset to be recognised (present value of refunds and reductions in future contributions) from that used to derive the actuarial gains and losses and other components of the defined benefit cost (fair value of plan assets less projected unit credit value of plan liabilities). Changes in the recognised asset arise from changes in the present value of refunds and reductions in future contributions. Such changes can be caused by events of the same type as those that cause actuarial gains and losses, for example changes in interest rates or assumptions about longevity, or by events that do not cause actuarial gains and losses, for example trustees agreeing to a refund in exchange for benefit enhancements or a management decision to curtail the plan. Because the asset ceiling imposes a different measurement basis for the asset to be recognised, the IASB does not believe it is possible to allocate the effect of the asset ceiling to the components of the defined benefit cost other than on an arbitrary basis. The IASB reaffirmed its view that the adjustment arising from the asset ceiling should, therefore, be regarded as a remeasurement and similar to an actuarial gain or loss. This treatment also has the advantages of (a) being simple and (b) giving transparent information because the cost of the defined benefit promise (ie the service costs and interest cost) remains unaffected by the funding of the plan. E54 included two alternative treatments for past service cost. The first approach was similar to that used in the old IAS 19 (amortisation for current employees and immediate recognition for former employees). The second approach was immediate recognition of all past service cost. Those who support the first approach argue that:

BC48EE

Past service cost (paragraphs 96101 of the Standard)

BC49

BC50

(a)

an entity introduces or improves employee benefits for current employees in order to generate future economic benefits in the form of reduced employee turnover, improved productivity, reduced demands for increases in cash compensation and improved prospects for attracting additional qualified employees; although it may not be feasible to improve benefits for current employees without also improving benefits for former employees, it would be impracticable to assess the resulting economic benefits for an entity and the period over which those benefits will flow to the entity; and

(b)

(c)

immediate recognition is too revolutionary. It would also have undesirable social consequences because it would deter companies from improving benefits. amortisation of past service cost is inconsistent with the view of employee benefits as an exchange between an entity and its employees for services rendered: past service cost relates to past events and affects the employer's present obligation arising from employees' past service. Although an entity may improve benefits in the expectation of future benefits, an obligation exists and should be recognised; deferred recognition of the liability reduces comparability; an entity that retrospectively improves benefits relating to past service will report lower liabilities than an entity that granted identical benefits at an earlier date, yet both have identical benefit obligations. Also, deferred recognition encourages entities to increase pensions instead of salaries; past service cost does not give an entity control over a resource and thus does not meet the Framework's definition of an asset. Therefore, it is not appropriate to defer recognition of the expense; and there is not likely to be a close relationship between costthe only available measure of the effect of the amendmentand any related benefits in the form of increased loyalty.

BC51

Those who support immediate recognition of all past service cost argue that: (a)

(b)

(c)

(d)

BC52

Under the old IAS 19, past service cost for current employees was recognised as an expense systematically over the expected remaining working lives of the employees concerned. Similarly, under the first approach set out in E54, past service cost was to be amortised over the average expected remaining working lives of the employees concerned. However, E54 also proposed that the attribution period for current service cost should end when the employee's entitlement to receive all significant benefits due under the plan is no longer conditional on further service. Some commentators on E54 felt that these two provisions were inconsistent. In the light of comments received, the Board concluded that past service cost should be amortised over the average period until the amended benefits become vested, because: (a) (b) once the benefits become vested, there is clearly a liability that should be recognised; and although non-vested benefits give rise to an obligation, any method of attributing non-vested benefits to individual periods is essentially arbitrary. In determining how that obligation builds up, no single method is demonstrably superior to all others.

BC53

BC54

Some argue that a 'corridor' approach should be used for past service cost because the use of a different accounting treatment for past service cost than for actuarial gains and losses may create an opportunity for accounting arbitrage. However, the purpose of the 'corridor' is to deal with the inevitable imprecision in the measurement of defined benefit obligations. Past service cost results from a management decision, rather than inherent measurement uncertainty. Consequently, the Board rejected the 'corridor' approach for past service cost. The Board rejected proposals that:

BC55

(a)

past service cost should (as under the old IAS 19) be recognised over a shorter period where plan amendments provide an entity with economic benefits over that shorter period: for example, when plan amendments were made regularly, the old IAS 19 stated that the additional cost may be recognised as an expense or income systematically over the period to the next expected plan amendment. The Board believes that the actuarial assumptions should allow for such regular plan amendments and that subsequent differences between the assumed increase and the actual increase are actuarial gains or losses, not a past service cost; past service cost should be recognised over the remaining life expectancy of the participants if all or most plan participants are inactive. The Board believes that it is not clear that the past service cost will lead to economic benefits to the entity over that period; and even if past service cost is generally recognised on a delayed basis, past service cost should not be recognised immediately if the past service cost results from legislative changes (such as a new requirement to equalise retirement ages for men and women) or from decisions by trustees who are not controlled, or influenced, by the entity's management. The Board decided that such a distinction would not be practicable.

(b)

(c)

BC56

The old IAS 19 did not specify the basis upon which an entity should amortise the unrecognised balance of past service cost. The Board agreed that any amortisation method is arbitrary and decided to require straight-line amortisation, as that is the simplest method to apply and understand. To enhance comparability, the Board decided to require a single method and not to permit alternative methods, such as methods that assign: (a) (b) an equal amount of past service cost to each expected year of employee service; or past service cost to each period in proportion to estimated total salaries in that period.

Paragraph 99 confirms that the amortisation schedule is not amended for subsequent changes in the average remaining working life, unless there is a curtailment or settlement. BC57 Unlike the old IAS 19, the new IAS 19 treats past service cost for current employees differently from actuarial gains. This means that some benefit improvements may be funded out of actuarial gains that have not yet been recognised in the financial statements. Some argue that the resulting past service cost should not be recognised because: (a) the cost of the improvements does not meet the Framework's definition of an expense, as there is no outflow or depletion of any asset which was previously recognised in the balance sheet; and in some cases, benefit improvements may have been granted only because of actuarial gains.

(b)

The Board decided to require the same accounting treatment for all past service cost (ie recognise over the average period until the amended benefits become vested) whether or not they are funded out of an actuarial gain that is already recognised in the entity's balance sheet.

BC58

Some commentators on E54 argued that the recognition of actuarial gains should be limited if there is unamortised past service cost. The Board rejected this proposal because it would introduce additional complexity for limited benefit. Other commentators would prohibit the recognition of actuarial gains that are earmarked for future benefit improvements. However, the Board believes that if such earmarking is set out in the formal (or constructive) terms of the plan, the benefit improvements should be included in the actuarial assumptions. In other cases, there is insufficient linkage between the actuarial gains and the benefit improvements to justify an exceptional treatment. The old IAS 19 did not specify the balance sheet treatment for past service cost. Some argue that an entity should recognise past service cost immediately both as an addition to the liability and as an asset (prepaid expense) on the grounds that deferred recognition of the liability offsets a liability against an asset (unamortised past service cost) that cannot be used to settle the liability. However, the Board decided that an entity should recognise past service cost for current employees as an addition to the liability gradually over a period, because: (a) (b) (c) past service cost does not give an entity control over a resource and thus does not meet the Framework's definition of an asset; separate presentation of a liability and a prepaid expense may confuse users; and although non-vested benefits give rise to an obligation, any method of attributing non-vested benefits to individual periods is essentially arbitrary. In determining how that obligation builds up, no single method is demonstrably superior to all others.

BC59

BC60

The old IAS 19 appeared to treat plan amendments that reduce benefits as negative past service cost (ie amortisation for current employees, immediate recognition for former employees). However, some argue that this results in the recognition of deferred income that conflicts with the Framework. They also argue that there is only an arbitrary distinction between amendments that should be treated in this way and curtailments or settlements. Therefore, E54 proposed that: (a) plan amendments are: (i) (ii) (b) a curtailment if the amendment reduces benefits for future service; and a settlement if the amendment reduces benefits for past service; and

any gain or loss on the curtailment or settlement should be recognised immediately when the curtailment or settlement occurs.

BC61

Some commentators on E54 argued that such 'negative plan amendments' should be treated as negative past service cost by being recognised as deferred income and amortised into the income statement over the working lives of the employees concerned. The basis for this view is that 'negative' amendments reduce employee morale in the same way that 'positive' amendments increase morale. Also, a consistent treatment avoids the abuses that might occur if an entity could improve benefits in one period (and recognise the resulting expense over an extended period) and then reduce the benefits (and recognise the resulting income immediately). The Board agreed with this view. Therefore, the new IAS 19 treats both 'positive' and 'negative' plan amendments in the same way. The distinction between negative past service cost and curtailments would be important if:

BC62

(a)

a material amount of negative past service cost were amortised over a long period (this is unlikely, as the new IAS 19 requires that negative past service cost should be amortised until the time when those (reduced) benefits that relate to prior service are vested); or unrecognised past service cost or actuarial gains exist. For a curtailment these would be recognised immediately, whereas they would not be affected directly by negative past service cost.

