International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 560
additional liability for future MFR payments in respect of past service (discussed
at 8.2.4 below).
Example 31.4: Deficit-clearing future minimum funding requirements when
refunds are not available
An entity has a funding level on the minimum funding requirement basis (which is measured on a different
basis from that required under IAS 19) of 95% in Plan C. Under the minimum funding requirements, the
entity is required to pay contributions to increase the funding level to 100% over the next three years. The
contributions are required to make good the deficit on the minimum funding requirement basis (shortfall) and
to cover future service.
Plan C also has an IAS 19 surplus at the end of the reporting period of €50m, which cannot be refunded to
the entity under any circumstances. There are no unrecognised amounts.
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The nominal amounts of the minimum funding contribution requirements in respect of the shortfall and the
future IAS 19 service cost for the next three years are set out below.
Year Total
minimum
funding
Minimum contributions required
Minimum contributions required
contribution requirement
to make good the shortfall
to cover future accrual
€m €m €m
1
135
120
15
2
125
112
13
3
115
104
11
The entity’s present obligation in respect of services already received includes the contributions required to
make good the shortfall but does not include the minimum contributions required to cover future service.
The present value of the entity’s obligation, assuming a discount rate of 6% per year, is approximately 300,
calculated as follows:
€120m/(1.06) + €112m /(1.06)2 + €104m/(1.06)3
When these contributions are paid into the plan, the IAS 19 surplus (i.e. the fair value of assets less the present
value of the defined benefit obligation) would, other things being equal, increase from €50m to €350m.
However, the surplus is not refundable although an asset may be available as a future contribution reduction.
As noted above, the economic benefit available as a reduction in future contributions is the present value of:
• the future service cost in each year to the entity; less
• any minimum funding contribution requirements in respect of the future accrual of benefits in that year
over the expected life of the plan.
The amounts available as a future contribution reduction are set out below.
IAS
19
Minimum contributions
Amount available
service cost
required to cover
as contribution
future accrual
reduction
Year €m
€m
€m
1
13
15
(2)
2
13
13
0
3
13
11
2
4+
13
9
4
Assuming a discount rate of 6%, the economic benefit available as a future contribution reduction is therefore
equal to:
€(2)m/(1.06) + €0m/(1.06)2 + €2m/(1.06)3 + €4m/(1.06)4 + €4m/(1.06)5 + €4m/(1.06)6 .... = €56m.
The asset available from future contribution reductions is accordingly limited to €56m.
As discussed at 8.2.4 below, IFRIC 14 requires the entity to recognise a liability to the extent that the
additional contributions payable will not be fully available. Therefore, the effect of the asset ceiling is to
reduce the defined benefit asset by €294m (€50m + €300m – €56m).
As discussed at 10.4 below, the effect of the asset ceiling is part of remeasurements and the €294m is
recognised immediately in other comprehensive income and the entity recognises a net liability of €244m.
No other liability is recognised in respect of the obligation to make contributions to fund the minimum
funding shortfall.
When the contributions of €300m are paid into the plan, the net asset will become €56m (€300m – €244m).
Employee
benefits
2807
Example 31.5: Effect of a prepayment when a minimum funding requirement
exceeds the expected future service charge
An entity is required to fund Plan D so that no deficit arises on the minimum funding basis. The entity is
required to pay minimum funding requirement contributions to cover the service cost in each period
determined on the minimum funding basis.
Plan D has an IAS 19 surplus of 35 at the beginning of 2015. This example assumes that the discount rate is
0%, and that the plan cannot refund the surplus to the entity under any circumstances but can use the surplus
for reductions of future contributions.
The minimum contributions required to cover future service are €15 for each of the next five years. The
expected IAS 19 service cost is €10 in each year.
The entity makes a prepayment of €30 at the beginning of 2015 in respect of years 2015 and 2016, increasing
its surplus at the beginning of 2015 to €65. That prepayment reduces the future contributions it expects to
make in the following two years, as follows:
Minimum funding requirement contribution:
Year
IAS 19 service cost (€)
Before pre-payment (€)
After pre-payment (€)
2015
10
15
0
2016
10
15
0
2017
10
15
15
2018
10
15
15
2019
10
15
15
Total
50
75
45
At the beginning of 2015, the economic benefit available as a reduction in future contributions is the sum of:
• 30, being the prepayment of the minimum funding requirement contributions; and
• nil. The estimated minimum funding requirement contributions required for future service would be 75
if there was no prepayment. Those contributions exceed the estimated future service cost (50); therefore
the entity cannot use any part of the surplus of 35.
