IASB September 2007

Definitions of benefit promises

The Board continued its discussion of the definitions of benefit promises. The staff proposed the following definitions:

• A defined return promise is a post-employment benefit accumulated through a contribution amount which, for any given period, can be expressed independently of the salary that will be earned after the end of that period. For some defined return promises the entity may have an obligation for the promised return on the contribution amount. The promised return is a guaranteed fixed return, the change in the value of an asset, or group of assets, the change in value of an index, or any combination of these.
• A defined benefit promise is a post-employment benefit that is not a defined return promise.

The Board suggested some editorial changes to clarify its intentions. It also tentatively decided to include the former defined contribution promises in the defined return category, and asked the staff to consider whether, in the light of this change, a new term would be more appropriate than defined return for this category of benefit promises.

The Board noted that a full explanation would be required in the discussion paper to make it clear that the accounting for a former defined contribution promise, in which the contributions relating to employee service in the current period are due immediately and are paid when they are due, would not be changed.

The Board also tentatively decided to treat defined benefit promises as the residual category of benefit promises and to address the accounting for post-retirement medical plans in Phase II of the project.

Measurement of the defined return promises

The Board discussed whether the employer’s liability for the contribution requirement and the promised return in defined return promises should be measured at fair value assuming the benefit promise does not change.

The Board noted that there are some types of defined return promises that are similar to derivatives or embedded derivatives and that a fair value measure would be necessary for a faithful representation of the benefit promise.

The Board discussed whether the notion of fair value assuming the benefit promise does not change would be best expressed by stating that the unit of account for the fair value measurement is the benefit promise assuming no future changes, even though some do not consider this amount to be fair value of the benefit promise.

Therefore, the Board suggested that the discussion paper include a building block approach to measuring defined return promises, similar to the approach used in the Insurance project. However, the discussion paper should not offer a view on whether the appropriate measure for defined return promises is fair value. The definition of fair value will be addressed in the Fair Value Measurement project.

Distinguishing between defined return and defined benefit promises and measurement of benefits in the payout and deferment phases

The Board noted that most employment benefit promises can be viewed as having three distinct phases:

• An accumulation phase during which the employee renders service in exchange for the promise of remuneration in the future. This phase ends when the employment ceases.
• A deferment phase, which occurs after the employee has ceased employment but before the benefit payment has started (eg during a pension deferment period or a sickness waiting period).
• A payout phase during which the employer’s liability to the employee for previously deferred remuneration is settled.

The Board discussed whether the definitions of benefit promises should refer only to the accumulation phase. The Board noted that the effect of longevity risk was significant and asked the staff to consider further the effect if any, of this, on the categorisation of benefit promises.

The Board also discussed how benefits in the deferment and payout phases should be measured. The Board noticed that because the accounting for post-employment benefit promises uses a mixed measurement model, it will consider two options:

•  Option 1 - All benefits in the deferment or payout phase to be measured the same as defined benefit promises regardless of whether they were accumulated as defined return or defined benefit promises. In this option, gains and losses may arise when an employee with a defined return benefit promise retires.
•  Option 2 - The distinction between benefit promises is maintained in the deferment and payout phases. In this option, an entity could have the same obligation to pay a given pension amount measured differently depending on whether the pension was accumulated as a defined return or a defined benefit promise

The Board deferred its decision on this pending further staff analysis.