International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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of the benefit to years of service and the impact of an unwinding discount.
The wide variety of possible arrangements in practice mean that careful
consideration of individual circumstances will be required to determine the true
substance of such arrangements.
3.3 Multi-employer
plans
3.3.1
Multi-employer plans other than plans sharing risks between entities
under common control
3.3.1.A
The treatment of multi-employer plans
Multi-employer plans, other than state plans (see 3.4 below), under IAS 19 are defined
contribution plans or defined benefit plans that:
(a) pool assets contributed by various entities that are not under common control; and
(b) use those assets to provide benefits to employees of more than one entity, on the
basis that contribution and benefit levels are determined without regard to the
identity of the entity that employs the employees. [IAS 19.8].
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Accordingly, they exclude group administration plans, which simply pool the assets of more
than one employer, for investment purposes and the reduction of administrative and
investment costs, but keep the claims of different employers segregated for the sole benefit
of their own employees. The standard observes that group administration plans pose no
particular accounting problems because information is readily available to treat them in the
same way as any other single employer plan and because they do not expose the participating
employers to actuarial risks associated with the current and former employees of other
entities. Accordingly, the standard requires group administration plans to be classified as
defined contribution plans or defined benefit plans in accordance with the terms of the plan
(including any constructive obligation that goes beyond the formal terms). [IAS 19.38].
The standard gives a description of one example of a multi-employer scheme as follows:
(a) the plan is financed on a pay-as-you-go basis: contributions are set at a level that is
expected to be sufficient to pay the benefits falling due in the same period; and future
benefits earned during the current period will be paid out of future contributions; and
(b) employees’ benefits are determined by the length of their service and the participating
entities have no realistic means of withdrawing from the plan without paying a
contribution for the benefits earned by employees up to the date of withdrawal. Such
a plan creates actuarial risk for the entity: if the ultimate cost of benefits already earned
at the end of the reporting period is more than expected, it will be necessary for the
entity either to increase its contributions or persuade employees to accept a reduction
in benefits. Therefore, such a plan is a defined benefit plan. [IAS 19.35].
A multi-employer plan should be classified as either a defined contribution plan or a
defined benefit plan in accordance with its terms in the normal way (see 3.1 above).
[IAS 19.32]. If a multi-employer plan is classified as a defined benefit plan, IAS 19 requires
that the employer should account for its proportionate share of the defined benefit
obligation, plan assets and costs associated with the plan in the same way as for any
other defined benefit plan (see 5-11 below). [IAS 19.33, 36].
The standard does, however, contain a practical exemption if insufficient information is
available to use defined benefit accounting. This could be the case, for example, where:
(a) the entity does not have access to information about the plan that satisfies the
requirements of the standard; or
(b) the plan exposes the participating entities to actuarial risks associated with the
current and former employees of other entities, with the result that there is no
consistent and reliable basis for allocating the obligation, plan assets and cost to
individual entities participating in the plan. [IAS 19.36].
In such circumstances, an entity should account for the plan as if it were a defined
contribution plan and make the disclosures set out at 15.2.4 below. [IAS 19.34, 36].
The standard notes that there may be a contractual agreement between the multi-employer
plan and its participants that determines how the surplus in the plan will be distributed to
the participants (or the deficit funded). In these circumstances, an entity participating in such
a plan, and accounting for it as a defined contribution plan (as described above), should
recognise the asset or liability arising from the contractual agreement and the resulting
income or expense in profit or loss. [IAS 19.37]. The standard illustrates this with an example
of an entity participating in a multi-employer defined benefit plan which it accounts for as
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a defined contribution plan because no IAS 19 valuations are prepared. A non-IAS 19
funding valuation shows a deficit of CU100 million in the plan. A contractual schedule of
contributions has been agreed with the participating employers in the plan that will
eliminate the deficit over the next five years. The entity’s total contributions to eliminate
the deficit under the contract are CU8 million. IAS 19 requires the entity to recognise
immediately a liability for the contributions adjusted for the time value of money and an
equal expense in profit or loss. The important point here is that the standard makes clear
that ‘defined contribution accounting’ is not the same as cash accounting. Extra payments
to make good a deficit should be provided for immediately when they are contracted for.