(b)

The Board believes that the distinction between negative past service cost and curtailments is unlikely to have any significant effect in practice and that any attempt to deal with exceptional cases would result in excessive complexity. 15 BC62A In 2007 the IFRIC reported that practices differ for the recognition of gains or losses on plan amendments that reduce existing benefits, and that such differences in practices can lead to substantial differences in amounts that entities recognise in profit or loss. The IFRIC asked the IASB to clarify when entities should account for those plan amendments as a curtailment instead of as negative past service costs. As part of Improvements to IFRSs issued in May 2008, the IASB made the distinction between curtailments and negative past service costs clearer. In particular, the Board clarified how a reduction in the extent to which future salary increases are linked to the benefits payable for past service should be treated. The Board noted that an employee is entitled to future salary increases after the reporting date only as a result of future service. Therefore, if a change to a benefit plan affects the extent to which future salary increases after the reporting date are linked to benefits payable for past service, all of the effect of that change on the present value of the defined benefit obligation should be treated as a curtailment, not a negative past service cost. This is consistent with the treatment of a change related to future service. The Board considered whether it should require an entity to recognise an additional minimum liability where: (a) an entity's immediate obligation if it discontinued a plan at the balance sheet date would be greater than the present value of the liability that would otherwise be recognised in the balance sheet; vested post-employment benefits are payable at the date when an employee leaves the entity. Consequently, because of the effect of discounting, the present value of the vested benefit would be greater if an employee left immediately after the balance sheet date than if the employee completes the expected period of service; or the present value of vested benefits exceeds the amount of the liability that would otherwise be recognised in the balance sheet. This could occur where a large proportion of the benefits are fully vested and an entity has not recognised actuarial losses or past service cost.

BC62B

Recognition and measurement: an additional minimum liability

BC63

(b)

(c)

BC64

One example of a requirement for an entity to recognise an additional minimum liability is in the US Standard SFAS 87 Employers' Accounting for Pensions: the minimum liability is based on current salaries and excludes the effect of deferring certain past service cost and actuarial gains and losses. If the minimum liability exceeds the obligation measured on the normal projected salary basis (with deferred recognition of certain income and expense), the excess is recognised as

an intangible asset (not exceeding the amount of any unamortised past service cost, with any further excess deducted directly from equity) and as an additional minimum liability. BC65 The Board believes that such additional measures of the liability are potentially confusing and do not provide relevant information. They would also conflict with the Framework's going concern assumption and with its definition of a liability. The new IAS 19 does not require the recognition of an additional minimum liability. Certain of the circumstances discussed in the preceding two paragraphs may give rise to contingent liabilities requiring disclosure under IAS 10 Events after the Balance Sheet Date.16 The new IAS 19 requires explicitly that defined benefit obligations should be recognised as a liability after deducting plan assets (if any) out of which the obligations are to be settled directly (see paragraph 54 of the Standard). This is already widespread, and probably universal, practice. The Board believes that plan assets reduce (but do not extinguish) an entity's own obligation and result in a single, net liability. Although the presentation of that net liability as a single amount in the balance sheet differs conceptually from the offsetting of separate assets and liabilities, the Board decided in issuing IAS 19 in 1998 that the definition of plan assets should be consistent with the offsetting criteria in IAS 32 Financial Instruments: Disclosure and Presentation.17 IAS 32 states that a financial asset and a financial liability should be offset and the net amount reported in the balance sheet when an entity: (a) (b) BC67 has a legally enforceable right to set off the recognised amounts; and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Plan assets (paragraphs 102107 of the Standard)

BC66

IAS 19 (revised 1998) defined plan assets as assets (other than non-transferable financial instruments issued by the reporting entity) held by an entity (a fund) that satisfies all of the following conditions: (a) (b) the entity is legally separate from the reporting entity; the assets of the fund are to be used only to settle the employee benefit obligations, are not available to the entity's own creditors and cannot be returned to the entity (or can be returned to the entity only if the remaining assets of the fund are sufficient to meet the plan's obligations); and to the extent that sufficient assets are in the fund, the entity will have no legal or constructive obligation to pay the related employee benefits directly.

(c) BC67A

In issuing IAS 19 in 1998, the Board considered whether the definition of plan assets should include a fourth condition: that the entity does not control the fund. The Board concluded that control is not relevant in determining whether the assets in a fund reduce an entity's own obligation. In response to comments on E54, the Board decided to modify the definition of plan assets to exclude non-transferable financial instruments issued by the reporting entity. If this were not done, an entity could reduce its liabilities, and increase its equity, by issuing non-transferable equity instruments to a defined benefit plan.

BC68

Plan assets: revised definition adopted in 2000

BC68A

In 1999, the Board began a limited scope project to consider the accounting for assets held by a fund that satisfies parts (a) and (b) of the definition set out in paragraph BC67 above, but does not satisfy condition (c) because the entity retains a legal or constructive obligation to pay the benefits directly. IAS 19 (revised 1998) did not address assets held by such funds. The Board considered two main approaches to such funds: (a) (b) a net approach the entity recognises its entire obligation as a liability after deducting the fair value of the assets held by the fund; and a gross approach the entity recognises its entire obligation as a liability and recognises its rights to a refund from the fund as a separate asset. Supporters of a net approach made one or more of the following arguments: (a) a gross presentation would be misleading, because: (i) (ii) where conditions (a) and (b) of the definition in paragraph BC67 above are met, the entity does not control the assets held by the fund; and even if the entity retains a legal obligation to pay the entire amount of the benefits directly, this legal obligation is a matter of form rather than substance;

BC68B

BC68C

(b)

a gross presentation would be an unnecessary change from current practice, which generally permits a net presentation. It would introduce excessive complexity into the Standard, for limited benefit to users, given that paragraph 120A(c) already requires disclosure of the gross amounts; a gross approach may lead to measurement difficulties because of the interaction with the 10% corridor for the obligation. (i) One possibility would be to measure the assets at fair value, with all changes in fair value recognised immediately. This might seem inconsistent with the treatment of plan assets, because changes in the fair value of plan assets are one component of the actuarial gains and losses to which the corridor is applied under IAS 19. In other words, this approach would deny entities the opportunity of offsetting gains and losses on the assets against gains and losses on the liability. A second possibility would be to defer changes in the fair value of the assets to the extent that there are unrecognised actuarial gains and losses on the obligations. However, the carrying amount of the assets would then have no easily describable meaning. It would probably also require complex and arbitrary rules to match the gains and losses on the assets with gains and losses on the obligation. A third possibility would be to measure the assets at fair value, but to aggregate the changes in fair value with actuarial gains and losses on the liability. In other words, the assets would be treated in the same way as plan assets, except the balance sheet presentation would be gross rather than net. However, this would mean that changes in the fair value of the assets could affect the measurement of the obligation; and

(c)

(ii)

(iii)

(d)

a net approach might be viewed as analogous to the treatment of joint and several liabilities under paragraph 29 of IAS 37. An entity recognises a provision for the part of the obligation for which an outflow of resources

embodying economic benefits is probable. The part of the obligation that is expected to be met by other parties is treated as a contingent liability. BC68D Supporters of a gross approach advocated that approach for one or more of the following reasons: (a) paragraph BC66 above gives an explanation for presenting defined benefit obligations net of plan assets. The explanation focuses on whether offsetting is appropriate. Part (c) of the 1998 definition focuses on offsetting. This suggests that assets that satisfy parts (a) and (b) of the definition, but fail part (c) of the definition, should be treated in the same way as plan assets for recognition and measurement purposes, but should be shown gross on the face of the balance sheet without offsetting; if offsetting is allowed when condition (c) is not met, this would seem to be equivalent to permitting a net presentation for 'in-substance defeasance' and other analogous cases where IAS 32 indicates explicitly that offsetting is inappropriate. The Board has rejected 'in-substance defeasance' for financial instruments (see IAS 39 Application Guidance, paragraph AG59) and there is no obvious reason to permit it in accounting for defined benefit plans. In these cases the entity retains an obligation that should be recognised as a liability and the entity's right to reimbursement from the plan is a source of economic benefits that should be recognised as an asset. Offsetting would be permitted if the conditions in paragraph 3342 of IAS 32 are satisfied; the Board decided in IAS 37 to require a gross presentation for reimbursements related to provisions, even though this was not previously general practice. There is no conceptual reason to require a different treatment for employee benefits; although some consider that a gross approach requires an entity to recognise assets that it does not control, others believe that this view is incorrect. A gross approach requires the entity to recognise an asset representing its right to receive reimbursement from the fund that holds those assets. It does not require the entity to recognise the underlying assets of the fund; in a plan with plan assets that meet the definition adopted in 1998, the employees' first claim is against the fundthey have no claim against the entity if sufficient assets are in the fund. In the view of some, the fact that employees must first claim against the fund is more than just a difference in formit changes the substance of the obligation; and defined benefit plans might be regarded under SIC-12 ConsolidationSpecial Purpose Entities as special purpose entities that the entity controlsand should consolidate. As the offsetting criterion in IAS 19 is consistent with offsetting criteria in other International Accounting Standards, it is relatively unimportant whether the pension plan is consolidated in cases where the obligation and the plan assets qualify for offset. If the assets are presented as a deduction from the related benefit obligations in cases where condition (c) is not met, it could become important to assess whether the entity should consolidate the plan.

