obligation and it can be estimated reliably.
For contributions linked to the sale of an asset or a business, arguments could be made that
the requirements of IFRS 5 – Non-current Assets Held for Sale and Discontinued
Operations – may be relevant in determining when a minimum funding requirement exists.
The appropriate accounting treatment of any particular arrangement will require
judgement to be made based on the individual facts and circumstances.
9
DEFINED BENEFIT PLANS – PRESENTATION OF THE NET
DEFINED BENEFIT LIABILITY (ASSET)
Neither IAS 19 nor IAS 1 specifies where in the statement of financial position a net asset
or net liability in respect of a defined benefit plan should be presented, nor whether
such balances should be shown separately on the face of the statement of financial
position or only in the notes – this is left to the discretion of the reporting entity subject
to the general requirements of IAS 1 discussed in Chapter 3 at 3.1. If the format of the
statement of financial position distinguishes current assets and liabilities from non-
current ones, the question arises as to whether this split needs also to be made for
pension balances. IAS 19 does not specify whether such a split should be made, on the
grounds that it may sometimes be arbitrary. [IAS 19.133, BC200].
Employers with more than one plan may find that some are in surplus while others are
in deficit. IAS 19 contains offset criteria closely modelled on those in IAS 32. [IAS 19.132].
Employee
benefits
2811
An asset relating to one plan may only be offset against a liability relating to another plan
when there is a legally enforceable right to use a surplus in one plan to settle obligations
under the other plan, and the employer intends to settle the obligations on a net basis
or realise the surplus and settle the obligation simultaneously. [IAS 19.131]. We believe
that these offset criteria are unlikely to be met in practice.
10
DEFINED BENEFIT PLANS – TREATMENT IN PROFIT OR
LOSS AND OTHER COMPREHENSIVE INCOME
IAS 19 identifies three components of annual pension cost as follows:
(a) service cost (see 10.1 below);
(b) net interest on the net defined benefit liability (asset) (see 10.3 below); and
(c) remeasurements of the net defined benefit liability (see 10.4 below). [IAS 19.120].
Of these, (a) and (b) are recognised in profit or loss and (c) is recognised in other
comprehensive income. This is unless another standard requires or permits the costs to
be included in the cost of an asset, for example IAS 2 – Inventories – and IAS 16 –
Property, Plant and Equipment. Where the post-employment benefit costs are included
in the cost of an asset the appropriate proportion of all the above items must be
included. [IAS 19.121]. There is no guidance in the standard as to what an ‘appropriate’
proportion of these items might be, although both IAS 2 and IAS 16 are clear that only
those costs which are directly attributable to the asset qualify for capitalisation. It is not
necessarily the case that the appropriate proportion will be the same for all of the
components and judgement will be required in deciding how much of each item can
meaningfully be said to relate to the production of an asset.
Remeasurements recognised in other comprehensive income should not be reclassified
to profit and loss in a subsequent period. The standard notes that those amounts may
be transferred within equity. [IAS 19.122].
The standard states that it does not specify how an entity should present service cost
and net interest on the net defined benefit liability or asset. These components are
accounted for in accordance with IAS 1 (see Chapter 3 at 3.2). [IAS 19.134].
10.1 Service
cost
Service cost comprises:
(a) current service cost – the increase in the present value of the defined benefit
obligation resulting from employee service in the current period;
(b) past service cost –the change in the present value of the defined benefit obligation
for employee service in prior periods, resulting from a plan amendment (the
introduction or withdrawal of, or changes to, a defined benefit plan) or a
curtailment (a significant reduction by the entity in the number of employees
covered by a plan); and
(c) any gain or loss on settlement –the difference, at the date of settlement, between
the present value of the defined benefit obligation being settled and the settlement
price, including any plan assets transferred and any payments made directly by the
entity in connection with the settlement. [IAS 19.8, 109].
2812 Chapter 31
The current service cost should be determined using the projected unit credit method.
[IAS 19.67]. The basic computation is illustrated in Example 31.2 at 7.3 above.
There is no need to distinguish between past service cost resulting from a plan
amendment, past service cost resulting from a curtailment and a gain or loss on
settlement if these transactions occur together. In some cases, a plan amendment occurs
before a settlement, such as when an entity changes the benefits under the plan and
settles the amended benefits later. In those cases an entity recognises past service cost
before any gain or loss on settlement. [IAS 19.8, 100].
A settlement occurs together with a plan amendment and curtailment if a plan is
terminated with the result that the obligation is settled and the plan ceases to exist.