3.3.1.B
What to do when ‘sufficient information’ becomes available
As discussed above, IAS 19 requires a multi-employer defined benefit plan to be treated
for accounting purposes as a defined contribution plan when insufficient information is
available to use defined benefit accounting. The standard does not address the accounting
treatment required when that situation changes because sufficient information becomes
available in a period. Two possible approaches present themselves:
(a) an immediate charge/credit to profit or loss equal to the deficit/surplus; or
(b) an actuarial gain or loss recognised on other comprehensive income.
Arguments in favour of (a) would be that for accounting purposes the scheme was a defined
contribution scheme. Accordingly, starting defined benefit accounting is akin to introducing
a new scheme. The defined benefit obligation recognised is essentially a past service cost.
In addition, as discussed at 3.3.1.A above, the standard clarifies that while defined
contribution accounting is being applied an asset or liability should be recognised where
there is a contractual arrangement to share a surplus or fund a deficit. The receipt of full
information could be considered to represent such an arrangement and hence require full
recognition in the statement of financial position with an equivalent entry in profit or loss.
Arguments for (b) would be that the scheme has not changed and that defined contribution
accounting was a proxy (and best available estimate) for what the defined benefit accounting
should have been. Accordingly, any change to that estimate due to the emergence of new
information is an actuarial variance which is
recognised in other comprehensive income.
Given the ambiguity of the standard either approach is acceptable if applied consistently.
3.3.1.C
Withdrawal from or winding up of a multi-employer scheme
IAS 19 requires the application of IAS 37 to determine when to recognise and how to
measure a liability relating to the withdrawal from, or winding-up of, a multi-employer
scheme. [IAS 19.39].
3.3.2
Defined benefit plans sharing risks between entities under common
control
IAS 19 provides that defined benefit plans that share risks between various entities
under common control, for example a parent and its subsidiaries, are not multi-
employer plans. [IAS 19.40].
The test, described earlier, for allowing a defined benefit multi-employer plan to be
accounted for as a defined contribution plan is that insufficient information is available.
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By completely excluding entities that are under common control from the definition of
multi-employer plans the standard is essentially saying that for these employers
sufficient information is deemed always to be available – at least for the plan as a whole.
The standard requires an entity participating in such a plan to obtain information about
the plan as a whole measured in accordance with IAS 19 on the basis of assumptions
that apply to the plan as a whole. [IAS 19.41]. Whilst a subsidiary may not be in a position
to demand such information (any more than participants in schemes described at 3.3.1
above), the standard is essentially saying that the parent must make the information
available if it wants the subsidiary to be able to comply with IAS 19.
The standard then goes on to specify the accounting treatment to be applied in the
individual financial statements of the participating entities. The standard states: ‘If there
is a contractual agreement or stated policy for charging to individual group entities the
net defined benefit cost for the plan as a whole measured in accordance with this
Standard, the entity shall, in its separate or individual financial statements, recognise the
net defined benefit cost so charged. If there is no such agreement or policy, the net
defined benefit cost shall be recognised in the separate or individual financial
statements of the group entity that is legally the sponsoring employer for the plan. The
other group entities shall, in their separate or individual financial statements, recognise
a cost equal to their contribution payable for the period’. [IAS 19.41]. This seems to raise
more questions than it answers. For example, it provides no clarity on what is meant by:
• the ‘net defined benefit cost ... measured in accordance with [IAS 19]’. In particular,
are actuarial gains and losses part of this ‘net cost’?
• an entity that ‘is legally the sponsoring employer for the plan’. The pan-
jurisdictional scope of IFRS makes such a determination particularly difficult.
Furthermore, it suggests that there is only one such legal sponsor – which may not
be the case in practice.
A further difficulty with these provisions of the standard is whether it is ever likely in
practice that entities would be charged an amount based on the ‘defined benefit cost
measured in accordance with [IAS 19]’. Naturally, situations vary not just across, but also
within, individual jurisdictions. However, it is typically the case that funding valuations
will not be on an IAS 19 basis, so that any amounts ‘charged’ will not be measured in
accordance with IAS 19. Indeed, as discussed at 3.3.1 above, the standard gives non-
IAS 19 funding valuations in a multi-employer plan as a reason why sufficient
information to allow defined benefit accounting is not available.
Some further insight as to the IASB’s intentions can be found in the Basis for
Conclusions to the standard.