(b)

(c)

(d)

(e)

(f)

BC68E

Some argued that a net approach should be permitted when an entity retains an obligation to pay the entire amount of the benefits directly, but the obligation is considered unlikely to have any substantive effect in practice. The Board concluded that it would not be practicable to establish guidance of this kind that could be applied in a consistent manner.

BC68F

The Board also considered the possibility of adopting a 'linked presentation' that UK Financial Reporting Standard FRS 5 Reporting the Substance of Transactions, requires for non-recourse finance. Under FRS 5, the face of the balance sheet presents both the gross amount of the asset and, as a direct deduction, the related non-recourse debt. Supporters of this approach argued that it portrays the close link between related assets and liabilities without compromising general offsetting requirements. Opponents of the linked presentation argued that it creates a form of balance sheet presentation that IASC has not used previously and may cause confusion. The Board decided not to adopt the linked presentation. The Board concluded that a net presentation is justified where there are restrictions (including restrictions that apply on bankruptcy of the reporting entity) on the use of the assets so that the assets can be used only to pay or fund employee benefits. Accordingly, the Board decided to modify the definition of plan assets set out in paragraph BC67 above by: (a) (b) emphasising that the creditors of the entity should not have access to the assets held by the fund, even on bankruptcy of the reporting entity; and deleting condition (c), so that the existence of a legal or constructive obligation to pay the employee benefits directly does not preclude a net presentation, and modifying condition (b) to explicitly permit the fund to reimburse the entity for paying the long-term employee benefits.

BC68G

BC68H

When an entity retains a direct obligation to the employees, the Board acknowledges that the net presentation is inconsistent with the derecognition requirements for financial instruments in IAS 39 and with the offsetting requirements in IAS 32. However, in the Board's view, the restrictions on the use of the assets create a sufficiently strong link with the employee benefit obligations that a net presentation is more relevant than a gross presentation, even if the entity retains a direct obligation to the employees. The Board believes that such restrictions are unique to employee benefit plans and does not intend to permit this net presentation for other liabilities if the conditions in IAS 32 and IAS 39 are not met. Accordingly, condition (a) in the new definition refers to the reason for the existence of the fund. The Board believes that an arbitrary restriction of this kind is the only practical way to permit a pragmatic exception to IASC's general offsetting criteria without permitting an unacceptable extension of this exception to other cases. In some plans that exist in some countries, an entity is entitled to receive a reimbursement of employee benefits from a separate fund but the entity has discretion to delay receipt of the reimbursement or to claim less than the full reimbursement. Some argue that this element of discretion weakens the link between the benefits and the reimbursement so much that a net presentation is not justifiable. They believe that the definition of plan assets should exclude assets held by such funds and that a gross approach should be used in such cases. The Board concluded that the link between the benefits and the reimbursement is strong enough in such cases that a net approach is still appropriate. The Board's proposal for extending the definition of plan assets was set out in Exposure Draft E67 Pension Plan Assets, published in July 2000. The vast majority of the 39 respondents to E67 supported the proposal. A number of respondents to E67 proposed a further extension of the definition to include certain insurance policies that have similar economic effects to funds

BC68I

BC68J

BC68K

BC68L

whose assets qualify as plan assets under the revised definition proposed in E67. Accordingly, the Board decided to extend the definition of plan assets to include certain insurance policies (now described in IAS 19 as qualifying insurance policies) that satisfy the same conditions as other plan assets. These decisions were implemented in a revised IAS 19, approved by the Board in October 2000.

Plan assets: measurement

BC69 The old IAS 19 stated that plan assets are valued at fair value, but did not define fair value. However, other International Accounting Standards define fair value as 'the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction'. This may imply that no deduction is made for the estimated costs necessary to sell the asset (in other words, it is a mid-market value, with no adjustment for transaction costs). However, some argue that a plan will eventually have to dispose of its assets in order to pay benefits. Therefore, the Board concluded in E54 that plan assets should be measured at market value. Market value was defined, as in IAS 25 Accounting for Investments,18 as the amount obtainable from the sale of an asset in an active market. Some commentators on E54 felt that the proposal to measure plan assets at market value would not be consistent with IAS 22 Business Combinations19 and with the measurement of financial assets as proposed in the discussion paper Accounting for Financial Assets and Financial Liabilities published by IASC's Financial Instruments Steering Committee in March 1997. Therefore, the Board decided that plan assets should be measured at fair value. Some argue that concerns about volatility in reported profit should be countered by permitting or requiring entities to measure plan assets at a market-related value that reflects changes in fair value over an arbitrary period, such as five years. The Board believes that the use of market-related values would add excessive and unnecessary complexity and that the combination of the 'corridor' approach to actuarial gains and losses with deferred recognition outside the 'corridor' is sufficient to deal with concerns about volatility. The old IAS 19 stated that, when fair values were estimated by discounting future cash flows, the long-term rate of return reflected the average rate of total income (interest, dividends and appreciation in value) expected to be earned on the plan assets during the time period until benefits are paid. It was not clear whether the old IAS 19 allowed a free choice between market values and discounted cash flows, or whether discounted cash flows could be used only when no market value was available. The Board decided that plan assets should be measured by techniques such as discounting expected future cash flows only when no market value is available. Some believe that plan assets should be measured on the following basis, which is required by IAS 25 Accounting for Investments:20 (a) long-term investments are carried in the balance sheet at either cost, revalued amounts or, in the case of marketable equity securities, the lower of cost and market value determined on a portfolio basis. The carrying amount of a long-term investment is reduced to recognise a decline other than temporary in the value of the investment; and current investments are carried in the balance sheet at either market value or the lower of cost and market value.

BC70

BC71

BC72

BC73

(b)

The Board rejected this basis because it is not consistent with the basis used for measuring the related obligations. BC74 The Board decided that there should not be a different basis for measuring investments that have a fixed redemption value and that match the obligations of the plan, or specific parts thereof. IAS 26 Accounting and Reporting by Retirement Benefit Plans permits such investments to be measured on an amortised cost basis. In response to comments on E54, the Board decided that all plan administration costs (not just investment administration costs, as proposed in E54), should be deducted in determining the return on plan assets. The IASB concluded that if the actuarial assumptions used to measure the defined benefit obligation include an allowance for plan administration costs, the deduction of such costs in calculating the return on plan assets would result in double-counting them. Therefore, as part of Improvements to IFRSs issued in May 2008, the IASB amended the definition of the return on plan assets to require the deduction of plan administration costs only to the extent that such costs have not been reflected in the measurement of the defined benefit obligation. Paragraph 41 of IAS 19 states that an entity recognises its rights under an insurance policy as an asset if the policy is held by the entity itself. IAS 19 (revised 1998) did not address the measurement of these insurance policies. The entity's rights under the insurance policy might be regarded as a financial asset. However, rights and obligations arising under insurance contracts are excluded from the scope of IAS 39 Financial Instruments: Recognition and Measurement. Also, IAS 39 does not apply to 'employers' assets and liabilities rights and obligations under employee benefit plans, to which IAS 19 Employee Benefits applies'. Paragraphs 3942 of IAS 19 discuss insured benefits in distinguishing defined contribution plans and defined benefit plans, but this discussion does not deal with measurement. In reviewing the definition of plan assets (see paragraphs BC68ABC68L above), the Board decided to review the treatment of insurance policies that an entity holds in order to fund employee benefits. Even under the revised definition adopted in 2000, the entity's rights under an insurance policy that is not a qualifying insurance policy (as defined in the 2000 revision to IAS 19) are not plan assets. In 2000, the Board decided to introduce recognition and measurement requirements for reimbursements under such insurance policies (see paragraphs 104A104D). The Board based these requirements on the treatment of reimbursements under paragraphs 5358 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In particular, the Standard requires an entity to recognise a right to reimbursement of post-employment benefits as a separate asset, rather than as a deduction from the related obligations. In all other respects (for example, the use of the 'corridor') the Standard requires an entity to treat such reimbursement rights in the same way as plan assets. This requirement reflects the close link between the reimbursement right and the related obligation. Paragraph 104 states that where plan assets include insurance policies that exactly match the amount and timing of some or all of the benefits payable under the plan, the plan's rights under those insurance policies are measured at the same amount as the related obligations. Paragraph 104D extends that conclusion to insurance policies that are assets of the entity itself.

BC75

Reimbursements (paragraphs 104A104D of the Standard)

BC75A

BC75B

BC75C

BC75D

BC75E

IAS 37 states that the amount recognised for the reimbursement should not exceed the amount of the provision. Paragraph 104A of the Standard contains no similar restriction, because the asset limit in paragraph 58 already applies to prevent the recognition of an asset that exceeds the available economic benefits.

Limit on the recognition of an asset (paragraphs 5860 of the Standard)

BC76 In certain cases, paragraph 54 of the new IAS 19 would require an entity to recognise an asset. E54 proposed that the amount of the asset recognised should not exceed the aggregate of the present values of: (a) (b) any refunds expected from the plan; and any expected reduction in future contributions arising from the surplus.