However, the termination of a plan is not a settlement if the plan is replaced by a new
plan that offers benefits that are, in substance, the same. [IAS 19.101].
10.2 Changes in a defined benefit plan
Accounting for past service costs (plan amendments or curtailments) and settlements
are discussed in sections 10.2.1 and 10.2.2 below, respectively.
In summary, when determining the effect of such a transaction, the net defined benefit
liability (asset) should be remeasured using up to date values for plan assets and actuarial
assumptions before and after the event to determine the effect of it. [IAS 19.99].
Any past service cost, or gain or loss on settlement should be recognised and measured
without considering the effect of the asset ceiling (see 8.2 above). The effect of the asset
ceiling should then be determined after the plan amendment, curtailment or settlement
with any change in that effect, excluding amounts included in net interest, recognised
in other comprehensive income. [IAS 19.101A].
Current service cost should ordinarily be determined using actuarial assumptions as at
the start of the reporting period. However, as discussed at 10.2.1 below, a plan
amendment, curtailment or settlement during a reporting period will require
remeasurement of the net defined benefit liability (asset). In such cases the current
service cost for the remainder of the period, that is, after the plan amendment,
curtailment or settlement, should be calculated using the actuarial assumptions used to
for the remeasurement. [IAS 19.122A].
The point in time at which a plan amendment occurs will often be a matter of fact based
on the legal entitlements of plan members. Judgement may be required, based on
; individual facts and circumstances, if the benefits concerned constitute constructive, as
opposed to legal, obligations (see 7.1 above).
Sometimes benefit plans are amended in such a way as to allow members a choice, for a
limited period, between two or more benefit arrangements. In such cases a plan
amendment occurs (and a positive or negative past service cost will be recognised) on the
date at which the new arrangement comes into existence (legally or constructively) and
not at the later date by which members are required to make their choice. This may mean
that the initial accounting for the plan amendment will require estimates to be made of
the choices which members will make. However, if it is known, at the time the relevant
financial statements are prepared, what choices members have made (for example,
because the ‘window’ for making selections closes before the financial statements are
Employee
benefits
2813
authorised for issue) this definitive data would remove the need for estimation. Any
subsequent changes in estimates in the following years resulting from the confirmation
process would be a change in estimate and recognised as a remeasurement gain or loss.
10.2.1
Past service cost
Past service cost is the change in the present value of the defined benefit obligation
resulting from a plan amendment or curtailment. [IAS 19.8, 102].
Past service costs should be recognised at the earlier of the date when:
(a) the plan amendment or curtailment occurs; and
(b) the entity recognises related restructuring costs in accordance with IAS 37
(discussed in Chapter 27 at 6.1). [IAS 19.8, 103].
A plan amendment occurs when an entity introduces, or withdraws, a defined benefit
plan or changes the benefits payable under an existing defined benefit plan. [IAS 19.8, 104].
A curtailment occurs when an entity significantly reduces the number of employees
covered by a plan. A curtailment may arise from an isolated event, such as the closing of
a plant, discontinuance of an operation or termination or suspension of a plan. [IAS 19.8, 105].
Past service cost may be either positive (when benefits are introduced or changed so
that the present value of the defined benefit obligation increases) or negative (when
benefits are withdrawn or changed so that the present value of the defined benefit
obligation decreases). [IAS 19.8, 106].
Where an entity reduces benefits payable under an existing defined benefit plan and, at
the same time, increases other benefits payable under the plan for the same employees,
the entity treats the change as a single net change. [IAS 19.8, 107].
Past service cost excludes:
(a) the effect of differences between actual and previously assumed salary increases
on the obligation to pay benefits for service in prior years (there is no past service
cost because actuarial assumptions allow for projected salaries, accordingly the
effect of any such difference is an actuarial gain or loss – see 7.5 above);
(b) under- and over-estimates of discretionary pension increases when an entity has
a constructive obligation to grant such increases (there is no past service cost
because actuarial assumptions allow for such increases, accordingly the effect of
any such under- or over-estimate is an actuarial gain or loss – see 7.5 above);
(c) estimates of benefit improvements that result from actuarial gains or from the return on
plan assets that have been recognised in the financial statements if the entity is obliged,
by either the formal terms of a plan (or a constructive obligation that goes beyond those
terms) or legislation, to use any surplus in the plan for the benefit of plan participants,
even if the benefit increase has not yet been formally awarded (the resulting increase in
the obligation is an actuarial loss and not past service cost, see 7.5 above); and
(d) the increase in vested benefits (that is, those not conditional on future employment)
when, in the absence of new or improved benefits, employees complete vesting
requirements (there is no past service cost because the estimated cost of benefits was
recognised as current service cost as the service was rendered, accordingly the effect
of any such increase is an actuarial gain or loss, see 7.5 above). [IAS 19.108].
