IASB April 2007

The Board continued its discussion of the presentation of components of post-employment defined benefit plans.

The Board considered what the presentation of gains and losses on settlements and curtailments of defined benefit promises should be in each of the approaches discussed in March 2007. These approaches are:

1: all gains and losses presented in profit or loss

2: financing items presented outside profit or loss

3: remeasurement changes presented outside profit or loss.

The Board tentatively decided that:

(a) the gain or loss on a settlement or curtailment should be recognized when the settlement or curtailment occurs.

(b) a curtailment gain or loss is a service cost. Therefore, in all three approaches it would be presented in profit or loss.

(c) a settlement gain or loss is the difference between consideration required to settle the obligation and its measurement in accordance with IAS 19 Employee Benefits. As a result, it is not a service cost, but arises from a change in financial assumptions. It should be presented:

• in profit or loss in approach 1
• outside profit or loss in approaches 2 and 3.

The Board also discussed how to distinguish whether plan amendments that reduce benefits are curtailments or negative past service costs. This issue had been referred to the Board by the IFRIC. The Board tentatively decided that it should address this issue, possibly through the annual improvements process. The Board asked the staff to develop for further consideration an amendment that would clarify the difference between negative past service costs and curtailments in IAS 19. If the necessary amendment is not suitable for the annual improvements process, it will be undertaken separately.

Employee Benefits – Cash balance and similar plans

The Board discussed the classification of benefit promises with fixed increases.

The staff drew attention to the proposed definitions of the three benefit promises:

• A defined contribution benefit promise is one for which the entity has no further obligation in respect of current and prior periods once the defined contributions have been paid into a separate fund. It was proposed that these benefit promises be accounted for in accordance with current IAS 19 requirements for defined contribution plans.
• An asset-based benefit promise is one whose amount changes in response to the change in an asset or index, other than assets or indices that yield fixed increases. It was proposed that these benefit promises be measured at fair value.
• All other benefit promises are defined benefit. Typically, defined benefit promises change in line with specified fixed increases, service or salary. It was proposed that these benefit promises be measured in accordance with current IAS 19 requirements for defined benefit plans.

The staff acknowledged that benefit promises with fixed increases are asset-based, conceptually, but noted that to preserve a defined benefit category a line would need to be drawn between (i) current salary benefit and some average salary benefit and (ii) final salary benefit and other average salary benefit. The staff thought it would be difficult to justify why such a line should be drawn and proposed that benefit promises with fixed increases should be classified as defined benefit.

The Board did not make a decision on the classification of benefit promises whose amount changes in response to fixed increases in an asset. The Board noted that the proposed definition of defined contribution benefits excluded deposit-like benefits and would require some plans, which appear to be defined contribution with a guarantee, to be treated as defined benefit. The Board asked the staff to develop a new definition of defined contribution, defined benefit, and asset-based promises that would exclude deposit-like benefits from the definition of defined benefit and would clarify the treatment of benefit promises with fixed increases.

The Board noted that the term ‘asset-based’ was misleading because several of the benefit promises being considered may also be based on notional assets. The Board asked the staff to propose a new term for these benefit promises to identify more clearly the characteristics of the promises that will be included in the scope of phase I of the project.

The Board will discuss the classification of inflationary increases at a future meeting.