Assuming a discount rate of 0%, the present value of the economic benefit available as a reduction in future
contributions is equal to 30. Accordingly, the entity recognises an asset of 30 (because this is lower than the
IAS 19 surplus of 65).
Two points worth noting in Example 31.5 above are as follows. The first is that, if
IFRIC 14 did not allow the recognition of such prepayments, the full surplus of €65
would have been written off. The second is that, in the fact pattern of the question, it is
unnecessary to know that the surplus before the prepayment was €35. This is because
any surplus (other than the prepayment of MFR) would not be recognised because
refunds are not available and future MFR exceeds future service costs.
8.2.4
IFRIC Interpretation 14 – when a minimum funding requirement may
; give rise to a liability
If there is an obligation under a minimum funding requirement to pay contributions to
cover an existing shortfall on the minimum funding basis in respect of services already
received, the entity should determine whether the contributions payable will be available
as a refund or reduction in future contributions after they are paid into the plan. [IFRIC 14.23].
Recovery through reduced future contributions is discussed at 8.2.2 and 8.2.3 above.
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If a surplus is recoverable by way of a refund (see 8.2.1 above), a minimum funding
requirement to cover a shortfall in respect of past services will neither restrict an IAS 19 asset
nor trigger the recognition of a liability as it will be recoverable with any refund. IFRIC 14
illustrates this by way of an example upon which the following is based. [IFRIC 14.IE1-2].
Example 31.6: Effect of the minimum funding requirement when there is an
IAS 19 surplus and the minimum funding contributions payable
are fully refundable to the entity
An entity has a funding level on the minimum funding requirement basis (which is measured on a different basis
from that required under IAS 19) of 82% in Plan A. Under the minimum funding requirements, the entity is
required to increase the funding level to 95% immediately. As a result, the entity has a statutory obligation at the
end of the reporting period to contribute €200m to Plan A immediately. The plan rules permit a full refund of
any surplus to the entity at the end of the life of the plan. The year-end valuations for Plan A are set out below.
€million
Fair value of assets
1,200
Present value of defined benefit obligation under IAS 19
(1,100)
Surplus
100
Defined benefit asset (before consideration of the minimum funding requirement)
100
Payment of the contributions of €200m will increase the IAS 19 surplus from €100m to €300m. Under the
rules of the plan this amount will be fully refundable to the entity with no associated costs. Therefore, no
liability is recognised for the obligation to pay the contributions and the net defined benefit asset will be
recognised at €100m.
To the extent that the contributions payable will not be available after they are paid into
the plan, a liability should be recognised when the obligation arises. The liability should
reduce the net defined benefit asset or increase the net defined benefit liability so that
no gain or loss is expected to result from the effect of the asset ceiling when the
contributions are paid. [IFRIC 14.24].
IFRIC 14 illustrates this by way of an example upon which the following is based.
[IFRIC 14.IE3-8].
Example 31.7: Effect of a minimum funding requirement when there is an
IAS 19 deficit and the minimum funding contributions payable
would not be fully available
An entity has a funding level on the minimum funding requirement basis (which is measured on a different
basis from that required under IAS 19) of 77% in Plan B. Under the minimum funding requirements, the
entity is required to increase the funding level to 100% immediately. As a result, the entity has a statutory
obligation at the end of the reporting period to pay additional contributions of €300m to Plan B. The plan
rules permit a maximum refund of 60% of the IAS 19 surplus to the entity and the entity is not permitted to
reduce its contributions below a specified level which happens to equal the IAS 19 service cost. The year-end
valuations for Plan B are set out below.
€million
Fair value of assets
1,000
Present value of defined benefit obligation under IAS 19
(1,100)
Deficit
(100)
Employee
benefits
2809
The payment of €300m would change the IAS 19 deficit of €100m to a surplus of €200m.
