IASB June 2007

The Board considered issues relating to defined return promises, and tentatively decided:

• not to revisit the principle in IAS 19 Employee Benefits that unvested benefits give rise to a liability. Thus, unvested benefits arising from defined return promises would give rise to a liability in phase 1 of the post-employment benefits project.
• an entity should allocate the contribution component of a defined return promise to periods of service in line with the benefit formula, even when the benefit formula specifies a materially higher level of contributions in later years.
• an entity should recognise benefits arising from the promised return component of a defined return promise in the period to which it allocates the related contribution.
• that for defined benefit promises it is outside the scope of phase 1 to address whether expected increases in salary are included in assessing whether a benefit formula allocates a materially higher level of benefit in later years. The Board noted that the IFRIC identified this issue for future consideration but was constrained by IAS 19’s existing definition of defined benefit, which includes the cash balance plans that are the subject of the Board’s project. The Board expressed reservations about whether it would be appropriate for the IFRIC to address this issue in the light of the Board’s project.

Measurement of the liability for the contribution requirement in a defined return promise

The Board discussed the measurement of the liability for the contribution requirement in a defined return promise. At the previous meeting, the Board had tentatively decided that the liability for the contribution requirement in a defined return promise should be measured at the amount of any unpaid contributions.

However at this meeting, the Board noted that including the time value of money in the measurement of the unpaid contributions is necessary to avoid substantial overstatement of the liabilities in unfunded plans. The Board asked the staff to develop an example to illustrate how the time value of money could best be included.

For defined contribution promises, the Board reaffirmed its tentative decision that the liability for unpaid contributions would be measured at the sum of those unpaid contributions.

Classification of inflationary increases

The Board considered whether benefit promises with a promised return on contributions linked to wage inflation should be classified as defined benefit.

The Board noted that it would be difficult to derive a definition of a wage-inflation index that was consistently applicable across jurisdictions. Furthermore, there is no conceptual basis for treating some forms of inflationary increases (eg wage inflation) differently from others (eg consumer price inflation) and to do so could add unnecessary complexity.

Therefore, the Board tentatively concluded that all benefit promises with a promised return linked to an index should be classified as defined return.

Disaggregation and presentation of the cost of defined return promises

The Board tentatively decided that the change in the liability for a defined return promise should be disaggregated as follows:

• service cost, which is the initial recognition of the liability for the contributions payable for the year plus the initial fair value of the promised return on those contributions
• fair value gain/loss, which is the amount arising on the subsequent remeasurement of the liabilities.

The Board also tentatively decided that all the changes in the liabilities for a defined return promise and changes in the value of any assets available to fund those liabilities should be recognised in profit or loss.