2814 Chapter 31
10.2.2 Settlements
IAS 19 defines a settlement as a transaction that eliminates all further legal or
constructive obligations for part or all of the benefits provided under a defined benefit
plan, other than a payment of benefits to, or on behalf of, employees that is set out in
the terms of the plan and included in the actuarial assumptions. [IAS 19.8].
A settlement occurs when an employer enters into a transaction that eliminates all
further legal or constructive obligations for part or all of the benefits provided under a
defined benefit plan (other than a payment of benefits to, or on behalf of, employees in
accordance with the terms of the plan and included in the actuarial assumptions). For
example, a one-off transfer of significant employer obligations under the plan to an
insurance company through the purchase of an insurance policy (often referred to as a
buy-out) is a settlement; a lump sum cash payment, under the terms of the plan, to plan
participants in exchange for their rights to receive specified post-employment benefits
is not. [IAS 19.111].
In other words, settlement occurs at the point of absolute risk extinguishment.
The interaction between the asset ceiling and past service cost or a gain or loss on
settlement is discussed further at 10.21 above.
IAS 19 observes that an employer may acquire an insurance policy to fund some or
all of the employee benefits relating to employee service in the current and prior
periods. The acquisition of such a policy is not a settlement if the employer retains a
legal or constructive obligation to pay further amounts if the insurer does not pay the
employee benefits specified in the insurance policy (often referred to as a buy-in).
[IAS 19.112]. However, the acquisition of an insurance policy will mean an entity has an
asset which needs to be measured at fair value. As discussed at 6.2 above, certain
insurance policies are valued at an amount equal to the present value of the defined
benefit obligation which they match. The cost of buying such a policy will typically
greatly exceed its subsequent carrying amount. That raises the question of how to
treat the resultant debit entry. One view might be that the loss is, in substance, very
similar to a settlement loss and should be recognised in profit or loss. This treatment
may be appropriate, for example, if the purchase of the insurance is in anticipation
of full settlement with the insurer at a later date. Another view is that because the
loss results from exchanging one plan asset for another it is an actuarial loss. The
typical bid-offer spread in quoted investments results in the same type of actuarial
loss, albeit typically less significant. In our view, either approach is acceptable if
applied consistently and, where material, disclosed. The plan assets and plan
liabilities would remain to be recorded on the statement of financial position until
such time as the settlement had
occurred and the entity no longer had any obligations
under the plan.
The following extract from IHG plc illustrates a buy-in which has occurred in one
financial period and followed by a buy-out in the following financial period. As the
policy was structured so as to enable the plan to move to a buy-out, and the intention
was to proceed on that basis, the buy-in transaction was accounted for as a settlement
with the loss arising recorded in the income statement.
Employee
benefits
2815
Extract 31.1: InterContinental Hotels Group PLC (2014)
Notes to the Group Financial Statements [extract]
25. Retirement
benefits [extract]
UK [extract]
Historically UK retirement and death in service benefits have been provided for eligible employees in the UK
principally by the InterContinental Hotels UK Pension Plan, which has both defined benefit and defined
contribution sections. The defined benefit section was subject to a buy-in transaction on 15 August 2013 whereby
the assets of the plan were invested in a bulk purchase annuity policy with the insurer Rothesay Life under which
the benefits payable to defined benefit members became fully insured. On 31 October 2014, the plan completed the
move to a full buy-out of the defined benefit section, following which Rothesay Life has become fully and directly
responsible for the pension obligations. On completion of the buy-out, the defined benefit assets (comprising the
Rothesay Life insurance policy) and matching defined benefit liabilities were derecognised from the Group
Statement of financial position.
US and other [extract]
In respect of the defined benefit plans, the amounts recognised in the Group income statement, in administrative
expenses, are:
Pension plans
Post-employment
UK
US and other
benefits Total
2014
2013 2012 2014
2013 2012 2014
2013 2012 2014
2013 2012
$m
$m $m $m
$m $m $m
$m $m $m
$m $m
Current service
cost
–
2 5 1
1 1 –
– – 1
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 561
