• calculating the benefit to be paid in the future by projecting forward the
contributions or notional contributions at the guaranteed fixed rate of return;
• allocating the benefit to periods of service;
• discounting the benefits allocated to the current and prior periods at the rate specified
in IAS 19 to arrive at the plan liability, current service cost and net interest; and
• recognising any remeasurements in accordance with the entity’s accounting policy
(note that there is no longer an accounting policy choice under IAS 19 and
remeasurements must be recorded in other comprehensive income).
For benefits covered by (b) above, it was proposed that the plan liability should be
measured at the fair value, at the end of the reporting period, of the assets upon which the
benefit is specified (whether plan assets or notional assets). No projection forward of the
benefits would be made, and discounting of the benefit would not therefore be required.
D9 suggested that plans with a combination of a guaranteed fixed return and a benefit
that depends on future asset returns should be accounted for by analysing the benefits
into a fixed component and a variable component. The defined benefit asset or liability
that would arise from the fixed component alone would be measured and recognised as
described above. The defined benefit asset (or liability) that would arise from the
variable component alone would then be calculated as described above and compared
to the fixed component. An additional plan liability would be recognised to the extent
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that the asset (or liability) calculated for the variable component is smaller (or greater)
than the asset (or liability) recognised in respect of the fixed component.
The great complexity of these provisions was not wholeheartedly supported by
respondents to the document. Also, many commentators pointed out that the proposals
effectively re-wrote, rather than interpreted, the standard (as drafted at the time). In
August 2005, the Interpretations Committee announced the withdrawal of D9,
observing the following: ‘The staff found the fixed/variable and modified fixed/variable
approaches inadequate to give a faithful representation of the entity’s obligation for
more complex benefit structures. They believed that some aspects of the fixed/variable
approach in D9 were not fully consistent with IAS 19. ... The staff ... recommended that
the correct treatment for D9 plans should be determined as part of an IASB project.’
The Interpretations Committee was asked in 2012 whether the revisions to IAS 19 in 2011
affect the accounting for these types of employee benefits and concluded they do not.1
The Interpretations Committee re-opened its examination of the subject and spent some
time considering the issue. In May 2014, it decided not to proceed with the issue, stating
the following: ‘In the Interpretations Committee’s view, developing accounting
requirements for these plans would be better addressed by a broader consideration of
accounting for employee benefits, potentially through the research agenda of the IASB.
The Interpretations Committee acknowledged that reducing diversity in practice in the
short term would be beneficial. However, because of the difficulties encountered in
progressing the issues, the Interpretations Committee decided to remove the project from
its agenda. The Interpretations Committee notes the importance of this issue because of
the increasing use of these plans. Consequently, the Interpretations Committee would
welcome progress on the IASB’s research project on post-employment benefits’.2
What this means is that the current text of IAS 19 applies. Accordingly, the projected
unit credit method will need to be applied to such benefits as it is to other defined
benefit arrangements. In February 2018 to Board announced a research project on
pension benefits that depend on asset returns, see 16.1 below for further details.
3.6 Death-in-service
benefits
The provision of death-in-service benefits is a common part of employment packages
(either as part of a defined benefit plan or on a standalone basis). We think it is regrettable
that IAS 19 provides no guidance on how to account for such benefits, particularly as E54
(the exposure draft preceding an earlier version of IAS 19) devoted considerable attention
to the issue.3 IAS 19 explains the removal of the guidance as follows: ‘E54 proposed
guidance on cases where death-in-service benefits are not insured externally and are not
provided through a post-employment benefit plan. IASC concluded that such cases will be
rare. Accordingly, IASC deleted the guidance on death-in-service benefits.’ [IAS 19.BC253].
In our view, this misses the point – E54 also gave guidance on cases where the benefits
are externally insured and where they are provided through a post-employment benefit
plan. In our view, the proposals in E54 had merit, and it is worth reproducing them here.
‘An enterprise should recognise the cost of death-in-service benefits ... as follows:
(a) in the case of benefits insured or re-insured with third parties, in the period
in respect of which the related insurance premiums are payable; and
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(b) in the case of benefits not insured or re-insured with third parties, to the
extent that deaths have occurred before the end of the reporting period.
‘However, in the case of death-in-service benefits provided through a post-
employment benefit plan, an enterprise should recognise the cost of those benefits
by including their present value in the post-employment benefit obligation.
