AASB 119 - Employee Benefits

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AASB 119 - Employee Benefits

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Summary
Developments, Key Differences & History
Compared to IFRS
Interpretations
Rejection Notices
Questions & Answers
Articles
AASB website

IFRIC Rejections and Guidance

November 2008 - IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction - Stable workfoce assumption
May 2008 - Settlements
January 2008 - Death in service benefits
January 2008 - Definition of plan assets
January 2008 - Pension promises based on performance hurdles
November 2007 - Treatment of employee contributions
November 2007 - Changes to a plan caused by government
September 2007 - Changes to a plan caused by government
September 2007 - ‘Death in service’ benefits
September 2007 - Treatment of employee contributions
September 2007 - Post-employment benefits—Benefit allocation for defined benefit plans
May 2007 - Curtailments and negative past service costs
March 2007 - Special Wages Tax
December 2005 - Classification of Employee long service leave liabilities
November 2005 - Classification of Long-Service Leave Liabilities
June 2005 - Determining the appropriate rate to discount post-employment benefit obligations
April 2003 - Accounting for the Transfer to the Japanese Government of the Substitutional Protion of Employee Pension Fund Liabilities
August 2002 - Calssification of an insured plan
April 2002 - Undiscounted vested employee benefits
February 2002 - Calculation of discount rates

1. November 2008 - IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction - Stable workfoce assumption

Issue:

The IFRIC received a request to consider an issue arising from IFRIC 14. The issue relates to the economic benefit available in the form of reductions in future contributions when there is a minimum funding requirement. IFRIC 14 requires the economic benefit to be determined assuming a stable workforce in the future unless the entity is demonstrably committed at the end of the reporting period to make a reduction in the number of employees covered by the plan. The request noted that in some circumstances the assumption of a stable workforce may understate the economic benefits available to the entity as a reduction in future contributions. The request noted that contributions to a plan are recognised as an expense, not an asset, if they provide no economic benefits in accordance with IFRIC 14. Therefore, by choosing the timing and the level of such contributions, an entity can affect its reported earnings.

IFRIC Decision:

The IFRIC noted that the requirements of IFRIC 14 regarding the assumption of a stable workforce are explicit. The issue was discussed extensively during the development of IFRIC 14 and the request provides no new information to cause the IFRIC to reconsider its conclusion. The IFRIC therefore decided not to add this issue to its agenda.
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2. May 2008 - Settlements

Issue:

The IFRIC received a request to clarify whether some payments of benefits under a defined benefit plan are settlements as defined in IAS 19. The payments in question arise when an existing plan gives plan members the option to choose to receive a lump sum payment at retirement instead of ongoing payments.

IFRIC Decision:

The IFRIC noted that events that are covered by the actuarial assumptions underlying the measurement of the defined benefit obligation are not treated as settlements under IAS 19. The IFRIC decided not to add the issue to its agenda because there was little diversity in practice.
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3. January 2008 - Death in service benefits

Issue:

An entity may provide payments to employees if they die while employed (‘death in service’ benefits). In some situations, IAS 19 requires these benefits to be attributed to periods of service using the Projected Unit Credit Method. The IFRIC received a request for guidance on how an entity should attribute these benefits to periods of service. The request noted that different treatments existed in practice.

IFRIC Decision:

The IFRIC noted that paragraph 67(b) of IAS 19 requires attribution of the cost of the benefits 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.’

In the case of death in service benefits, the IFRIC noted that:

the anticipated date of death would be the date at which no material amount of further benefit would arise from the plan;
using different mortality assumptions for a defined benefit pension plan and an associated death in service benefit would not comply with the requirement in paragraph 72 of IAS 19 to use actuarial assumptions that are mutually compatible; and
if the conditions in paragraph 39 of IAS 19 were met then accounting for death in service benefits on a defined contribution basis would be appropriate.

The IFRIC concluded that divergence in this area was unlikely to be significant. In addition, any further guidance that it could issue would be application guidance on the use of the Projected Unit Credit Method. The IFRIC therefore decided not to add the issue to its agenda.
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4. January 2008 - Definition of plan assets

Issue:

The IFRIC received a request for guidance on the accounting for investment or insurance policies that are issued by an entity to a pension plan covering its own employees (or the employees of an entity that is consolidated in the same group as the entity issuing the policy). The request asked for guidance on whether such policies would be part of plan assets in the consolidated and separate financial statements of the sponsor.

IFRIC Decision:

The IFRIC noted the definitions of plan assets, assets held by a long-term employee benefit fund and a qualifying insurance policy in IAS 19 paragraph 7. The IFRIC noted that, if a policy was issued by a group company to the employee benefit fund then the treatment would depend upon whether the policy was a ‘non-transferable financial instrument issued by the reporting entity’. Since the policy was issued by a related party, it could not meet the definition of a qualifying insurance policy.

