IASB July 2007

Definitions of benefit promises

The Board continued its discussions of the definitions of benefit promises. The staff pointed out that the Board had previously tentatively decided that post-employment benefit plans are composed of defined benefit (DB), defined contribution (DC) and defined return (DR) benefit promises. The staff proposed the following definitions:

A defined contribution promise is a post-employment benefit promise that obliges the employer to pay specified contributions to a separate entity (a fund). Payment by the employer of those specified contributions extinguishes the obligation.

A defined return promise is a post-employment benefit promise, which may be funded or unfunded, that obliges the employer to pay a benefit comprising:

(a) a contribution requirement based on current salary; and

(b) a promised return on the specified contributions that is linked to the change in an asset or index.

A defined benefit (DB) promise is a post-employment benefit promise that is neither defined contribution nor defined return.

The Board suggested some editorial changes to clarify the definitions. The Board noted further that DC promises are DR promises in which the employer has no obligation for the promised return. Therefore, the Board asked the staff to consider whether these two benefit promises should be combined into one category. The Board asked the staff to consider whether DB promises should be the residual category of benefit promises.

Benefit promises expressed as the ‘higher of’ two or more alternatives

Some benefit promises are expressed as the ‘higher of’ two or more alternatives. For example a plan may provide the higher of a DB or DR promise.

The Board tentatively decided:

• If a plan provides the higher of two or more benefit promises and one of the benefit alternatives is a DB promise, it should be classified as DB with a ‘higher of’ promise.
• The liability for the DB promise should be accounted for in accordance with IAS 19 Employee Benefits.
• The liability for the ‘higher of’ promise should be measured at fair value which takes account of the likelihood of each promise being higher than the other.
• The change in the liability for the ‘higher of’ promise should be disaggregated into a service cost and fair value gain/loss. The service cost is equal to the initial recognition of the liability for the ‘higher of’ promise.
• The fair value gain/loss is equal to the amount arising on the subsequent remeasurement of that liability. The service cost and fair value gain/loss should be presented in profit or loss.

The Board noted that some plans provide alternatives that involve different types of benefit events. For example an employer may promise an employee a DC retirement benefit if the employee survives to retirement or a DB death in service pension if the employee dies before retirement. The Board tentatively decided that the accounting for alternatives that involve different types of benefit events is outside the scope of phase I. Therefore the proposed accounting treatment of the ‘higher of’ promises does not include alternatives that involve different benefit events. Such a plan would therefore be classified as having a DC retirement benefit and a DB death in service benefit.

Splitting components of a defined return plan

The Board discussed the split of a DR promise into a contribution requirement and a return requirement. If a DR promise is funded, the assets acquired when a contribution is made may subsequently decline in value below the amount of the contribution. The Board tentatively decided that the resulting deficit should be included in the return component of the DR promise, not the contribution component.

The Board also discussed the role of performance risk in the measurement of a DR promise. The Board tentatively decided that the contribution requirement should be measured at the specified unpaid contributions discounted at the IAS 19 discount rate, ie should exclude performance risk. The Board also tentatively decided that the return requirement should be measured at fair value assuming that the benefits for past service will not change.

The Board noted that this proposal assumes that it is possible to distinguish between a change in benefits and other performance risk, such as credit risk. That is a question that will be discussed in the fair value measurement project. If those discussions indicate that such a distinction cannot be made, the staff will bring back to the Board the question of performance risk in the measurement of the return requirement.

The Board also considered the question of the measurement of the benefit in payment following a DR promise before payments begin. The Board asked the staff to bring further analysis to the next Board meeting.

Discussion of approaches to measurement of the contribution component was postponed until the next Board meeting.

Employee Benefit Working Group feedback

The staff presented a report on the Employee Benefit Working Group meeting held on 5 June. In the light of comments made at the working group meeting, the Board tentatively:

• confirmed that unvested past service cost should be recognised immediately in the period that a plan amendment occurs.
• decided to include a general discussion of a possible remeasurement approach in place of Approach 3. Approach 3 would recognise changes arising from non-financial assumptions in profit or loss, ie service cost, interest cost, actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate, dividends received and interest earned on plan assets (using the current rate inherent in fair value). The discussion paper would set out different proposals on how to achieve a presentation that separates remeasurement gains and losses from other gains and losses and discuss the possible difficulties identified with each.

Vested benefits payable when an employee leaves the entity

In some cases an employer would be required to pay an employee who leaves service immediately after the reporting date more than the amount that it would recognise as its liability at the reporting date. The Board considered whether an additional liability should be recognised to reflect the amount that an employer would have to pay an employee leaving service before retirement. The Board tentatively decided that the discussion paper should not propose that an additional liability is recognised, but should include a discussion of the issue.