‘If an enterprise re-insures a commitment to provide death-in-service benefits, it
acquires a right (to receive payments if an employee dies in service) in exchange
for an obligation to pay the premiums.
‘Where an enterprise provides death-in-service benefits directly, rather than
through a post-employment benefit plan, the enterprise has a future commitment
to provide death-in-service coverage in exchange for employee service in those
same future periods (in the same way that the enterprise has a future commitment
to pay salaries if the employee renders service in those periods). That future
commitment is not a present obligation and does not justify recognition of a
liability. Therefore, an obligation arises only to the extent that a death has already
occurred by the end of the reporting period.
‘If death-in-service benefits are provided through a pension plan (or other post-
employment plan) which also provides post-employment benefits to the same
employee(s), the measurement of the obligation reflects both the probability of a
reduction in future pension payments through death in service and the present
value of the death-in-service benefits (see [E-54’s discussion of mutual
compatibility of actuarial assumptions]).
‘Death-in-service benefits differ from post-employment life insurance because
post-employment life insurance creates an obligation as the employee renders
services in exchange for that benefit; an enterprise accounts for that obligation in
accordance with [the requirements for defined benefit plans]. Life insurance
; benefits that are payable regardless of whether the employee remains in service
comprise two components: a death-in-service benefit and a post-employment
benefit. An enterprise accounts for the two components separately.’
We suggest that the above may continue to represent valid guidance to the extent it
does not conflict with extant IFRS. In particular, an appropriate approach could be that:
• death-in-service benefits provided as part of a defined benefit post-employment
plan are factored into the actuarial valuation. In this case any insurance cover
should be accounted for in accordance with the normal rules of IAS 19 (see 6
below). An important point here is that insurance policies for death-in-service
benefits typically cover only one year, and hence will have a low or negligible fair
value. As a result, it will not be the case that the insurance asset is equal and
opposite to the defined benefit obligation;
• other death-in-service benefits which are externally insured are accounted for by
expensing the premiums as they become payable; and
• other death-in-service benefits which are not externally insured are provided for
as deaths in service occur.
The first bullet is particularly important. The measure of the post-employment benefit (like
a pension) will be reduced to take account of expected deaths in service. Accordingly, it
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would be inappropriate to ignore the death in service payments that would be made. The
question that arises is how exactly to include those expected payments. This raises the
same issue as disability benefits (discussed at 13.2.2 below), i.e. what to do with the debit
entry. However, IAS 19 has no explicit special treatment for death-in-service benefits
comparable to that for disability benefits. Given the absence of specific guidance, the
requirement is to apply the projected unit credit method to death in service benefits. As
the benefit is fully vested, an argument could be made that the expected benefit should be
accrued fully (on a discounted basis). Another approach would be to build up the credit
entry in the statement of financial position over the period to the expected date of death.
An alternative approach could be to view death-in-service benefits as being similar to
disability benefits. Proponents of this view would argue that the recognition
requirements for disability benefits (discussed at 13.2.2 below) could also be applied to
death-in-service.
In January 2008, the Interpretations Committee published its agenda decision
explaining why it decided not to put death-in-service benefits onto its agenda.4 In the
view of the Interpretations Committee, ‘divergence in this area was unlikely to be
significant. In addition, any further guidance that it could issue would be application
guidance on the use of the Projected Unit Credit Method’. In our view, the second
reason seems more credible than the first.
As part of its analysis, the ‘rejection notice’ sets out some of the Interpretations
Committee’s views on the subject. It observes the following:
(a) in some situations, IAS 19 requires these benefits to be attributed to periods of
service using the Projected Unit Credit Method;
(b) IAS 19 requires attribution of the cost of the benefits until the date when further
service by the employee will lead to no material amount of further benefits under
the plan, other than from further salary increases;
(c) the anticipated date of death would be the date at which no material amount of
further benefit would arise from the plan; and
(d) using different mortality assumptions for a defined benefit pension plan and an
associated death-in-service benefit would not comply with the requirement of
IAS 19 to use actuarial assumptions that are mutually compatible.
Points (a) to (c) above support the analysis that a provision should be built up gradually
from the commencement of employment to the expected date of death. They also suggest
that making an analogy to the specific rules in the standard on disability may not be
appropriate. In addition, point (c) is simply re-iterating a clear requirement of the standard.