The IFRIC considered that the issue was too narrow in scope to develop an Interpretation and decided not to add the issue to its agenda.
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5. January 2008 - Pension promises based on performance hurdles

Issue:

The IFRIC received a request to clarify the measurement of the defined benefit obligation when pension promises are based on achieving specific performance targets. Performance targets may relate to various forms of pension promises ranging from additional pensionable earnings from performance bonuses to more complex arrangements relating to additional sponsor contributions or years of deemed service. The issue is how defined benefit plans with such features should be accounted for in accordance with IAS 19.

IFRIC Decision:

The IFRIC noted that paragraph 73 of IAS 19 states that ‘Actuarial assumptions are an entity’s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits.’ Performance targets are variables that will affect the ultimate cost of providing the post-employment benefits. They should therefore be included in the determination of the benefit.

The IFRIC also noted that paragraph 67 of IAS 19 requires benefits to be attributed to periods of service according to the benefit formula, unless an employee’s service in later years will lead to a materially higher level of benefit than in earlier years. When benefits are affected by performance hurdles, the effect on the attribution of benefits must also be considered.

Given the requirements in IAS 19, the IFRIC did not expect divergence in practice and decided not to add the issue to its agenda.
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6. November 2007 - Treatment of employee contributions

Issue:

The IFRIC received a request to clarify the treatment of employee contributions in accordance with IAS 19. The first issue is how employee contributions should be accounted for in general. The second issue is how to account for a pension plan in which the cost of providing the benefits is shared between the employees and the employer.

IFRIC Decision:

On the first issue, the IFRIC noted that paragraph 7 of IAS 19 defines current service cost and that paragraph 120A of IAS 19 implies that contributions by employees to the ongoing cost of the plan reduce the current service cost to the entity. The IFRIC also noted that in accordance with paragraph 91 of IAS 19, employee contributions payable when benefits are paid, such as contributions to a post-employment healthcare plan, are to be taken into account in determining the defined benefit obligation.

On the second issue, the IFRIC noted that paragraph 85 of IAS 19 states that ‘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.’ Therefore, the IFRIC noted that:

if the terms of a defined benefit plan include surplus-sharing provisions, the employer’s obligation to use any surplus in the plan for the benefit of plan participants (eg adjusting participants’ benefits) should be considered when measuring its obligation.
if the terms of a defined benefit plan include cost-sharing provisions, the requirement for employees to make contributions to reduce or eliminate an existing deficit should be considered when measuring the employer’s obligation.

For these reasons, and because the IFRIC did not expect divergence in practice, the IFRIC decided not to take this item on to the agenda.
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7. November 2007 - Changes to a plan caused by government

Issue:

The IFRIC was asked to provide guidance on accounting for the effects of a change to a defined benefit plan resulting from action by a government.

IFRIC Decision:

The IFRIC noted that IAS 19 already provides guidance on whether the identity of the originator of the change affects the accounting. Paragraph 55 of the basis for conclusions on IAS 19 explains the IASC Board’s decision to reject the proposal that ‘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’. In other words, the IASC did not believe that the source of the change should affect the accounting. Therefore, the accounting for changes caused by government should be the same as for changes made by an employer.

The IFRIC acknowledged that, in some circumstances, it might be difficult to determine whether the change affects either actuarial assumptions or benefits payable and noted that judgement is required.

The IFRIC also noted that any guidance beyond that given in IAS 19 would be more in the nature of application guidance than an Interpretation.

For this reason, the IFRIC decided not to add this item to the agenda.
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8. September 2007 - Changes to a plan caused by government

Issue:

The IFRIC was asked to provide guidance on accounting for the effects of a change to a defined benefit plan resulting from action by a government.

IFRIC Tentative Decision:

The IFRIC noted that IAS 19 already provides guidance on accounting for the effects of changes:

Paragraph 73 of IAS 19 states that ‘actuarial assumptions are an entity's best estimates of the variables that will determine the ultimate cost of providing post-employment benefits’ (emphasis added);
Paragraph 97 of IAS 19 states that ‘past service cost arises when an entity introduces a defined benefit plan or changes the benefits payable under an existing defined benefit plan’ (emphasis added);
BC 55 of IAS 19 explains the Board’s decision to reject the proposal that ‘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’. That is, the Board did not believe that the source of the change should affect the accounting.

The IFRIC noted that IAS 19 therefore indicated that:

When a change in a plan caused by a government affects actuarial assumptions, this change should be accounted for as an actuarial gain or loss;
When a change in a plan caused by a government affects benefits for service before the change, this change should be accounted for as past service cost.

