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The changes address how defined benefit (DB) plan sponsors reflect funding contributions agreed with their trustees as an extra liability on the company’s balance sheet, and assess their accounting assumptions following a special event such as a DB plan amendment, settlement or curtailment.
Advisers have broadly welcomed the changes to IFRIC 14 but warn that DB schemes must pay close attention to the proposals. Towers Watson consultant Eric Steedman said: “The proposed amendment addresses a long-standing ambiguity in the application of IFRIC 14 for entities that have an unconditional right to a refund of surplus after a plan has run-off, but that do not have an unconditional right to ensure a ‘business-as-usual’ run-off happens.”
The advisers were less welcoming, however, of the IASB’s proposed changes to the treatment of so-called special events, with Lane Clark & Peacock partner Tim Marklew slamming the proposals as “unnecessary tinkering”.
Alex Waite, a partner with Lane Clark & Peacock, added: “Whether or not a company must show an extra liability on the balance sheet often depends on a ‘legal lottery’ of what the small print of the scheme’s trust deed and rules say, leading to big inconsistencies from company to company.” He warned that such funding liabilities could end up being much bigger than the normal deficit figure calculated under IAS 19.
Alongside the amendment to IFRIC 14, the IASB has also proposed a change addressing the assumptions DB plan sponsors must use in their pensions accounting following a plan amendment, settlement or curtailment. LCP partner Tim Marklew said: “In my view, the proposed new rules will, if adopted, make the calculation of company pension costs more complicated and more unpredictable, without providing any extra useful information. This looks like unnecessary tinkering with the rules, and we will be urging the IASB to reconsider whether to go ahead with these amendments.”
Simon Robinson added: “This change aligns IFRS with US GAAP. It requires you to re-measure the whole of the P&L effect of an exceptional event such as a settlement on a scheme from the date of the settlement going forward. Although I don’t think this change will make a huge difference, it will be more onerous on sponsors. It will certainly add a lot of complexity. If you have an event like a curtailment that only affects a small number of members, you will nonetheless have to remeasure the whole scheme.”
He added that there were also potential issues ahead with a proposed change to paragraph 64 of IAS 19 that forms part of the special-event amendment. “Again, this change is not without its problems,” he said. “If you have a settlement that hasn’t cost the sponsor anything, why should it reduce the company’s balance sheet? “I don’t think it is reasonable to impose a P&L charge on a company for using an asset that IAS 19 tells it isn’t an asset. One way out of this situation would be the old FRS 17 approach under UK GAAP, which allowed companies to offset any unrecognised surplus.”
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