The above agenda decision of the Interpretations Committee is not as helpful as we would
have liked. The use of the phrase ‘in some situations’ in point (a) above leaves uncertain
just what those circumstances may be. In September 2007, the Interpretations Committee
published a tentative agenda decision which said ‘[i]f these benefits are provided as part of
a defined benefit plan, IAS 19 requires them to be attributed to periods of service using the
Projected Unit Credit Method’.5 At the following meeting the Interpretations Committee
discussed the comment letters received which noted that it could be argued that such
attribution would be required only if the benefits were dependent on the period of service.
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No decision was reached on the final wording of the rejection notice because ‘IFRIC ... was
unable to agree on wording for its agenda decision’.6
Given the lack of explicit guidance on death-in-service benefits in IAS 19 itself, and
given the Interpretations Committee’s decision not to address the matter, it seems likely
that practice will be mixed.
4 DEFINED
CONTRIBUTION
PLANS
4.1 Accounting
requirements
4.1.1 General
Accounting for defined contribution plans (see 3 above) is straightforward under IAS 19
because, as the standard observes, the reporting entity’s obligation for each period is
determined by the amounts to be contributed for that period. Consequently, no
actuarial assumptions are required to be made to measure the obligation or the expense
and there is no possibility of any actuarial gain or loss to the reporting entity. Moreover,
the obligations are measured on an undiscounted basis, except where they are not
expected to be settled wholly before twelve months after the end of the period in which
the employees render the related service. [IAS 19.50]. Where discounting is required, the
discount rate should be determined in the same way as for defined benefit plans, which
is discussed at 7.6 below. [IAS 19.52]. In general, though, it would seem unlikely for a
defined contribution scheme to be structured with such a long delay between the
employee service and the employer contribution.
IAS 19 requires that, when an employee has rendered service during a period, the
employer should recognise the contribution payable to a defined contribution plan in
exchange for that service:
(a) as a liability (accrued expense), after deducting any contribution already paid. If
the contribution already paid exceeds the contribution due for service before the
end of the reporting period, the excess should be recognised as an asset (prepaid
expense) to the extent that the prepayment will lead to, for example, a reduction
in future payments or a cash refund; and
(b) as an expense, unless another IFRS requires or permits its capitalisation. [IAS 19.51].
As discussed at 3.3.1.A above, IAS 19 requires multi-employer defined benefit plans to
be accounted for as defined contribution plans in certain circum
stances. The standard
makes clear that contractual arrangements to make contributions to fund a deficit
should be fully provided for (on a discounted basis) even if they are to be paid over an
extended period. [IAS 19.37].
4.1.2
Defined contribution plans with vesting conditions
In February 2011, the Interpretations Committee received a request seeking clarification
on the effect that vesting conditions have on the accounting for defined contribution
plans. The Interpretations Committee was asked whether contributions to such plans
should be recognised as an expense in the period for which they are paid or over the
vesting period. In the examples given in the submission, the employee’s failure to meet
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a vesting condition could result in the refund of contributions to, or reductions in future
contributions by, the employer.
The Interpretations Committee decided not to add the issue to its agenda, noting that
there is no significant diversity in practice in respect of the effect that vesting conditions
have on the accounting for defined contribution post-employment benefit plans, nor
does it expect significant diversity in practice to emerge in the future.
Explaining its decision, the Interpretations Committee observed that each contribution
to a defined contribution plan is to be recognised as an expense or recognised as a
liability (accrued expense) over the period of service that obliges the employer to pay
this contribution to the defined contribution plan. This period of service is distinguished
from the period of service that entitles an employee to receive the benefit from the
defined contribution plan (i.e. the vesting period). Refunds are recognised as an asset
and as income when the entity/employer becomes entitled to the refunds, e.g. when the
employee fails to meet the vesting condition.7
5
DEFINED BENEFIT PLANS – GENERAL
The standard notes that accounting for defined benefit plans is complex because
actuarial assumptions are required to measure both the obligation and the expense, and
there is a possibility of actuarial gains and losses. Moreover, the obligations are
measured on a discounted basis because they may be settled many years after the
employees render the related service. [IAS 19.55]. Also, IAS 19 makes clear that it applies
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 554