PwC Comments to the IASB on Tentative Agenda Decision: IAS 19 , Employee benefits - Accounting for contribution-based promises

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PwC comment letter (IASB) 07/30/2012 by Global accounting consulting services

PwC global network of firms supports the Interpretations Committee's decision that the accounting for employee benefit plans with a promised return on contributions or notional contributions explored in the Draft IFRIC should be further considered.

Comment letter


IFRS Interpretations Committee
1st Floor
30 Cannon Street
London EC4M 6XH
United Kingdom

26 July 2012

Dear Sirs

IAS 19 Employee benefits—Accounting for contribution-based promises – Reconsideration of Draft Interpretation D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions

Tentative agenda decision relating to:

IAS 19 Employee Benefits—Accounting for contribution-based promises - Impact of the 2011 amendments to IAS 19

We are responding to the above tentative agenda decision, published in the May 2012 edition of the IFRS Interpretations Committee Update, on behalf of PricewaterhouseCoopers.

Following consultation with members of the PricewaterhouseCoopers network of firms, this response summarises the views of member firms that commented on the tentative agenda decision. ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Reconsideration of Draft Interpretation D9

We support the Interpretations Committee's decision that the accounting for employee benefit plans with a promised return on contributions or notional contributions explored in Draft Interpretation D9 (IFRIC D9) should be further considered.

Many funded contribution-based promise arrangements promise employees a benefit based on the higher of a fixed or actual return on employer and employee contributions. Some believe that IAS 19 requires an entity to determine the defined benefit obligation by estimating the future return on plan assets to determine the benefits to be paid to employees, and then discounting this amount using the yield on high-quality corporate or government bonds. This approach generally results in the entity recording a liability because the return on plan assets is usually higher than the discount rate. However, there will be no additional outflow of economic benefits to settle the obligation for many of these plans, because any payment to the employees will be funded from the investment returns.

Recording a liability does not reflect the economic substance of the arrangements or provide useful information to the users of the financial statements. We believe the principles proposed in IFRIC D9 reflect the economic substance of these plans and provide useful information about the obligations of these types of plan. We are aware that there remains divergence in the accounting for these arrangements under the existing version of IAS 19, and we believe that divergence is likely to continue under the 2011 amendments to IAS 19. Some entities apply the principles in IFRIC D9, but others recognise a liability. We would therefore welcome further clarification that the accounting proposed in IFRIC D9 is appropriate for these types of plan.

However, we are concerned by the statement in the tentative agenda decision that the IASB did not intend to change the accounting for these types of promise unless they include elements of risk-sharing. For the reasons described below, we believe the 2011 amendments to IAS 19 might have implications for entities that currently apply the principles in IFRIC D9.

Accounting for contribution based promises – Impact of the 2011 amendments to IAS 19

We are concerned that the tentative agenda decision addresses only contribution-based promises that do not contain elements of risk-sharing between the employer and the employee. We are also concerned that the tentative agenda decision does not address the specific changes to the words in IAS 19, which we believe might change the accounting for the types of plan addressed by IFRIC D9. The tentative agenda decision might not therefore reduce diversity in practice.

The tentative agenda decision states that the Committee does not expect the 2011 amendments to IAS 19 to cause changes to the accounting for contribution-based promise arrangements unless such promises also include elements of risk-sharing between employees and employers. Many of these types of plan share the risks of investment performance between the employer and the employee. It is therefore not clear that the tentative agenda decision applies to these plans. We believe that the tentative agenda decision should be revised to be clear about implications of the 2011 amendments to IAS 19 for plans that share investment risk.

The tentative agenda decision also states that the IASB did not intend to change the accounting for contribution-based promise arrangements. We are concerned that the accounting for many of the plans addressed by IFRIC D9 might have been changed inadvertently by some additional wording included in the 2011 amendments to IAS 19 and that the Board’s intention is therefore not relevant. Paragraph 88(c) of IAS 19 now states, “The measurement of the obligation reflects the best estimate of the effect of the performance target or other criteria”. This suggests that the measurement of the defined benefit obligation should reflect the present value of benefits to be paid on the basis of expected returns. This would be a change for those entities that have previously applied the guidance in IFRIC D9.

The basis for conclusions in paragraph BC143(c) now states that “any conditional indexation should be reflected in the measurement of the defined benefit obligation, whether the indexation or changes in benefits are automatic or are subject to a decision by the employer, the employee or a third party, such as trustees or administrators of the plan”. Paragraph BC148 also states that “In the Board’s view, projecting the benefit on the basis of current assumptions of future investment performance (or other criteria to which the benefits are indexed) is consistent with estimating the ultimate cost of the benefit, which is the objective of the measurement of the defined benefit obligation, as stated in paragraph 76”. Both of these statements appear to preclude applying the guidance in IFRIC D9.

We believe that the Committee should reconsider whether these specific amendments to IAS 19 require entities applying the principles in IFRIC D9 to change the accounting for the types of plan addressed by IFRIC D9. The tentative agenda decision should then be revised to address the implications of these amendments.

If you have any questions in relation to this letter, please do not hesitate to contact John Hitchins (+44 20 7804 2497) or Tony de Bell (+44 20 7213 5336).

Yours faithfully

PricewaterhouseCoopers