‘The Board noted that, if there were a contractual agreement or stated policy on
charging the net defined benefit cost to group entities, that agreement or policy would
determine the cost for each entity. If there is no such contractual agreement or stated
policy, the entity that is the sponsoring employer bears the risk relating to the plan by
default. The Board therefore concluded that a group plan should be allocated to the
individual entities within a group in accordance with any contractual agreement or
stated policy. If there is no such agreement or policy, the net defined benefit cost is
allocated to the sponsoring employer. The other group entities recognise a cost equal
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to any contribution collected by the sponsoring employer. This approach has the
advantages of (a) all group entities recognising the cost they have to bear for the defined
benefit promise and (b) being simple to apply’. [IAS 19.BC48-49].
This analysis is particularly noteworthy in these respects:
(a) there is no mention of amounts charged being measured in accordance with IAS 19.
Indeed, the third sentence refers to any such agreement or stated policy;
(b) the focus is not on ‘amounts charged’ but rather an ‘allocation’ of the scheme
across entities;
(c) references are to a ‘sponsoring employer’ crucially not a legally sponsoring
employer. The term is slightly clarified by the explanation that a sponsoring
employer is one that by default bears the ‘risks relating to the plan’; and
(d) the discussion of employers other than the sponsoring employer is explicitly by
reference to ‘amounts collected’.
Given the ambiguities in the standard we expect that, for entities applying IFRS at an
individual company level, there may well be divergent treatments in practice.
The standard makes clear that, for each individual group entity, participation in such a
plan is a related party transaction. Accordingly, the disclosures set out at 15.2.5 below
are required. [IAS 19.42].
3.4 State
plans
IAS 19 observes that state plans are established by legislation to cover all entities (or all
entities in a particular category, for example a specific industry) and are operated by
national or local government or by another body (for example an autonomous agency
created specifically for this purpose) which is not subject to control or influence by the
reporting entity. [IAS 19.44]. The standard requires that state plans be accounted for in the
same way as for a multi-employer plan (see 3.3.1 above). [IAS 19.43]. It goes on to note that
it is characteristic of many state plans that:
• they are funded on a pay-as-you-go basis with contributions set at a level that is
expected to be sufficient to pay the required benefits falling due in the same period; and
• future benefits earned during the current period will be paid out of future contributions.
Nevertheless, in most state plans, the entity has no legal or constructive obligation to
pay those future benefits: its only obligation is to pay the contributions as they fall due
and if the entity ceases to employ members of the state plan, it will have no obligation
to pay the benefits earned by its own employees in previous years. For this reason, the
standard considers that state plans are normally defined contribution plans. Ho
wever,
in cases when a state plan is a defined benefit plan, IAS 19 requires it to be treated as
such as a multi-employer plan. [IAS 19.45].
Some plans established by an entity provide both compulsory benefits which substitute
for benefits that would otherwise be covered under a state plan and additional voluntary
benefits. IAS 19 clarifies that such plans are not state plans. [IAS 19.44].
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3.5
Plans that would be defined contribution plans but for the
existence of a minimum return guarantee
It is common in some jurisdictions for the employer to make contributions to a defined
contribution post-employment benefit plan and to guarantee a minimum level of return
on the assets in which the contributions are invested. In other words, the employee enjoys
upside risk on the investments but has some level of protection from downside risk.
The existence of such a guarantee means the arrangement fails to meet the definition of a
defined contribution plan (see 3.1 above) and accordingly is a defined benefit plan. Indeed,
the standard is explicit, as it uses plans which guarantee a specified return on contributions
as an example of a defined benefit arrangement. [IAS 19.29(b)]. The somewhat more difficult
issue is how exactly to apply defined benefit accounting to such an arrangement, as this
would require projecting forward future salary increases and investment returns, and
discounting these amounts at corporate bond rates. Although this approach is clearly
required by the standard, some consider it to be inappropriate in such circumstances. This
issue was debated by the Interpretations Committee, which published a draft
interpretation on 8 July 2004 entitled D9 – Employee Benefit Plans with a Promised
Return on Contributions or Notional Contributions. The approach taken in D9 was to
distinguish two different types of benefits:
(a) a benefit of contributions or notional contributions plus a guarantee of a fixed
return (in other words, benefits which can be estimated without having to make an
estimate of future asset returns); and
(b) a benefit that depends on future asset returns.
For benefits under (a) above, it was proposed that the defined benefit methodology in
IAS 19 be applied as normal. In summary, that meant: