statement of financial position at each reporting period. [IAS 19.63].
8.2
Restriction of assets to their recoverable amounts
The net defined benefit balance determined under IAS 19 may be an asset. The standard
asserts that an asset may arise (that is, an asset measured on the basis of IAS 19) where
a defined benefit plan has been ‘over-funded’ or when actuarial gains have arisen. The
standard justifies the recognition of an asset in such cases because:
(a) the entity controls a resource, which is the ability to use the surplus to generate
future benefits;
(b) that control is a result of past events (contributions paid by the entity and service
rendered by the employee); and
(c) future
economic
benefits
are available to the entity in the form of a reduction in
future contributions or a cash refund, either directly to the entity or indirectly to
another plan in deficit; the present value of those benefits is described as the asset
ceiling. [IAS 19.8, 65].
In practice, pension plans tend to be funded on a significantly more prudent basis than would
be the case if a surplus or deficit was measured in accordance with IAS 19. In particular, the
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discount rate used for funding purposes is typically lower than the rate required by the
standard. For this reason, an IAS 19 valuation may produce a surplus, when for funding
purposes there is a deficit.
When there is a surplus in a defined benefit plan, the standard requires the net asset
recognised to be restricted to the lower of the surplus in the plan and the asset ceiling
discounted using the same discount rate used for determining the defined benefit
obligation (see 7.6 above). [IAS 19.8, 64, IFRIC 14.1].
Any adjustment required by the ceiling test is accounted for in other comprehensive
income (see 10.4 below).
This limitation has proved quite problematic in practice and as a result was considered
by the Interpretations Committee, initially in the context of statutory minimum funding
requirements (‘MFR’). This resulted in the publication, in July 2007, of IFRIC 14 – IAS 19
– The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction. Whilst dealing with the interaction of the asset ceiling with MFR, IFRIC 14
also deals more generally with the restriction of an asset on recoverability grounds.
[IFRIC 14.1-3, 6]. Subsequently, IFRIC 14 was amended to deal with pre-paid MFR –
see 8.2.3 below. It should also be noted that the IASB has published an exposure draft
of proposed amendments to IAS 19 and IFRIC 14 which addresses whether other
parties’ (for example pension trustees) power to enhance benefits for plan members or
wind up a plan affects the availability of a refund (see 16.2.2 below).
The Interpretations Committee notes that MFR exist in many countries and normally
stipulate a minimum amount or level of contribution that must be made to a plan over a
given period. Therefore, a minimum funding requirement may limit an entity’s ability to
reduce future contributions. [IFRIC 14.2].
In addition, the limit on the measurement of a defined benefit asset may cause a
minimum funding requirement to be onerous. Normally, a requirement to make
contributions to a plan would not affect the measurement of the defined benefit asset
or liability. This is because the contributions, once paid, will become plan assets and so
the additional net liability is nil. However, a minimum funding requirement may give
rise to a liability if the required contributions will not be available to the entity once
they have been paid. [IFRIC 14.3].
The issues addressed by IFRIC 14 are: [IFRIC 14.6]
• when refunds or reductions in future contributions should be regarded as available
in accordance with the definition of the asset ceiling (discussed at 8.2.1 and 8.2.2
below);
• how a minimum funding requirement might affect the availability of reductions in
future contributions (discussed at 8.2.3 below); and
• when a minimum funding requirement might give rise to a liability (discussed
at 8.2.4 below).
8.2.1
IFRIC Interpretation 14 – general requirements concerning the limit
on a defined benefit asset
IFRIC 14 clarifies that economic benefits, in the form of refunds or reduced future
contributions, are available if they can be realised by the entity at some point during the
2802 Chapter 31
life of the plan or when the plan liabilities are settled. In particular, such economic
benefits may be available even if they are not realisable immediately at the end of the
reporting period. [IFRIC 14.8].
Furthermore, the benefit available does not depend on how the entity intends to use
the surplus. The entity should determine the maximum economic benefit that is
available from refunds, reductions in future contributions or a combination of both.
However, economic benefits should not be recognised from a combination of refunds
and reductions in future contributions based on assumptions that are mutually
exclusive. [IFRIC 14.9]. Perhaps unnecessarily, the interpretation requires the availability
of a refund or a reduction in future contributions to be determined in accordance with
the terms and conditions of the plan and any statutory requirements in the jurisdiction
of the plan. [IFRIC 14.7].
