EFRAG stressed that a review of employee benefit accounting is needed to improve the financial reporting of employee benefits. In particular, it is necessary to define appropriate accounting for “modern‟ schemes that combine features of defined benefit plans and defined contribution plans.
In April 2010 the IASB issued the Exposure Draft Defined Benefit Plans: Proposed amendments to IAS 19 (the ED). The ED focuses on the elimination of the corridor approach, the disaggregation of pension costs into different components and improvements in disclosures, but also makes various other changes to IAS 19. In particular, such a review is necessary to define appropriate accounting for „modern‟ schemes that combine features of defined benefit plans and defined contribution plans. Also such a review needs to rely on a clear and appropriate distinction between profit or loss and other comprehensive income. We acknowledge that the IASB has still to determine and consult publicly on its post mid-2011 technical agenda, but EFRAG believes it is important that such a comprehensive review should be proposed by the Board as a matter of priority.
While we broadly welcome the proposals in the Exposure Draft as short term improvements, EFRAG wishes to emphasise that, in its view, a comprehensive review of employee benefit accounting is needed to bring significant improvement to the financial reporting of employee benefits. Our comments should therefore be read in the context of EFRAG’s support for the project as a short-term solution for pension accounting pending the debate on fundamental issues related to both pensions and performance reporting
EFRAG welcomes the publication of the Exposure Draft and believes that IAS 19 could benefit from short-term improvements given the various inconsistencies and implementation difficulties encountered to date in applying it.
EFRAG notes some of the key requirements set out in the Exposure Draft:
(a) Immediate recognition of changes in the estimation of the defined benefit obligation and in the fair value of the plan assets. Elimination of the corridor approach.
(b) Recognition of unvested plan costs in the year when an amendment to the plan is made.
(c) Disaggregation of the plan costs into three components: service costs, finance costs and remeasurement. Service and finance costs should be recognised in profit and loss. Remeasurements should be recognised in OCI. Changes in the estimate of service costs and in demographic assumptions should be included in the remeasurement component.
(d) The exposure draft proposes that the finance cost component comprises net interest income or expense, determined by applying the high quality corporate bond rate to the net defined asset or liability. As a consequence, it eliminates the requirement in IAS 19 to present an expected rate of return in profit or loss.
© EFRAG - European Financial Reporting Advisory Group
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