In approving E54, the Board took the view that an entity should not recognise an asset at an amount that exceeds the present value of the future benefits that are expected to flow to the entity from that asset. This view is consistent with the Board's proposal that assets should not be carried at more than their recoverable amount (see E55 Impairment of Assets). The old IAS 19 contained no such restriction. BC77 On reviewing the responses to E54, the Board concluded that the limit on the recognition of an asset should not over-ride the treatments of actuarial losses or past service cost in order not to defeat the purpose of these treatments. Consequently, the limit is likely to come into play only where: (a) an entity has chosen the transitional option to recognise the effect of adopting the new IAS 19 over up to five years, but has funded the obligation more quickly; or the plan is very mature and has a very large surplus that is more than large enough to eliminate all future contributions and cannot be returned to the entity.

(b)

BC78

Some commentators argued that the limit in E54 was not operable because it would require an entity to make extremely subjective forecasts of expected refunds or reductions in contributions. In response to these comments, the Board agreed that the limit should reflect the available refunds or reductions in contributions. In May 2002 the Board issued an amendment to the limit on the recognition of an asset (the asset ceiling) in paragraph 58 of the Standard. The objective of the amendment was to prevent gains (losses) being recognised solely as a result of the deferred recognition of past service cost and actuarial losses (gains). The asset ceiling is specified in paragraph 58 of IAS 19, which requires a defined benefit asset to be measured at the lower of: (a) (b) the amount determined under paragraph 54; and the total of: (i) (ii) any cumulative unrecognised net actuarial losses and past service cost; and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Asset ceiling: amendment issued in May 2002

BC78A

BC78B

BC78C

The problem arises when an entity defers recognition of actuarial losses or past service cost in determining the amount specified in paragraph 54 but is required to measure the defined benefit asset at the net total specified in paragraph 58(b). Paragraph 58(b)(i) could result in the entity recognising an increased asset because of actuarial losses or past service cost in the period. The increase in the asset would be reported as a gain in income. Examples illustrating the issue are given in part C of the implementation guidance accompanying the Standard. The Board agreed that recognising gains (losses) arising from past service cost and actuarial losses (gains) is not representationally faithful. Further, the Board holds the view that this issue demonstrates that IAS 19 can give rise to serious problems. The Board intends to undertake a comprehensive review of the aspects of IAS 19 that cause concern, including the interaction of the asset ceiling and the options to defer recognition of certain gains and losses. In the meantime, the Board regards as an improvement a limited amendment to prevent their interaction giving rise to unfaithful representations of events. Paragraph 58A, therefore, prevents gains (losses) from being recognised solely as a result of the deferred recognition of past service cost or actuarial losses (gains). Some Board members and respondents to the exposure draft of this amendment suggested that the issue be dealt with by removing paragraph 58(b)(i). Paragraph 58(b)(i) is the component of the asset ceiling that gives rise to the problem: losses that are unrecognised under paragraph 54 are added to the amount that can be recognised as an asset. However, deleting paragraph 58(b)(i) effectively removes the option of deferred recognition of actuarial losses for all entities that have a defined benefit asset. Removing this option would have wide reaching implications for the deferred recognition approach in IAS 19 that can be considered fully only within the context of the comprehensive review noted above.

BC78D

BC78E

BC78F

Curtailments and settlements (paragraphs 109115 of the Standard)

BC79 Under the old IAS 19, curtailment and settlement gains were recognised when the curtailment or settlement occurred, but losses were recognised when it was probable that the curtailment or settlement would occur. The Board concluded that management's intent to curtail or settle a defined benefit plan is not a sufficient basis to recognise a loss. The new IAS 19 requires that curtailment and settlement losses, as well as gains, should be recognised when the curtailment or settlement occurs. The guidance on the recognition of curtailments and settlements has been conformed to the proposals in E59 Provisions, Contingent Liabilities and Contingent Assets. Under some national standards: (a) the gain or loss on a curtailment includes any unamortised past service cost (on the grounds that a curtailment eliminates the previously expected motivational effect of the benefit improvement), but excludes unrecognised actuarial gains or losses (on the grounds that the entity is still exposed to actuarial risk); and the gain or loss on a settlement includes any unrecognised actuarial gains or losses (on the grounds that the entity is no longer exposed to actuarial risk), but excludes unamortised past service cost (on the grounds that the previously expected motivational effect of the benefit improvement is still present).

BC80

(b)

The Board considers that this approach has some conceptual merit, but it leads to considerable complexity. The new IAS 19 requires that the gain or loss on a curtailment or settlement should include the related unrecognised actuarial gains and losses and past service cost. This is consistent with the old IAS 19.

Presentation and disclosure (paragraphs 116125 of the Standard)

BC81 The Board decided not to specify whether an entity should distinguish current and non-current portions of assets and liabilities arising from post-employment benefits, because such a distinction may sometimes be arbitrary. Information about defined benefit plans is particularly important to users of financial statements because other information published by an entity will not allow users to estimate the nature and extent of defined benefit obligations and to assess the risks associated with those obligations. The disclosure requirements are based on the following principles: (a) the most important information about employee benefits is information about the uncertainty attaching to measures of employee benefit obligations and costs and about the potential consequences of such uncertainty for future cash flows; employee benefit arrangements are often complex, and this makes it particularly important for disclosures to be clear, concise and relevant; given the wide range of views on the treatment of actuarial gains and losses and past service cost, the required disclosures should highlight their impact on the income statement and the impact of any unrecognised actuarial gains and losses and unamortised past service cost on the balance sheet; and the benefits derived from information should exceed the cost of providing it.

BC82

(b) (c)

(d) BC83

The Board agreed the following changes to the disclosure requirements proposed in E54: (a) the description of a defined benefit plan need only be a general description of the type of plan: for example, flat salary pension plans should be distinguished from final salary plans and from post-employment medical plans. Further detail would not be required; an entity should disclose the amounts, if any, included in the fair value of plan assets not only for each category of the reporting entity's own financial instruments, but also for any property occupied by, or other assets used by, the entity; an entity should disclose not just the expected return on plan assets, but also the actual return on plan assets; an entity should disclose a reconciliation of the movements in the net liability (or asset) recognised in its balance sheet; and an entity should disclose any amount not recognised as an asset because of the new limit in paragraph 58(b) of the Standard.

(b)

(c) (d) (e) BC84

Some commentators on E54, especially preparers, felt that the disclosures were excessive. A particular concern expressed by several respondents was aggregation: how should an entity aggregate information about many different plans in a concise, meaningful and cost-effective way? Two disclosures that seemed to cause special concern were the analysis of the overall charge in the income statement

and the actuarial assumptions. In particular, a number of commentators felt that the requirement to disclose expected rates of salary increases would cause difficulties with employees. However, the Board concluded that all the disclosures were essential. BC85 The Board considered whether smaller or non-public entities could be exempted from any of the disclosure requirements. However, the Board concluded that any such exemptions would either prevent disclosure of essential information or do little to reduce the cost of the disclosures. From a review of national standards on accounting for post-employment benefits, the IASB identified the following disclosures that it proposed should be added to IAS 19: (a) reconciliations showing the changes in plan assets and defined benefit obligations. The IASB believed that these reconciliations give clearer information about the plan. Unlike the reconciliation previously required by IAS 19 that showed the changes in the recognised net liability or asset, the new reconciliations include amounts whose recognition has been deferred. The reconciliation previously required was eliminated. information about plan assets. The IASB believed that more information is needed about the plan assets because, without such information, users cannot assess the level of risk inherent in the plan. The exposure draft proposed: (i) (ii) (iii) (c) disclosure of the percentage that the major classes of assets held by the plan constitute of the total fair value of the plan assets; disclosure of the expected rate of return for each class of asset; and a narrative description of the basis used to determine the overall expected rate of return on assets.

Disclosures: amendment issued by the IASB in December 2004

BC85A

(b)

information about the sensitivity of defined benefit plans to changes in medical cost trend rates. The IASB believed that this is necessary because the effects of changes in a plan's medical cost trend rate are difficult to assess. The way in which healthcare cost assumptions interact with caps, cost-sharing provisions, and other factors in the plan precludes reasonable estimates of the effects of those changes. The IASB also noted that the disclosure of a change of one percentage point would be appropriate for plans operating in low inflation environments but would not provide useful information for plans operating in high inflation environments. information about trends in the plan. The IASB believed that information about trends is important so that users have a view of the plan over time, not just at the balance sheet date. Without such information, users may misinterpret the future cash flow implications of the plan. The exposure draft proposed disclosure of five-year histories of the plan liabilities, plan assets, the surplus or deficit and experience adjustments. information about contributions to the plan. The IASB believed that this will provide useful information about the entity's cash flows in the immediate future that cannot be determined from the other disclosures about the plan. It proposed the disclosure of the employer's best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the next fiscal year beginning after the balance sheet date.

(d)

(e)

(f)

information about the nature of the plan. The IASB proposed an addition to paragraph 121 of IAS 19 to ensure that the description of the plan is complete and includes all the terms of the plan that are used in the determination of the defined benefit obligation.