The IFRIC acknowledged that, in some circumstances, it might be difficult to determine whether the change affects either actuarial assumptions or benefits payable and noted that judgement is required. However, the IFRIC noted that although a change in benefits will always require changes in actuarial assumptions, changes in actuarial assumptions relating to the cost of providing benefits do not necessarily imply that the benefits have changed. The IFRIC also noted that any guidance beyond that given in IAS 19 would be more in the nature of implementation guidance than an Interpretation.

For this reason, the IFRIC [decided] not to add this item to the agenda.
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9. September 2007 - ‘Death in service’ benefits

Issue:

An entity may provide payments to employees if they die while employed (‘death in service’ benefits). If these benefits are provided as part of a defined benefit plan, IAS 19 requires them to be attributed to periods of service using the Projected Unit Credit Method. The IFRIC received a request for guidance as to how an entity should attribute these benefits to periods of service. The request noted that different treatments existed in practice.

IFRIC Tentative Decision:

The IFRIC noted that paragraph 67(b) of IAS 19 requires attribution of the cost of the benefits 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.”

In the case of death in service benefits, the IFRIC noted that:

the anticipated date of death would be the date at which no material amount of further benefit would arise from the plan;
using different mortality assumptions for a defined benefit pension plan and an associated death in service benefit would not comply with the requirement in paragraph 72 of IAS 19 to use actuarial assumptions that are mutually compatible; and
if the conditions in paragraph 39 of IAS 19 were met then accounting for death in service benefits on a defined contribution basis would be appropriate.

If the terms of a defined benefit plan include surplus-sharing provisions, the employer’s obligation to use any surplus in the plan for the benefit of plan participants (eg adjusting participants’ benefits or required contributions) should be taken into account when measuring the obligation;
If the terms of a defined benefit plan include cost-sharing provisions, the employer’s right to increase required employee contributions should be taken into account when measuring the obligation.

For these reasons, and because the IFRIC did not expect divergence in practice, the IFRIC [decided] not to take this item on to the agenda.
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11. September 2007 - Post-employment benefits—Benefit allocation for defined benefit plans

Issue:

IAS 19 Employee Benefits requires entities to attribute the benefit in defined benefit plans to periods of service in accordance with the benefit formula, unless the benefit formula would result in a materially higher level of benefit allocated to future years. In that case, the entity allocates the benefit on a straight-line basis (paragraph 67 of IAS 19). The IFRIC had previously considered whether entities should take into account expected increases in salary in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years.

IFRIC Decision:

The IFRIC considered this issue as part of its deliberations leading to Draft IFRIC Interpretation D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions. However, the IFRIC suspended work on this project until it could see what implications might be drawn from the Board’s deliberations in its project on post-employment benefits.

The IFRIC noted that the Board will not address this issue for all defined benefit plans in phase 1 of its project on post-employment benefits. However, the IFRIC noted that it would be difficult to address this issue while the Board had an ongoing project that addressed the issue for some defined benefit plans. The IFRIC decided to remove this issue from its agenda.
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12. May 2007 - Curtailments and negative past service costs

Issue:

The IFRIC was asked whether plan amendments that reduce benefits should be accounted for as curtailments or as negative past service costs. The submission noted that materially divergent practice could result because of the different recognition requirements for curtailments and negative past service cost.

IFRIC Decision:

The IFRIC noted that the Basis for Conclusions on IAS 19 indicates that IASC was aware of the ambiguity in distinguishing between negative past service costs and curtailments, but decided that the issue arose too rarely to justify the complexity that a more detailed requirement would produce. However, since the issue was becoming more prevalent and divergent practices were developing, the IFRIC believed that the issue should be addressed.

The IFRIC observed that there would be limited benefit in taking this issue on to its agenda because the Board was currently engaged in a post-employment benefits project. The IFRIC therefore decided not to take the issue on to its agenda, but to refer it to the Board for consideration.
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13. March 2007 - Special Wages Tax

Issue:

The IFRIC was asked to consider whether taxes related to defined benefits, for example taxes payable on contributions to a defined benefit plan or taxes payable on some other measure of the defined benefit, should be treated as part of the defined benefit obligation in accordance with IAS 19 Employee Benefits.