Of this €200m, 60% (€120m) is refundable. Therefore, of the contributions of €300m,
€100m eliminates the IAS 19 deficit and €120m (60% of €200m) is available as an
economic benefit. The remaining €80m (40% of €200m) of the contributions paid is not
available to the entity. As discussed above, IFRIC 14 requires the entity to recognise a
liability to the extent that the additional contributions payable are not available to it.
Accordingly, the net defined benefit liability is €180m, comprising the deficit of €100m
plus the additional liability of €80m with €80m also being recognised in other
comprehensive income. No other liability is recognised in respect of the statutory
obligation to pay contributions of €300m. When the contributions of €300m are paid,
the net asset will be €120m. If the entity were required to achieve a 100% funding
position at some point in the future, but not immediately, the present value of its
contributions over this period would be used in the calculation above.
8.2.5
Pension funding payments contingent on future events within the
control of the entity
As entities begin to consider moving away, in part at least, from deficit funding
contributions which are fixed payments at fixed dates (which are clearly deficit clearing
minimum funding requirements) to contributions contingent on future events, what
constitutes a minimum funding requirement becomes more important, especially where
it is concluded that an IAS 19 surplus is not recoverable. The definition of plan assets is
discussed at 6.1 above and minimum funding requirements are discussed at 8.2.3 above.
Where a surplus is not recoverable, under the asset ceiling an instrument recognised as
a plan asset would be written off and an arrangement which, whilst not being a plan
asset, is considered a minimum funding requirement, would be provided for under
IFRIC 14. But, a very similar arrangement which is considered neither a plan asset nor a
minimum funding requirement would not be accounted for until payments are made.
Examples of contingent funding payments include:
• an amount (which could be fixed or a proportion) of sales proceeds in the event
that the entity disposes of a significant asset, for example a proportion of the
proceeds from the sale of a building, or a division; and
• some multiple of any dividends paid within a specified period.
These arrangements require a funding payment as a consequence of a transaction which
reduces the covenant of the entity. In the scenarios above, the funding only happens as
a result of an action within the control of the entity. Accordingly, such an obligation on
a stand-alone basis would not be considered a financial liability under IAS 32 –
Financial Instruments: Presentation.
This leads to the key consideration of whether a binding agreement requiring the
making of payments to a fund be neither a plan asset (as it does not meet the definition
of a plan asset as it is non-transferable) nor a minimum funding requirement (as it is
contingent on the actions of the entity).
One view may be that these contingent contributions would meet the definition of a
minimum funding requirement. IAS 19 is based on the best estimates of ultimate cashflows
and it is unequivocal that cashflows used to calculate the defined benefit obligation
include the effect of actions which are within the control of the entity. Most obviously,
2810 Chapter 31
both continued employment and pay increases are within the control of the employer and
are estimated to determine the defined benefit obligation and service cost (see 7.5 above).
Therefore, if the defined benefit obligation reflects a best estimate of future actions within
the control of the entity, an argument could be made that a similar approach could be
taken to funding payments. If it is believed that contingent contributions meet the
definition of a minimum funding requirement, any accounting consequences of them
would be recognised at the inception of the agreement. Under this view the entity would
need to make a best estimate of the amount and timing of any future contributions, and
determine whether an additional liability arises under IFRIC 14 where these would not be
recoverable (see 8.2.4 above).
An alternative view that contingent funding is not a minimum funding requirement
could be formed by analogy to IAS 32 or IAS 37. A cash payment which the entity could
avoid would not generally be accounted for as a financial liability under IAS 32 (it would
be an equity instrument). It could be argued that it would therefore not be encompassed
within the phrase ‘any requirement to fund’. Under this analysis the definition of a plan
asset (see 6.1 above) becomes particularly important. A transferable instrument would
be a plan asset, and would be written off under the asset ceiling mechanism if it is not
considered recoverable under IFRIC 14. A non-transferable instrument would not meet
the definition of a plan asset. If such an instrument was not considered a minimum
funding requirement (because it could be avoided by the entity) it would not be
accounted for until a payment were made.
If analogy were made to IAS 37, the presence of a constructive obligation could trigger
recognition of a liability in respect of irrecoverable minimum funding payments at the
moment it becomes probable that an outflow of resources will be required to settle the