BC85B

The proposed disclosures were generally supported by respondents to the exposure draft, except for the expected rate of return for each major category of plan assets, sensitivity information about medical cost trend rates and the information about trends in the plan. In relation to the expected rate of return for each major category of plan assets, respondents argued that the problems of aggregation for entities with many plans in different geographical areas were such that this information would not be useful. The IASB accepted this argument and decided not to proceed with the proposed disclosure. However, the IASB decided to specify that the narrative description of the basis for the overall expected rate of return should include the effect of the major categories of plan assets. Respondents also expressed concerns that the sensitivity information about medical cost trend rates gave undue prominence to that assumption, even though medical costs might not be significant compared with other defined benefit costs. The IASB noted that the sensitivity information need be given only if the medical costs are material and that IAS 1 requires information to be given about all key assumptions and key sources of estimation uncertainty. Finally, some respondents argued that requiring five-year histories would give rise to information overload and was unnecessary because the information was available from previous financial statements. The IASB reconfirmed its view that the trend information was useful and noted that it was considerably easier for an entity to take the information from previous financial statements and present it in the current financial statements than it would be for users to find the figures for previous periods. However, the IASB agreed that as a transitional measure entities should be permitted to build up the trend information over time.

BC85C

BC85D

BC85E

Benefits other than post-employment benefits

Compensated absences (paragraphs 1116 of the Standard)
BC86 Some argue that an employee's entitlement to future compensated absences does not create an obligation if that entitlement is conditional on future events other than future service. However, the Board believes that an obligation arises as an employee renders service which increases the employee's entitlement (conditional or unconditional) to future compensated absences; for example, accumulating paid sick leave creates an obligation because any unused entitlement increases the employee's entitlement to sick leave in future periods. The probability that the employee will be sick in those future periods affects the measurement of that obligation, but does not determine whether that obligation exists. The Board considered three alternative approaches to measuring the obligation that results from unused entitlement to accumulating compensated absences: (a) recognise the entire unused entitlement as a liability, on the basis that any future payments are made first out of unused entitlement and only subsequently out of entitlement that will accumulate in future periods (a FIFO approach);

BC87

(b)

recognise a liability to the extent that future payments for the employee group as a whole are expected to exceed the future payments that would have been expected in the absence of the accumulation feature (a group LIFO approach); or recognise a liability to the extent that future payments for individual employees are expected to exceed the future payments that would have been expected in the absence of the accumulation feature (an individual LIFO approach).

(c)

These methods are illustrated by the following example.

Example An entity has 100 employees, who are each entitled to five working days of paid sick leave for each year. Unused sick leave may be carried forward for one year. Such leave is taken first out of the current year's entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 20X1, the average unused entitlement is two days per employee. The entity expects, based on past experience which is expected to continue, that 92 employees will take no more than four days of paid sick leave in 20X2 and that the remaining 8 employees will take an average of six and a half days each. Method (a): The entity recognises a liability equal to the undiscounted amount of 200 days of sick pay (two days each, for 100 employees). It is assumed that the first 200 days of paid sick leave result from the unused entitlement. The entity recognises no liability because paid sick leave for the employee group as a whole is not expected to exceed the entitlement of five days each in 20X2. The entity recognises a liability equal to the undiscounted amount of 12 days of sick pay (one and a half days each, for 8 employees).

Method (b):

Method (c):

BC88

The Board selected method (c), the individual LIFO approach, because that method measures the obligation at the present value of the additional future payments that are expected to arise solely from the accumulation feature. The new IAS 19 notes that, in many cases, the resulting liability will not be material.

Death-in-service benefits
BC89
EY Q&A

E54 gave guidance on cases where death-in-service benefits are not insured externally and are not provided through a post-employment benefit plan. The Board concluded that such cases will be rare. Accordingly, the Board agreed to delete the guidance on death-in-service benefits.

Other long-term employee benefits (paragraphs 126131 of the Standard)

BC90 The Board decided, for simplicity, not to permit or require a 'corridor' approach for other long-term employee benefits, as such benefits do not present measurement difficulties to the same extent as post-employment benefits. For the same reason,

the Board decided to require immediate recognition of all past service cost for such benefits and not to permit any transitional option for such benefits.

Termination benefits (paragraphs 132143 of the Standard)

BC91 Under some national standards, termination benefits are not recognised until employees have accepted the offer of the termination benefits. However, the Board decided that the communication of an offer to employees (or their representatives) creates an obligation and that obligation should be recognised as a liability if there is a detailed formal plan. The detailed formal plan both makes it probable that there will be an outflow of resources embodying economic benefits and also enables the obligation to be measured reliably. Some argue that a distinction should be made between: (a) (b) termination benefits resulting from an explicit contractual or legal requirement; and termination benefits resulting from an offer to encourage voluntary redundancy.

BC92

The Board believes that such a distinction is irrelevant; an entity offers termination benefits to encourage voluntary redundancy because the entity already has a constructive obligation. The communication of an offer enables an entity to measure the obligation reliably. E54 proposed some limited flexibility to allow that communication to take place shortly after the balance sheet date. However, in response to comments on E54, and for consistency with E59 Provisions, Contingent Liabilities and Contingent Assets, the Board decided to remove that flexibility. BC93 Termination benefits are often closely linked with curtailments and settlements and with restructuring provisions. Therefore, the Board decided that there is a need for recognition and measurement principles to be similar. The guidance on the recognition of termination benefits (and of curtailments and settlements) has been conformed to the proposals in E59 Provisions, Contingent Liabilities and Contingent Assets. The Board agreed to add explicit guidance (not given in E54) on the measurement of termination benefits, requiring discounting for termination benefits not payable within one year.

Equity compensation benefits (paragraphs 144152 of the Standard)

BC94 The Board decided that the new IAS 19 should not: (a) include recognition and measurement requirements for equity compensation benefits, in view of the lack of international consensus on the recognition and measurement of the resulting obligations and costs; or require disclosure of the fair value of employee share options, in view of the lack of international consensus on the fair value of many employee share options. 21

(b)

Transition and effective date (paragraphs 153158 of the Standard)

BC95 The Board recognises that the new IAS 19 will lead to significant changes for some entities. E54 proposed to mitigate this problem by delaying the effective date of the new IAS 19 until 3 years after its approval. In response to comments on E54, the Board introduced a transitional option to amortise an increase in defined

benefit liabilities over not more than five years. In consequence, the Board decided that it was not necessary to delay the effective date. BC96 E54 proposed no specific transitional provisions. Consequently, an entity applying the new IAS 19 for the first time would have been required to compute the effect of the 'corridor' retrospectively. Some commentators felt that this would be impracticable and would not generate useful information. The Board agreed with these comments. Accordingly, the new IAS 19 confirms that, on initial adoption, an entity does not compute the effect of the 'corridor' retrospectively. The IASB concluded that the amendments to paragraphs 7, 8(b) and 32B simply clarified the existing requirements and thus should be applied retrospectively. The amendments to the paragraphs concerning the distinction between negative past service costs and curtailments are to be applied prospectively. The IASB concluded that the cost of analysing past plan amendments using the clarified definitions and restating them would exceed the benefits.

BC97

Dissenting opinions
Dissent of Patricia L O'Malley from the issue in May 2002 of Employee Benefits: The Asset Ceiling (Amendment to IAS 19)
D01 Ms O'Malley dissents from this amendment of IAS 19. In her view, the perceived problem being addressed is an inevitable result of the interaction of two fundamentally inconsistent notions in IAS 19. The corridor approach allowed by IAS 19 permits the recognition of amounts on the balance sheet that do not meet the Framework's21A definition of assets. The asset ceiling then imposes a limitation on the recognition of some of those assets based on a recoverability notion. A far preferable limited amendment would be to delete the asset ceiling in paragraph 58. This would resolve the identified problem and at least remove the internal inconsistency in IAS 19. It is asserted that the amendment to the standard will result in a more representationally faithful portrayal of economic events. Ms O'Malley believes that it is impossible to improve the representational faithfulness of a standard that permits recording an asset relating to a pension plan that actually has a deficiency, or a liability in respect of a plan that actually has a surplus.

