Frequently Asked Questions
These Questions and Answers provide a simple introduction to the issues set out in the Discussion Paper: Preliminary Views on Amendments to IAS 19 Employee Benefits.
Why is the Board doing this project?
Analysts, investors and other users have long voiced concerns over IAS 19. Some of the main concerns from constituents are that:
- the accounting model has too many conceptual compromises;
- the different options for recognising gains and losses lead to lack of comparability; and
- the measurement model is inappropriate for some types of benefit promises.
In response, the Board is addressing the critical flaws identified in this project with an aim to making a significant improvement in the standard within 4 years.
About the Scope of the project
- Which types of plans could be affected by the project and how?
IAS 19 currently identifies two types of benefit promises only � defined benefit and defined contribution.
All defined benefit plans could be affected by the proposal to recognise all gains and losses in the period they occur and by the possible change in the presentation requirements.
In addition, some defined benefit promises could become contribution-based promises. Therefore, the measurement of the liability and presentation requirements for these promises would change.
The Board�s preliminary view is also that all defined contribution promises are re-classified as contribution-based promises. However the change in the accounting for these promises is not expected to be significant provided the plan is fully funded and the employer pays the contributions when they are due.
- Which types of plans would not be affected by the project?
The Board�s current view is that the measurement of the liability for typical final salary plans is not one of the key issues that need to be addressed urgently. There will also be no change to the measurement of post-retirement medical plans.
- I run a defined contribution plan and usually pay contributions in the period to which they relate. Could I be affected if the Board�s initial views become a part of the final standard?
The Board�s initial view is that the accounting for a defined contribution plan should change only if there is a liability in respect of unpaid contributions. In this case, the Board thinks that the new measurement method should be used to measure that liability. The Board does not propose any other changes to the accounting for defined contribution promises.
- I participate in a multi-employer plan. Could I be affected if the Board�s initial views become a part of the final standard?
The Board�s initial view is that the accounting for a multi-employer plan should change only if there is a liability in respect of unpaid contributions. In this case, the Board thinks that the new measurement method should be used to measure that liability. The Board does not propose any other changes to the accounting for multi-employer plans.
About recognition and presentation
- Is it true that the Board proposes to recognise all gains and losses immediately and put all changes through profit or loss?
Yes and No. The Board's preliminary view is that all gains and losses should be recognised immediately. However the Board has not reached a preliminary view on where these gains and losses should be presented in the financial statements. Instead, the Board proposes three possible approaches:
1. present all changes in the liability in profit or loss
2. present the costs of service in profit or loss and all other changes outside profit or loss
3. present the costs of service, interest cost and interest on plan assets in profit or loss and all other changes outside profit or loss
- The Board is proposing to introduce a new category of benefit promises. Why is this?
IAS 19 currently has two categories of benefit promises � defined benefit or defined contribution. However there are some benefit promises such as cash balance plans or promises linked to contributions with a promised return linked to an asset or an index that appear to have characteristics of both. It is not clear how these benefit promises should be classified.
To address this issue the Board proposes to introduce a new category of benefit promises called contribution-based promises.
- The Board is proposing to introduce a new measurement method for contribution-based promises. Why is this?
The current measurement method can lead to the under-statement or over-statement of the liabilities for some contribution-based promises. The key objective in proposing a new measurement attribute is to provide preparers and users with better information.
The Board thinks that the new measurement method for contribution-based promises should be based on current best estimates, unbiased, probability-weighted amounts and observable market values where they exist.
Also, the entity should assume that the terms of the benefit promise do not change. The Board used the term fair value assuming that the terms of the benefit promise do not change to express this.
- What would change if the new measurement method would be introduced?
For some types of plans, the only change from the current measurement approach would be in the choice of discount rate.
In other cases, if the benefit promise is more complicated, a more sophisticated measurement method would be needed, for example when a plan promises the higher of a defined benefit and contribution-based promise.
We would welcome comments on the difficulties which the new proposed measurement method could cause in practice.
About the process
- What is the timeframe for the project?
The Board has focused on the key issues of current pensions accounting to keep the project within a reasonable timeframe.
The Board hopes that the final standard will be issued at the end of the second quarter of 2011. If so the new standard would become effective from 1 January 2013. However, the timeframe will also depend on the outcome of the comment period and the Board�s deliberations.
Following the end of the consultation period and in the light of the comments received the Board will review the Discussion Paper and then issue an Exposure Draft that will set out the amended proposals.
The Exposure Draft will undergo a second public consultation and review period that will ultimately lead to the publication of the final standard, hopefully in 2011.
- Why isn�t the Board doing a comprehensive review of IAS 19?
Given the increasing importance of post-employment benefits some key issues in IAS 19 need to be addressed within a reasonable timeframe. A comprehensive project that addresses all areas of post-employment benefit accounting would take many years to complete. Users and preparers must be provided with information on pension liabilities that is reliable, clear and comparable.
The Board is aiming to issue a standard that would significantly improve pension accounting by 2011.
- Will this project be a joint project with the FASB?
This is currently not a joint project with the FASB. The FASB has started a two phase project and has already completed its first phase. The IASB and FASB projects are currently different in scope. However, both the IASB and FASB regard a converged standard on post-employment benefits as an ultimate goal and the Board intends to work with the FASB towards a converged standard on post-employment benefits.
- How can I contribute my views on the Discussion Paper?
You may contribute your views by submitting a comment letter. We would particularly welcome responses to the specific questions asked in the Invitation to Comment.
- Can I just wait and see the outcome of the Discussion Paper and then provide my views at the Exposure Draft stage?
The Board has issued its preliminary views to trigger a discussion on the issues addressed and your comments are vital for the project going forward. It is at this stage that the Board will discuss and decide about the scope and broad direction of the project. We will need your help to complete the project most efficiently.
- Where can I get further information?
The project website has a wide range of information on the project. Please browse the website for further details. If you are still unsure, contact one of the project managers.~
- Could a Board member or a member of the project management be invited to speak at a conference or public discussion?
Yes. Please contact one of the project managers to discuss your requirements.