The interpretation observes that an unconditional right to a refund can exist whatever
the funding level of a plan at the end of the reporting period. The interpretation further
states that benefits are available as a refund only if the entity has an unconditional right
to a refund:
(a) during the life of the plan, without assuming that the plan liabilities must be settled
in order to obtain the refund; or
(b) assuming the gradual settlement of the plan liabilities over time until all members
have left the plan; or
(c) assuming the full settlement of the plan liabilities in a single event (i.e. as a plan
wind-up).
However, if the right to a refund of a surplus depends on the occurrence or non-
occurrence of one or more uncertain future events not wholly within an entity’s control,
the entity does not have an unconditional right and should not recognise an asset.
[IFRIC 14.11-12].
The economic benefit available as a refund should be measured as the amount of the
surplus at the end of the reporting period (being the fair value of the plan assets less the
present value of the defined benefit obligation) that the entity has a right to receive as a
refund, less any associated costs. For example, if a refund would be subject to a tax other
than income tax of the reporting entity, it should be measured net of the tax. [IFRIC 14.13].
Tax on defined benefit pension plans is discussed further in Chapter 29 at 10.7.
In measuring the amount of a refund available when the plan is wound up (point (c)
above), the costs to the plan of settling the plan liabilities and making the refund should
be included. For example, a deduction should be made for professional fees if these are
paid by the plan rather than the entity, and the costs of any
insurance premiums that
may be required to secure the liability on wind-up. [IFRIC 14.14].
It is usually the case that the trustees of a pension fund are independent of the entity.
Trustees may have a variety of powers to influence a surplus in a plan. For example:
• setting the investment strategy whereby assets with lower risk and lower return
would erode a surplus over time; or the purchase of assets in the form of insurance
policies matching all or some of the cash outflows of the plan; or
• full or partial settlement of liabilities; or the improvement of benefits under the plan.
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IFRIC 14 makes it clear that for future benefit improvements made by the employer and
actuarial gains and losses, the existence of an asset at the end of the reporting period is
not affected by possible future changes to the amount of the surplus. If future events
occur that change the amount of the surplus, their effects are recognised when they
occur. [IFRIC 14.BC10].
The standard is also clear that if the right to a refund of a surplus depends on the
occurrence or non-occurrence of one or more uncertain future events that are not
wholly within an entity’s control, the entity does not have an unconditional right and
should not recognise a surplus. [IFRIC 14.11-12].
However neither IAS 19 nor IFRIC 14 address the question of whether the entity’s right
to a refund of a surplus which depends on the occurrence or non-occurrence of
uncertain future events means that no surplus should be recognised in any scenario
where trustees have the power to ‘spend’ a surplus.
As noted above, the IASB has published an exposure draft of proposed amendments to
IFRIC 14 which addresses whether the power of other parties (for example pension
trustees) to enhance benefits for plan members or wind up a plan affects the availability
of a refund (see 16.2.2 below). This exposure draft was issued as a response to two
requests to the Interpretations Committee, suggesting that there is diversity in practice
in this area. In the Basis for Conclusions on the exposure draft the IASB noted that
paragraph BC10 of IFRIC 14 had not specifically addressed the circumstances in which
trustees have such unconditional powers. The exposure draft proposes that the amount
of the surplus that the entity recognises as an asset on the basis of a future refund shall
not include amounts that other parties can use for other purposes that affect the benefits
for plan members, for example by enhancing those benefits without the entity’s consent.
Until the issue is clarified through the amendment to the standard and interpretation we
expect diversity in practice to continue in this area.
If the amount of a refund is determined as the full amount or a proportion of the surplus,
rather than a fixed amount, an entity should make no adjustment for the time value of
money, even if the refund is realisable only at a future date. [IFRIC 14.15].
8.2.2
Economic benefits available as reduced future contributions when
there are no minimum funding requirements for future service
IFRIC 14 addresses separately cases where there are minimum funding requirements
relating to benefits to be awarded in future periods in exchange for services to be
rendered in those periods, and cases where there are no such funding requirements.
This section deals with the situation where there are no such funding requirements. The
implications of future service minimum funding requirements are discussed at 8.2.3 below.
IFRIC 14 requires that the economic benefit available by way of reduced future
contributions be determined as the future service cost to the entity for each period over
the shorter of the expected life of the plan and the expected life of the entity. The future
service cost to the entity excludes amounts that will be borne by employees. [IFRIC 14.16].