D02

Dissent of James J Leisenring and Tatsumi Yamada from the issue in December 2004 of Actuarial Gains and Losses, Group Plans and Disclosures (Amendment to IAS 19) Mr Leisenring
DO1 DO2 Mr Leisenring dissents from the issue of the Amendment to IAS 19 Employee BenefitsActuarial Gains and Losses, Group Plans and Disclosures. Mr Leisenring dissents because he disagrees with the deletion of the last sentence in paragraph 34 and the addition of paragraphs 34A and 34B. He believes that group entities that give a defined benefit promise to their employees should account for that defined benefit promise in their separate or individual financial statements. He further believes that separate or individual financial statements that purport to be prepared in accordance with IFRSs should comply with the same requirements as other financial statements that are prepared in accordance with IFRSs. He therefore disagrees with the removal of the requirement for group entities to treat defined

benefit plans that share risks between entities under common control as defined benefit plans and the introduction instead of the requirements of paragraph 34A. DO3 Mr Leisenring notes that group entities are required to give disclosures about the plan as a whole but does not believe that disclosures are an adequate substitute for recognition and measurement in accordance with the requirements of IAS 19. Mr Yamada dissents from the issue of the Amendment to IAS 19 Employee BenefitsActuarial Gains and Losses, Group Plans and Disclosures. Mr Yamada agrees that an option should be added to IAS 19 that allows entities that recognise actuarial gains and losses in full in the period in which they occur to recognise them outside profit or loss in a statement of recognised income and expense, even though under the existing IAS 19 they can be recognised in profit or loss in full in the period in which they occur. He agrees that the option provides more transparent information than the deferred recognition options commonly chosen under IAS 19. However, he also believes that all items of income and expense should be recognised in profit or loss in some period. Until they have been so recognised, they should be included in a component of equity separate from retained earnings. They should be transferred from that separate component of equity into retained earnings when they are recognised in profit or loss. Mr Yamada does not, therefore, agree with the requirements of paragraph 93D. Mr Yamada acknowledges the difficulty in finding a rational basis for recognising actuarial gains and losses in profit or loss in periods after their initial recognition in a statement of recognised income and expense when the plan is ongoing. He also acknowledges that, under IFRSs, some gains and losses are recognised directly in a separate component of equity and are not subsequently recognised in profit or loss. However, Mr Yamada does not believe that this justifies expanding this treatment to actuarial gains and losses. The cumulative actuarial gains and losses could be recognised in profit or loss when a plan is wound up or transferred outside the entity. The cumulative amount recognised in a separate component of equity would be transferred to retained earnings at the same time. This would be consistent with the treatment of exchange gains and losses on subsidiaries that have a measurement currency different from the presentation currency of the group. Therefore, Mr Yamada believes that the requirements of paragraph 93D mean that the option is not an improvement to financial reporting because it allows gains and losses to be excluded permanently from profit or loss and yet be recognised immediately in retained earnings.

Mr Yamada
DO4 DO5

DO6

DO7

DO8

2011 IFRS Foundation

11 IAS 22 was withdrawn in 2004 and replaced by IFRS 3 Business Combinations. 12 IAS 1 (as revised in 2007) requires non-owner transactions to be presented separately from owner transactions in a statement of comprehensive income. 12A now paragraph 4.50 of the Conceptual Framework 12B Paragraph 34 was superseded by Chapter 3 of the Conceptual Framework

13 IAS 1 Presentation of Financial Statements (as revised in 2007) requires non-owner transactions to be presented separately from owner transactions in a statement of comprehensive income. 14 The limit also includes unrecognised actuarial gains and losses and past service costs. 15 Text deleted as a consequence of amendments by Improvements to IFRSs issued in May 2008. 16 In September 2007 the IASB amended the title of IAS 10 from Events after the Balance Sheet Date to Events after the Reporting Period as a consequence of the revision of IAS 1 Presentation of Financial Statements in 2007. 17 In 2005 the IASB amended IAS 32 as Financial Instruments: Presentation. 18 superseded by IAS 39 Financial Instruments: Recognition and Measurement and IAS 40 Investment Property. 19 IAS 22 was withdrawn in 2004 and replaced by IFRS 3 Business Combinations. 20 superseded by IAS 39 Financial Instruments: Recognition and Measurement and IAS 40 Investment Property. EY IFRS Q&As IAS 19.BC89-1 - Death in Service benefits 21 Paragraphs 144152 of IAS 19 were deleted by IFRS 2 Share-based Payment. 21A The reference to the Framework is to IASCs Framework for the Preparation and Presentation of Financial Statements, adopted by the IASB in 2001. In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting.

Guidance on Implementing IAS 19 Employee Benefits

The guidance accompanies, but is not part of, IAS 19.

A Illustrative example
Extracts from statements of comprehensive income and statements of financial position are provided to show the effects of the transactions described below. These extracts do not necessarily conform with all the disclosure and presentation requirements of other Standards.

Background information
The following information is given about a funded defined benefit plan. To keep interest computations simple, all transactions are assumed to occur at the year-end. The present value of the obligation and the fair value of the plan assets were both 1,000 at 1 January 20X1. Net cumulative unrecognised actuarial gains at that date were 140.
20X1 Discount rate at start of year Expected rate of return on plan assets at start of year Current service cost Benefits paid Contributions paid Present value of obligation at 31 December Fair value of plan assets at 31 December Expected average remaining working lives of employees (years) 10.0% 20X2 9.0% 20X3 8.0%

12.0% 130 150 90 1,141 1,092

11.1% 140 180 100 1,197 1,109

10.3% 150 190 110 1,295 1,093

10

10

10

In 20X2, the plan was amended to provide additional benefits with effect from 1 January 20X2. The present value as at 1 January 20X2 of additional benefits for employee service before 1 January 20X2 was 50 for vested benefits and 30 for non-vested benefits. As at 1 January 20X2, the entity estimated that the average period until the non-vested benefits would become vested was three years; the past service cost arising from additional nonvested benefits is therefore recognised on a straight-line basis over three years. The past service cost arising from additional vested benefits is recognised immediately (paragraph 96 of the Standard). The entity has adopted a policy of recognising actuarial gains and losses under the minimum requirements of paragraph 93.

Changes in the present value of the obligation and in the fair value of the plan assets

The first step is to summarise the changes in the present value of the obligation and in the fair value of the plan assets and use this to determine the amount of the actuarial gains or losses for the period. These are as follows:
20X1 Present value of obligation, 1 January Interest cost Current service cost Past service costnon-vested benefits Past service costvested benefits Benefits paid Actuarial (gain) loss on obligation (balancing figure) Present value of obligation, 31 December 1,000 100 130 (150) 20X2 1,141 103 140 30 50 (180) 20X3 1,197 96 150 (190)

61 1,141

(87) 1,197

42 1,295

Fair value of plan assets, 1 January Expected return on plan assets Contributions Benefits paid Actuarial gain (loss) on plan assets (balancing figure) Fair value of plan assets, 31 December

1,000 120 90 (150)

1,092 121 100 (180)

1,109 114 110 (190)

32 1,092

(24) 1,109

(50) 1,093

Limits of the 'corridor'

The next step is to determine the limits of the corridor and then compare these with the cumulative unrecognised actuarial gains and losses in order to determine the net actuarial gain or loss to be recognised in the following period. Under paragraph 92 of the Standard, the limits of the 'corridor' are set at the greater of: (a) (b) 10% of the present value of the obligation before deducting plan assets; and 10% of the fair value of any plan assets.

These limits, and the recognised and unrecognised actuarial gains and losses, are as follows:

20X1 Net cumulative unrecognised actuarial gains (losses) at 1 January Limits of 'corridor' at 1 January Excess [A]

20X2

20X3

140 100 40

107 114

170 120 50

Average expected remaining working lives (years) [B] Actuarial gain (loss) to be recognised [A/B]

10 4

10

10 5

Unrecognised actuarial gains (losses) at 1 January Actuarial gain (loss) for yearobligation Actuarial gain (loss) for yearplan assets Subtotal Actuarial (gain) loss recognised Unrecognised actuarial gains (losses) at 31 December

140 (61) 32 111 (4)

107 87 (24) 170

170 (42) (50) 78 (5)

107

170

73

Amounts recognised in the statement of financial position and profit or loss, and related analyses
The final step is to determine the amounts to be recognised in the statement of financial position and profit or loss, and the related analyses to be disclosed in accordance with paragraph 120A(f), (g) and (m) of the Standard (the analyses required to be disclosed in accordance with paragraph 120A(c) and (e) are given in the section 'Changes in the present value of the obligation and in the fair value of the plan assets'). These are as follows.
20X1 Present value of the obligation Fair value of plan assets 20X2 20X3

1,141 (1,092)

1,197 (1,109)

1,295 (1,093)

49 Unrecognised actuarial gains (losses) Unrecognised past service costnon-vested benefits Liability recognised in statement of financial position

88

202

107

170

73

(20)

(10)

156

238

265

Current service cost Interest cost Expected return on plan assets Net actuarial (gain) loss recognised in year Past service costnon-vested benefits Past service costvested benefits Expense recognised in profit or loss

130 100

140 103

150 96

(120)

(121)

(114)

(4)

(5)

10

10

50

106

182

137

Actual return on plan assets Expected return on plan assets Actuarial gain (loss) on plan assets Actual return on plan assets

120

121

114

32 152

(24) 97

(50) 64

Note: see example illustrating paragraphs 104A104C for presentation of

reimbursements.

B Illustrative disclosures
Extracts from notes show how the required disclosures may be aggregated in the case of a large multi-national group that provides a variety of employee benefits. These extracts do not necessarily conform with all the disclosure and presentation requirements of IAS 19 and other Standards. In particular, they do not illustrate the disclosure of: (a) accounting policies for employee benefits (see IAS 1 Presentation of Financial Statements). Paragraph 120A(a) of the Standard requires this disclosure to include the entity's accounting policy for recognising actuarial gains and losses. a general description of the type of plan (paragraph 120A(b)). amounts recognised in other comprehensive income (paragraph 120A(h) and (i)). a narrative description of the basis used to determine the overall expected rate of return on assets (paragraph 120A(l)). employee benefits granted to directors and key management personnel (see IAS 24 Related Party Disclosures). share-based employee benefits (see IFRS 2 Share-based Payment).

