The IASB discussed two matters arising from the IFRS Interpretations Committee relating to the application of IAS 19 Employee Benefits.
IAS 19 Employee Benefits—Actuarial assumptions: discount rate
In October 2012, the Interpretations Committee received a request for guidance on the determination of the rate used to discount post-employment benefit obligations. In particular, the submitter asked the Interpretations Committee whether corporate bonds with an internationally recognised rating lower than ‘AA’ can be considered to be high quality corporate bonds (HQCB).
In its January 2013 meeting, the Interpretations Committee requested the staff to consult with the IASB:
a.to confirm that the underlying principle for the determination of the discount rate is set out in paragraph 84 of IAS 19 (2011), and is described as “the discount rate reflects the time value of money but not the actuarial or investment risk”;
b.to provide clarity about this sentence in paragraph 84;
c.to ask whether this sentence in paragraph 84 means that the objective for the discount rate for post-employment benefit obligations should be a risk free rate; and
d.to confirm that IAS 19 should be amended to clarify that when government bonds are used to establish the discount rate in the absence of HQCBs, those government bonds used must themselves be of high quality.
At the February 2013 IASB meeting, the staff consulted the Board on these matters. The IASB was asked if it agreed:
a.that the objective for the determination of the discount rate is paragraph 84 of IAS 19, ie “the discount rate reflects the time value of money but not the actuarial or investment risk”. Furthermore, the discount rate does not reflect the entity-specific credit risk borne by the entity's creditors, nor does it reflect the risk that future experience may differ from actuarial assumptions.;
b.that the Interpretations Committee should clarify the sentence “the discount rate reflects the time value of money but not the actuarial or investment risk”. Specifically, that this sentence does not mean that the discount rate for post-employment benefit obligations should be a risk free rate; and
c.that the discount rate should reflect the credit risk of HQCB, that a reasonable interpretation of HQCB could be corporate bonds with minimal or very low credit risk.
Twelve IASB members agreed.
The IASB was also asked if it agreed that the Interpretations Committee should propose amendments to IAS 19 to specify that when government bonds are used to determine the discount rate those bonds should be of high quality.
Eleven IASB members agreed.
The staff will report the views of the IASB to a future Interpretations Committee meeting, along with proposals for guidance to clarify the requirements of IAS 19 consistently with the IASB’s views.
IAS 19 Employee Benefits—Measurement of the net DBO for post-employment benefit plans with employee contributions
The Interpretations Committee received two requests, in May and September 2012 respectively, seeking clarification of paragraph 93 of IAS 19. That paragraph refers to the accounting for employee contributions set out in the formal terms of a defined benefit plan. The submitters specifically request guidance on the accounting for employee contributions in respect of service. The Standard is effective for annual periods beginning on or after 1 January 2013.
At its January 2013 meeting, the Interpretations Committee decided to propose to the IASB that the IASB should consider a narrow-scope amendment to IAS 19. Under the proposal, contributions from employees or third parties are treated as a reduction in short-term employee benefit cost and accounted for in that same period, if they are linked solely to the employee’s service rendered in the same period in which they are paid, for example if the contributions are a fixed percentage of salary throughout the entire period of the employment.
At the February 2013 IASB meeting, the IASB discussed the Interpretations Committee’s proposal.
The IASB tentatively decided that it should make a narrow-scope amendment to IAS 19 on this issue but that contributions from employees or third parties should be a reduction in service cost instead of a reduction in short-term employee benefit cost.
All IASB members agreed with this decision.
The staff will prepare an Exposure Draft based on these decisions and will begin the balloting process for publication.