Future service costs should be determined using assumptions consistent with those used
to determine the defined benefit obligation and with the situation that exists at the end
of the reporting period as determined by IAS 19. Accordingly, no future changes to the
2804 Chapter 31
benefits to be provided by a plan should be assumed until the plan is amended, and a
stable workforce in the future should be assumed unless the entity makes a reduction in
the number of employees covered by the plan. In the latter case, the assumption about
the future workforce should include the reduction. The present value of the future
service cost should be determined using the same discount rate as that used in the
calculation of the defined benefit obligation (discount rates are discussed at 7.6 above).
[IFRIC 14.17].
8.2.3
IFRIC Interpretation 14 – the effect of a minimum funding
requirement on the economic benefit available as a reduction in
future contributions
IFRIC 14 defines minimum funding requirements as ‘any requirements to fund a post-
employment or other long-term defined benefit plan’. [IFRIC 14.5]. This is clearly quite a
wide definition encompassing more than just statutory regimes.
Some minimum funding arrangements require periodic reappraisal (for example,
every three years). Should such an arrangement cover a longer period, all payments
over this longer period constitute the minimum funding requirement, not just the
three years until the next reappraisal. In its March 2015 meeting the Interpretations
Committee, following a request for clarification, discussed whether an entity should
assume that the minimum funding requirement for contributions to cover future
services (see below) would continue over the estimated life of the pension plan. The
Interpretations Committee tentatively decided not to add this issue to its agenda as it
believed that sufficient guidance existed and that neither an Interpretation nor an
amendment to the standard was necessary.14 In its July 2015 meeting, the
Interpretations Committee noted that the entity should assume a continuation of
existing funding principles because15:
• For any factors not specified by the minimum funding basis (for example, the
period to continue the plan is not specified by the existing funding principles), the
assumptions for determining future service costs and those used to estimate the
future minimum funding requirement contributions for future service must be
consistent. This is because the Interpretation requires an entity to use assumptions
that are consistent with those used to determine the defined benefit obligation and
with the situation that exists at the end of the reporting period. [IFRIC 14.17, 21].
• The estimate should not include changes to the funding principles to determine
contributions for future service, if such changes require future negotiations with
pension trustees. [IFRIC 14.21, BC30].
The interpretation requires any minimum funding requirement at a given date to be
analysed into contributions that are required to cover: [IFRIC 14.18]
(a) any existing shortfall for past service on the minimum funding basis. These
contributions do not affect future contributions for future service. However, they
may give rise to a liability under IFRIC 14 (see 8.2.4 below); [IF
RIC 14.19] and
(b) future
service.
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benefits
2805
If there is a minimum funding requirement for contributions relating to future service,
the economic benefit available as a reduction in future contributions is the sum of:
[IFRIC 14.20]
(a) any amount that reduces future minimum funding requirement contributions for
future service because the entity made a pre-payment (that is, it paid the amount
before being required to do so); and
(b) the estimated future service cost in each period (as discussed at 8.2.2 above) less the
estimated minimum funding requirement contributions that would be required for
future service in those periods if there were no pre-payment as described in (a).
The future minimum funding contributions required in respect of future service should
be calculated:
• taking into account the effect of any existing surplus on the minimum funding
requirement basis but excluding the pre-payment discussed in (a) immediately above;
• using assumptions consistent with the minimum funding requirement basis. For
any factors not specified by the minimum funding requirement, the assumptions
used should be consistent with those used to determine the defined benefit
obligation and with the situation that exists at the end of the reporting period as
determined by IAS 19;
• including any changes expected as a result of the entity paying the minimum
contributions when they are due; and
• excluding the effect of expected changes in the terms and conditions of the
minimum funding basis that are not substantively enacted or contractually agreed
at the end of the reporting period. [IFRIC 14.21].
If the future minimum funding contribution required in respect of future service
exceeds the future IAS 19 service cost in any given period, the present value of that
excess reduces the amount of the asset available as a reduction in future contributions.
However, the amount of the asset available as a reduction in future contributions can
never be less than zero. [IFRIC 14.22].
The mechanics of the above requirements are illustrated in the following two
examples based on the illustrative examples accompanying IFRIC 14. [IFRIC 14.IE9-IE27].
Example 31.4 also illustrates the requirement in certain circumstances to recognise an
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 559