IFRIC Decision:

The IFRIC noted the following:
- Taxes paid by a defined benefit plan are included in the definition in IAS 19 of the return on plan assets.
- Income taxes paid by the entity are accounted for in accordance with IAS 12.
- The scope of IAS 19 is not restricted to benefits paid to employees. It includes some costs of employee benefits that are not paid to employees.
- A wide variety of taxes on pension costs could exist worldwide, each specific to its own jurisdiction, and it is a matter of judgement whether they are income taxes within the scope of IAS 12, costs of employee benefits within the scope of IAS 19, or other costs within the scope of IAS 37.
Given the variety of tax arrangements, the IFRIC believed that guidance beyond the above observations could not be developed in a reasonable period of time.
The IFRIC therefore decided not to take the issue onto its agenda.
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14. December 2005 - Classification of Employee long service leave liabilities

Issue:

Whether a liability for long-service leave employee benefits falls within Accounting Standard AASB 119 Employee Benefits or whether it is a financial liability
within the scope of AASB 132 Financial Instruments: Disclosure and Presentation. The classification affects the presentation and disclosure of long-service leave liabilities in financial reports.

AASB Decision:

At its December 2005 meeting, the AASB decided not to add this issue to the Urgent Issues Group’s agenda. The AASB agreed with the conclusions of the IFRIC.
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15. November 2005 - Classification of Long-Service Leave Liabilities

Issue:

Whether a liability for long-service leave employee benefits falls within Accounting Standard AASB 119 Employee Benefits or whether it is a financial liability
within the scope of AASB 132 Financial Instruments: Disclosure and Presentation. The classification affects the presentation and disclosure of long-service leave liabilities in financial reports.

IFRIC Decision:

IAS 19 [AASB 119] indicates that employee benefit plans include a wide range of formal and informal arrangements, and that it is therefore clear that the exclusion of employee benefit plans from IAS 32 [AASB 132] includes all employee benefits covered by IAS 19. The IFRIC decided that, since the Standard is clear, it would not expect diversity in practice and would not take this item onto its agenda.
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16. June 2005 - Determining the appropriate rate to discount post-employment benefit obligations

Issue:

The issue relates to paragraph 78 of IAS 19. If there is no deep market in high quality corporate bonds in a country, may the discount rate for a post-employment benefit obligation be determined by reference to a synthetically constructed equivalent instead of using the yield on government bonds?

IFRIC Decision:

Paragraph 78 of IAS 19 states that:
‘The rate used to discount post-employment benefit obligations (both funded and unfunded) shall 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 shall be used…’[Emphasis added]

The IFRIC took the view that paragraph 78 is clear that a synthetically constructed equivalent to a high quality corporate bond by reference to the bond market in another country may not be used to determine the discount rate.

The IFRIC observed that the reference to ‘in a country’ could reasonably be read as including high quality corporate bonds that are available in a regional market to which the entity has access, provided that the currency of the regional market and the country were the same (e.g. the euro). This would not apply if the country currency differed from that of the regional market.
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17. April 2003 - Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities

Issue:

The issue is how an employer should account for the separation of the substitutional portion of the benefit obligation of employees' pension fund plans (which are defined benefit pension plans established under the Japanese Welfare Pension Insurance Law) from the corporate portion and the transfer of the substitutional portion and related assets to the Japanese government.

IFRIC Decision:

The IFRIC agreed that this issue did not have widespread and practical relevance in an IFRS context (ie the issue is too narrow to take onto the IFRIC’s agenda). The IFRIC also noted that it was not aware of any interpretive questions that have arisen on this issue in practice.
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18. August 2002 - Classification of an insured plan

Issue:

The IFRIC considered whether to provide guidance relating to a particular insured plan found in Sweden. In particular, whether the particular plan is a defined benefit or a defined contribution plan under IAS 19 and, if it was thought to be a defined benefit plan, whether it would qualify for the exemptions from defined benefit plan accounting available under IAS 19 for some multi-employer plans.

IFRIC Decision:

The IFRIC agreed not to require publication of an Interpretation on this issue because IAS 19 is clear that the particular plan considered is a defined benefit plan.
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19. April 2002 - Undiscounted vested employee benefits

Issue:

In April 2002, the IFRIC considered issuing guidance on whether vested benefits that are payable when an employee left service could be recognised at an undiscounted amount (ie the amount that would be payable if all employees left the entity at the balance sheet date).

IFRIC Decision:

The IFRIC agreed to not issue an interpretation on this matter because the answer is clear under IAS 19 Employee Benefits. IAS 19 states that the measurement of the liability for the vested benefits must reflect the expected date of employees leaving service, and that the liability is discounted to a present value.
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20. February 2002 - Calculation of discount rates

Issue:

The IFRIC considered addressing how to determine the discount rate to be used in measuring a defined benefit liability under IAS 19 "Employee Benefits" when there is no deep market in high quality corporate bonds, and the terms of government bonds are much shorter than the benefit obligations.

IFRIC Decision:

The IFRIC agreed to not take this issue onto its agenda because IAS 19 provides sufficient guidance.
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