(b) (c) (d) (e) (f)

Employee benefit obligations

The amounts recognised in the statement of financial position are as follows:
Defined benefit pension plans 20X2 Present value of funded obligations Fair value of plan assets 20X1 Post-employment medical benefits 20X2 20X1

20,300 (18,420) 1,880

17,400 (17,280) 120

Present value of unfunded obligations Unrecognised actuarial gains (losses) Unrecognised past service cost Net liability

2,000

1,000

7,337

6,405

(1,605) (450) 1,825

840 (650) 1,310

(2,707) 4,630

(2,607) 3,798

Amounts in the statement of financial position: liabilities assets Net liability 1,825 1,825 1,400 (90) 1,310 4,630 4,630 3,798 3,798

The pension plan assets include ordinary shares issued by [name of reporting entity] with a fair value of 317 (20X1: 281). Plan assets also include property occupied by [name of reporting entity] with a fair value of 200 (20X1: 185). The amounts recognised in profit or loss are as follows:
Defined benefit pension plans 20X2 Current service cost Interest on obligation Expected return on plan assets Net actuarial losses (gains) recognised in year Past service cost Losses (gains) on curtailments and settlements Total, included in 'employee benefits expense' Actual return on plan assets 850 950 (900) 20X1 750 1,000 (650) Post-employment medical benefits 20X2 479 803 20X1 411 705

(70) 200

(20) 200

150

140

175

(390)

1,205 600

890 2,250

1,432 -

1,256 -

Changes in the present value of the defined benefit obligation are as follows:
Defined benefit pension plans 20X2 20X1 Post-employment medical benefits 20X2 20X1

Opening defined benefit obligation Service cost Interest cost Actuarial losses (gains) Losses (gains) on curtailments Liabilities extinguished on settlements Liabilities assumed in a business combination Exchange differences on foreign plans Benefits paid Closing defined benefit obligation

18,400 850 950 2,350 (500)

11,600 750 1,000 950

6,405 479 803 250

5,439 411 705 400

(350)

5,000

900 (650) 22,300

(150) (400) 18,400 (600) 7,337 (550) 6,405

Changes in the fair value of plan assets are as follows:

Defined benefit pension plans 20X2 Opening fair value of plan assets Expected return Actuarial gains and (losses) Assets distributed on settlements Contributions by employer Assets acquired in a business combination Exchange differences on foreign plans Benefits paid 17,280 900 (300) (400) 700 20X1 9,200 650 1,600 350

890 (650)

6,000 (120) (400)

18,420

17,280

The group expects to contribute 900 to its defined benefit pension plans in 20X3.
The major categories of plan assets as a percentage of total plan assets are as follows: European equities North American equities European bonds North American bonds Property

20X2 30% 16% 31% 18% 5%

20X1 35% 15% 28% 17% 5%

Principal actuarial assumptions at the end of the reporting period (expressed as weighted averages):
20X2 Discount rate at 31 December Expected return on plan assets at 31 December Future salary increases Future pension increases Proportion of employees opting for early retirement Annual increase in healthcare costs Future changes in maximum state healthcare benefits 5.0% 20X1 6.5%

5.4% 5% 3%

7.0% 4% 2%

30% 8%

30% 8%

3%

2%

Assumed healthcare cost trend rates have a significant effect on the amounts recognised in profit or loss. A one percentage point change in assumed healthcare cost trend rates would have the following effects:
One percentage point decrease (150)

One percentage point increase Effect on the aggregate of the service 190

cost and interest cost Effect on defined benefit obligation 1,000 (900)

Amounts for the current and previous four periods are as follows: Defined benefit pension plans
20X2 Defined benefit obligation Plan assets Surplus/(deficit) Experience adjustments on plan liabilities Experience adjustments on plan assets 20X1 20X0 20W9 20W8

(22,300) 18,420 (3,880)

(18,400) 17,280 (1,120)

(11,600) 9,200 (2,400)

(10,582) 8,502 (2,080)

(9,144) 10,000 856

(1,111)

(768)

(69)

543

(642)

(300)

1,600

(1,078)

(2,890)

2,777

Post-employment medical benefits

20X2 Defined benefit obligation Experience adjustments on plan liabilities 20X1 20X0 20W9 20W8

7,337

6,405

5,439

4,923

4,221

(232)

829

490

(174)

(103)

The group also participates in an industry-wide defined benefit plan that provides pensions linked to final salaries and is funded on a pay-as-you-go basis. It is not practicable to determine the present value of the group's obligation or the related current service cost as the plan computes its obligations on a basis that differs materially from the basis used in [name of reporting entity]'s financial statements. [describe basis] On that basis, the plan's financial statements to 30 June 20X0 show an unfunded liability of 27,525. The unfunded liability will result in future payments by participating employers. The plan has approximately 75,000 members, of whom approximately 5,000 are current or former employees of [name of reporting entity] or their dependants. The expense recognised in profit or loss, which is equal to contributions due for the year, and is not included in the above amounts, was 230 (20X1: 215). The group's future contributions may be increased substantially if other entities withdraw from the plan.

C Illustration of the application of paragraph 58A

The issue
Paragraph 58 of the Standard imposes a ceiling on the defined benefit asset that can be recognised. 58 The amount determined under paragraph 54 may be negative (an asset). An entity shall measure the resulting asset at the lower of: (a) (b) the amount determined under paragraph 54 [ie the surplus/deficit in the plan plus (minus) any unrecognised losses (gains)]; and the total of: (i) (ii) any cumulative unrecognised net actuarial losses and past service cost (see paragraphs 92, 93 and 96); and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The present value of these economic benefits shall be determined using the discount rate specified in paragraph 78.

Without paragraph 58A (see below), paragraph 58(b)(i) has the following consequence: sometimes deferring the recognition of an actuarial loss (gain) in determining the amount specified by paragraph 54 leads to a gain (loss) being recognised in profit or loss. The following example illustrates the effect of applying paragraph 58 without paragraph 58A. The example assumes that the entity's accounting policy is not to recognise actuarial gains and losses within the 'corridor' and to amortise actuarial gains and losses outside the 'corridor'. (Whether the 'corridor' is used is not significant. The issue can arise whenever there is deferred recognition under paragraph 54.) Example 1
F= lower of D and E

D=A+C

E=B+C

Year 1 2

Surplus in plan 100 70

Economic Losses benefits unrecognised Asset Gain available under ceiling, ie Paragraph Paragraph recognised recognised (paragraph paragraph 58(b)(ii)) 54 54 58(b) asset in year 2 0 0 0 30 100 100 0 30 0 30 30

At the end of year 1, there is a surplus of 100 in the plan (column A in the table above), but no economic benefits are available to the entity either from refunds or reductions in future contributions7 (column B). There are no unrecognised gains and losses under paragraph 54 (column C). So, if there were no asset ceiling, an asset of 100 would be recognised, being the amount specified by paragraph 54 (column D). The asset ceiling in paragraph 58 restricts the asset to nil (column F). In year 2 there is an actuarial loss in the plan of 30 that reduces the surplus from 100 to 70 (column A) the recognition of which is deferred under paragraph 54 (column C). So, if there were no asset ceiling, an asset of 100 (column D) would be recognised. The asset ceiling

without paragraph 58A would be 30 (column E). An asset of 30 would be recognised (column F), giving rise to a gain in income (column G) even though all that has happened is that a surplus from which the entity cannot benefit has decreased. A similarly counter-intuitive effect could arise with actuarial gains (to the extent that they reduce cumulative unrecognised actuarial losses).

Paragraph 58A
Paragraph 58A prohibits the recognition of gains (losses) that arise solely from past service cost and actuarial losses (gains). 58A The application of paragraph 58 shall not result in a gain being recognised solely as a result of an actuarial loss or past service cost in the current period or in a loss being recognised solely as a result of an actuarial gain in the current period. The entity shall therefore recognise immediately under paragraph 54 the following, to the extent that they arise while the defined benefit asset is determined in accordance with paragraph 58(b): (a) net actuarial losses of the current period and past service cost of the current period to the extent that they exceed any reduction in the present value of the economic benefits specified in paragraph 58(b)(ii). If there is no change or an increase in the present value of the economic benefits, the entire net actuarial losses of the current period and past service cost of the current period shall be recognised immediately under paragraph 54. net actuarial gains of the current period after the deduction of past service cost of the current period to the extent that they exceed any increase in the present value of the economic benefits specified in paragraph 58(b)(ii). If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period shall be recognised immediately under paragraph 54.

