The new IFRS guidance will create differ- ences in the accounting for taxes related to benefit plans.
A contribution tax should be recognized as a component of net periodic pension cost in the period in which the contribu- tion is made.
In June 2011, the IASB issued amend- ments to IAS 19, Employee Benefits. Taxes related to benefit plans should be included either in the return on assets or the calculation of the benefit obligation, depending on their nature. For example, taxes payable by the plan on contributions are included in actuarial assumptions for the calculation of the benefit obligation.
Technical references
IFRS IAS 19, IAS 37, IAS 39, IFRIC 14
IASB Amendment to IAS 19, Employee Benefits
In June 2011, the IASB issued an amendment to IAS 19 with significant changes to the recognition, presentation, and disclosure of long-term employee benefit plans. The key provisions are as follows:
Recognition of gains and losses
Gains and losses will be recognized immediately in OCI. The corridor and spreading option in IAS 19, which allows delayed recogni- tion of gains and losses for postemployment benefits, will be prohibited. Immediate recognition of gains and losses in profit and loss, which is currently permitted for postemployment benefits and required for other long-term benefits, also will be prohibited. Gains and losses recognized in OCI will not be recycled through profit or loss in subsequent periods.
Gains and losses arise from changes in the assumptions used to measure the obligation for benefits. These include assumptions about salary increases, mortality rates, and the discount rate. The amendments will increase balance sheet volatility for IFRS reporting companies that currently use delayed recognition methods for gains and losses. Significant differences to US GAAP will remain. While both frameworks will require that the funded status of their defined benefit plans be recorded on the balance sheet, the method of recognizing gains and losses will vary, as US GAAP requires recognition of gains and losses in the income statement. US GAAP still provides a policy choice between either (1) immediate recognition within the income statement or (2) delayed recog- nition through the use of the corridor approach. Neither of the US GAAP options would exist under the new IFRS model.
Recognition of past-service cost (referred to as prior-service cost under US GAAP)
All past-service costs (positive or negative) will be recognized in profit or loss when the employee benefit plan is amended. Past- service cost arises when the terms of a defined benefit plan are amended to provide additional benefits for service the employee has already delivered. These additional benefits are sometimes conditional on the employee providing future service (i.e., over a vesting period). IAS 19 currently requires past-service cost to be recognized on a straight-line basis until the future service has been delivered, or recognized immediately if no future service is required. This new guidance will no longer allow past-service cost to be spread over the future-service period, which will increase volatility in profit or loss.
This will create a further difference from US GAAP under which prior-service cost is recognized in OCI at the date the plan amend- ment is adopted and then amortized into income over the participants’ remaining years of service, service to full eligibility date, or life expectancy.
Measurement of pension expense
The expected return on plan assets and the interest cost on the pension obligation will be replaced by a new method of calculating the finance cost associated with a funded defined benefit obligation. The new guidance requires that net interest expense or income would be calculated by applying the discount rate to the recognized net surplus or deficit of the plan (the plan assets less the defined benefit obligation, allowing for any asset ceiling restriction). The discount rate would be a high-quality corporate bond rate in markets where there is a deep market in such bonds, and a government bond rate in other markets. The effect of this is that the expected earnings on plan assets will be determined using the same discount rate that is used to calculate the obligation. Currently, the expected return on plan assets is generally higher than the discount rate, so the change will increase the pension cost recog- nized in profit or loss for most entities with funded plans. The measurement of the interest cost for an unfunded plan will remain unchanged.
US GAAP currently uses an expected return on plan assets and a separate discount rate on the liability; therefore, this will create a new difference.
IAS 19 was amended to remove some of the flexibility around where in profit and loss the components of pension expense will be recognized. All components recognized in determining net income (i.e., service and finance costs, but not actuarial gains and losses) may be presented as (1) a single net amount (similar to US GAAP) or (2) those components may be separately displayed. The new guidance limits some but not all of the flexibility in classification. Therefore, differences may continue in income statement classification.
Termination benefits
The guidance for termination benefits in IAS 19 was amended in a manner that aligns the treatment of termination benefits with US GAAP guidance for one-time termination benefits. See further discussion in the Recent/proposed guidance section of the Liabilities—other chapter.
Disclosure requirements
Additional disclosures will be required with regard to the characteristics of the company’s benefit plans, the amounts recognized in the financial statements, and the amount, timing, and uncertainty of future cash flows arising from defined benefit plans and multi- employer plans. The disclosures are presented as objectives that the disclosures should achieve rather than a checklist of required disclosures. The new requirements likely will increase the volume of disclosure for many companies.
The increased disclosures are generally consistent with disclosures already required under US GAAP, though some will be additional disclosures.
Timing
A final standard was issued June 2011. The effective date for the amendments is January 1, 2013, with early application permitted. The FASB’s project in this area is not active, but the board is monitoring the work of the IASB as it contemplates next steps. The IASB has indicated an intention to perform a comprehensive review of defined benefit accounting including measurement issues. The review will be performed in the future as part of a next phase for which a timetable has not yet been set. The IASB would consider conducting such a review with the FASB.
IFRS IC is currently reconsidering the accounting for employee benefit plans with a promised return on contributions or notional contributions. The Committee has previously considered this issue in 2002-2006. In 2004 it published IFRIC Draft Interpretation D9. In November 2006 it decided to refer the issue to the Board to be included in the Board’s project on post-employment benefits. Although the Board initially intended to address contribution-based promises in its project, it later decided to defer this work to a future broader project on employee benefits. In the light of the Board’s decision not to address the accounting for contribution- based promises at present and the ongoing concerns about how to account for such pension arrangements, the Committee decided to revisit the issues. Accordingly, the Committee started its discussions in July 2012.
US Patient Protection and Affordable Care Act
The 2010 Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 (HCERA) include provisions that will impact companies that provide retiree health care benefits through postretirement benefit plans. Although many of these provisions do not take effect for a number of years, they affect the current measurement of the benefit obligations because the impact of presently enacted law changes must be reflected in the estimate of the future benefit levels.
Many aspects of the legislation remain unclear and may be revisited by Congress. Further guidance is expected as clarifying regula- tions are issued. Until then, companies should continue to make their best estimate of what the future impact will be (based on enacted laws) when measuring their year-end obligations.
At the end of June 2012, the US Supreme Court upheld the constitutionality of the PPACA, with the exception of a narrow ruling regarding federal funding of state Medicaid programs. As such, employers should continue to reflect the anticipated effects of the Acts in their measurement of OPEB obligations. One example of an implication of the PPACA that will create an accounting differ- ence is the changes to the tax treatment of federal subsidies paid to sponsors of retiree healthcare plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, these subsidy payments will become taxable effective in tax years beginning after December 31, 2012. The impact of the change in tax law will be treated differently under US GAAP and IFRS. US GAAP requires the impact of the change in tax law to be recognized immediately in continuing opera- tions in the income statement in the period that includes the enactment date. IFRS requires the change in deferred tax balances to be allocated to the account(s) where the original pre-tax transaction or event was initially recorded (sometimes referred to as “backwards tracing”). US GAAP prohibits backwards tracing. See the Liabilities—taxes chapter for further discussion on the differ- ences in accounting for subsequent changes to deferred taxes.