03 April 2015

IPE: IFRS rejects ESMA demand on asset-ceiling measurement for pensions

The International Financial Reporting Standards Interpretations Committee (IFRS IC) rejected a demand from ESMA for it to issue guidance on the asset-ceiling test in International Accounting Standard 19, Employee Benefits (IAS 19).

Summing up the committee’s support for the staff analysis of the issue, chairman Wayne Upton said: “The draft agenda decision is basically right, but we need to make clear this notion of the ‘underlying principle of the negotiation’ or words to that effect.” ESMA wrote to the committee demanding “clarification of whether an entity with a contractually agreed future minimum funding requirement should assume this requirement will exist over the life of the pension plan when performing an asset ceiling test”.

In an analysis of the issue, IFRS IC staff argued: “On the basis of our assessment of the Interpretations Committee’s agenda criteria, we think the Interpretations Committee should not add this issue to its agenda.” Staff said this was because “paragraphs 17, 21 and BC30 of IFRIC 14 provide sufficient guidance for this issue, as explained in the section for the staff conclusions”.

The guidance dealing with the asset-ceiling test under International Financial Reporting Standards (IFRS) is set out in IFRIC 14, “The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction”. That document interprets the requirements of IAS 19.

When a defined benefit (DB) plan sponsor applies IAS 19, it must first measure the DB obligation using the projected unit credit method and fair value any plan assets on the other. This calculation will produce either a DB asset or liability at the balance sheet date. Where a plan is in surplus, the sponsor will recognise the lower of any surplus and the IAS 19 asset ceiling – that is, the economic benefits available to the entity from the surplus.

Paragraph 64 of IAS 19 limits the net DB asset an entity can recognise in its accounts to the lower of the plan surplus or the asset ceiling. IAS 19 defines the asset ceiling as “the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan”. Among the jurisdictions potentially affected by the discussion are the UK – which ESMA referred to in its submission to the IFRS IC – Ireland and Canada.

IFRS IC member Tony Debell, a PwC audit partner, argued: “You can’t assume the minimum funding requirement disappears simply because the period of the agreement disappears. “We are saying you should continue to apply the principle that underpins the minimum funding requirement to make assumptions that are consistent between the way you measure the DBO and the way you measure the minimum funding requirement.”

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