(b)

Examples
The following examples illustrate the result of applying paragraph 58A. As above, it is assumed that the entity's accounting policy is not to recognise actuarial gains and losses within the 'corridor' and to amortise actuarial gains and losses outside the 'corridor'. For the sake of simplicity the periodic amortisation of unrecognised gains and losses outside the corridor is ignored in the examples. Example 1 continued Adjustment when there are actuarial losses and no change in the economic benefits available
F= lower of D and E

D=A+C

E=B+C

Year

Surplus in plan

Economic Losses Asset benefits unrecognised available under ceiling, ie Gain (paragraph paragraph Paragraph Paragraph recognised recognised 58(b)(ii)) 54 54 58(b) asset in year 2

1 2

100 70

0 0

0 0

100 70

0 0

0 0

The facts are as in example 1 above. Applying paragraph 58A, there is no change in the economic benefits available to the entity8 so the entire actuarial loss of 30 is recognised immediately under paragraph 54 (column D). The asset ceiling remains at nil (column F) and no gain is recognised. In effect, the actuarial loss of 30 is recognised immediately, but is offset by the reduction in the effect of the asset ceiling.
Statement of financial position asset under paragraph 54 (column D above) Year 1 Year 2 Gain/(loss) 100 70 (30)

Effect of the asset ceiling (100) (70) 30

Asset ceiling (column F above) 0 0 0

In the above example, there is no change in the present value of the economic benefits available to the entity. The application of paragraph 58A becomes more complex when there are changes in present value of the economic benefits available, as illustrated in the following examples. Example 2 Adjustment when there are actuarial losses and a decrease in the economic benefits available
F= lower of D and E

D=A+C

E=B+C

Year 1 2

Surplus in plan 60 25

Economic Losses benefits unrecognised Asset Gain available under ceiling, ie Paragraph Paragraph recognised recognised (paragraph paragraph 58(b)(ii)) 54 54 58(b) asset in year 2 30 20 40 50 100 75 70 70 70 70 0

At the end of year 1, there is a surplus of 60 in the plan (column A) and economic benefits available to the entity of 30 (column B). There are unrecognised losses of 40 under paragraph 549 (column C). So, if there were no asset ceiling, an asset of 100 would be recognised (column D). The asset ceiling restricts the asset to 70 (column F).

In year 2, an actuarial loss of 35 in the plan reduces the surplus from 60 to 25 (column A). The economic benefits available to the entity fall by 10 from 30 to 20 (column B). Applying paragraph 58A, the actuarial loss of 35 is analysed as follows:
Actuarial loss equal to the reduction in economic benefits Actuarial loss that exceeds the reduction in economic benefits 10

25

In accordance with paragraph 58A, 25 of the actuarial loss is recognised immediately under paragraph 54 (column D). The reduction in economic benefits of 10 is included in the cumulative unrecognised losses that increase to 50 (column C). The asset ceiling, therefore, also remains at 70 (column E) and no gain is recognised. In effect, an actuarial loss of 25 is recognised immediately, but is offset by the reduction in the effect of the asset ceiling.
Statement of financial position asset under paragraph 54 (column D above) Year 1 Year 2 Gain/(loss) 100 75 (25)

Effect of the asset ceiling (30) (5) 25

Asset ceiling (column F above) 70 70 0

Example 3 Adjustment when there are actuarial gains and a decrease in the economic benefits available to the entity
F= lower of D and E

D=A+C

E=B+C

Year 1 2

Surplus in plan 60 110

Economic Losses Asset benefits unrecognised Gain available under ceiling, ie (paragraph paragraph Paragraph Paragraph recognised recognised 58(b)(ii)) 54 54 58(b) asset in year 2 30 25 40 40 100 150 70 65 70 65 (5)

At the end of year 1 there is a surplus of 60 in the plan (column A) and economic benefits available to the entity of 30 (column B). There are unrecognised losses of 40 under paragraph 54 that arose before the asset ceiling had any effect (column C). So, if there were no asset ceiling, an asset of 100 would be recognised (column D). The asset ceiling restricts the asset to 70 (column F).

In year 2, an actuarial gain of 50 in the plan increases the surplus from 60 to 110 (column A). The economic benefits available to the entity decrease by 5 (column B). Applying paragraph 58A, there is no increase in economic benefits available to the entity. Therefore, the entire actuarial gain of 50 is recognised immediately under paragraph 54 (column D) and the cumulative unrecognised loss under paragraph 54 remains at 40 (column C). The asset ceiling decreases to 65 because of the reduction in economic benefits. That reduction is not an actuarial loss as defined by IAS 19 and therefore does not qualify for deferred recognition. In effect, an actuarial gain of 50 is recognised immediately, but is (more than) offset by the increase in the effect of the asset ceiling.
Statement of financial position asset under paragraph 54 (column D above) Year 1 Year 2 Gain/(loss) 100 150 50

Effect of the asset ceiling (30) (85) (55)

Asset ceiling (column F above) 70 65 (5)

In both examples 2 and 3 there is a reduction in economic benefits available to the entity. However, in example 2 no loss is recognised whereas in example 3 a loss is recognised. This difference in treatment is consistent with the treatment of changes in the present value of economic benefits before paragraph 58A was introduced. The purpose of paragraph 58A is solely to prevent gains (losses) being recognised because of past service cost or actuarial losses (gains). As far as is possible, all other consequences of deferred recognition and the asset ceiling are left unchanged. Example 4 Adjustment in a period in which the asset ceiling ceases to have an effect
F= lower of D and E

D=A+C

E=B+C

Year 1 2

Surplus in plan 60 (50)

Economic Losses Asset benefits unrecognised Gain available under ceiling, ie Paragraph Paragraph recognised recognised (paragraph paragraph 58(b)(ii)) 54 54 58(b) asset in year 2 25 0 40 115 100 65 65 115 65 65 0

At the end of year 1 there is a surplus of 60 in the plan (column A) and economic benefits are available to the entity of 25 (column B). There are unrecognised losses of 40 under paragraph 54 that arose before the asset ceiling had any effect (column C). So, if there were no asset ceiling, an asset of 100 would be recognised (column D). The asset ceiling restricts the asset to 65 (column F).

In year 2, an actuarial loss of 110 in the plan reduces the surplus from 60 to a deficit of 50 (column A). The economic benefits available to the entity decrease from 25 to 0 (column B). To apply paragraph 58A it is necessary to determine how much of the actuarial loss arises while the defined benefit asset is determined in accordance with paragraph 58(b). Once the surplus becomes a deficit, the amount determined by paragraph 54 is lower than the net total under paragraph 58(b). So, the actuarial loss that arises while the defined benefit asset is determined in accordance with paragraph 58(b) is the loss that reduces the surplus to nil, ie 60. The actuarial loss is, therefore, analysed as follows:
Actuarial loss that arises while the defined benefit asset is measured under paragraph 58(b): Actuarial loss that equals the reduction in economic benefits Actuarial loss that exceeds the reduction in economic benefits 25 35 60 Actuarial loss that arises while the defined benefit asset is measured under paragraph 54 Total actuarial loss

50 110

In accordance with paragraph 58A, 35 of the actuarial loss is recognised immediately under paragraph 54 (column D); 75 (25 + 50) of the actuarial loss is included in the cumulative unrecognised losses which increase to 115 (column C). The amount determined under paragraph 54 becomes 65 (column D) and under paragraph 58(b) becomes 115 (column E). The recognised asset is the lower of the two, ie 65 (column F), and no gain or loss is recognised (column G). In effect, an actuarial loss of 35 is recognised immediately, but is offset by the reduction in the effect of the asset ceiling.
Statement of financial position asset under paragraph 54 (column D above) Year 1 Year 2 Gain/(loss) 100 65 (35)

Effect of the asset ceiling (35) 0 35

Asset ceiling (column F above) 65 65 0

Notes
1 In applying paragraph 58A in situations when there is an increase in the present value of the economic benefits available to the entity, it is important to remember that the present value of the economic benefits available cannot exceed the surplus in the plan.10

In practice, benefit improvements often result in a past service cost and an increase in expected future contributions due to increased current service costs of future years. The increase in expected future contributions may increase the economic benefits available to the entity in the form of anticipated reductions in those future contributions. The prohibition against recognising a gain solely as a result of past service cost in the current period does not prevent the recognition of a gain because of an increase in economic benefits. Similarly, a change in actuarial assumptions that causes an actuarial loss may also increase expected future contributions and, hence, the economic benefits available to the entity in the form of anticipated reductions in future contributions. Again, the prohibition against recognising a gain solely as a result of an actuarial loss in the current period does not prevent the recognition of a gain because of an increase in economic benefits.

2011 IFRS Foundation

7 based on the current terms of the plan. 8 The term 'economic benefits available to the entity' is used to refer to those economic benefits that qualify for recognition under paragraph 58(b)(ii). 9 The application of paragraph 58A allows the recognition of some actuarial gains and losses to be deferred under paragraph 54 and, hence, to be included in the calculation of the asset ceiling. For example, cumulative unrecognised actuarial losses that have built up while the amount specified by paragraph 58(b) is not lower than the amount specified by paragraph 54 will not be recognised immediately at the point that the amount specified by paragraph 58(b) becomes lower. Instead their recognition will continue to be deferred in line with the entity's accounting policy. The cumulative unrecognised losses in this example are losses the recognition of which is deferred even though paragraph 58A applies. 10 The example following paragraph 60 of IAS 19 is corrected so that the present value of available future refunds and reductions in contributions equals the surplus in the plan of 90 (rather than 100), with a further correction to make the limit 270 (rather than 280).