When sufficient information is not available to use defined benefit
accounting for a multi-employer defined benefit plan, an entity shall:
account for the plan in accordance with paragraphs 51 and 52 as if
it were a defined contribution plan; and
disclose the information required by paragraph 148.
One example of a multi-employer defined benefit plan is one where:
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
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, the entity will have either to increase its contributions or to persuade employees to accept a reduction in benefits. Therefore, such a plan is a defined benefit plan.
Where sufficient information is available about a multi-employer defined benefit plan, an entity accounts for its proportionate share of the defined benefit obligation, plan assets and post-employment cost associated with the plan in the same way as for any other defined benefit plan. However, an entity may not be able to identify its share of the underlying financial position and performance of the plan with sufficient reliability for accounting purposes. This may occur if:
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; or
the entity does not have access to sufficient information about the plan to satisfy the requirements of this Standard.
In those cases, an entity accounts for the plan as if it were a defined contribution plan and discloses the information required by paragraph 148.
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). A participant in a multi-employer plan with such an agreement that accounts for the plan as a defined contribution plan in accordance with paragraph 34 shall recognise the asset or liability that arises from the contractual agreement and the resulting income or expense in profit or loss.
Example illustrating paragraph 37
An entity participates in a multi-employer defined benefit plan that does not prepare plan valuations on an IAS 19 basis. It therefore accounts for the plan
as if it were a defined contribution plan. A non-IAS 19 funding valuation
shows a deficit of CU100 million(a) in the plan. The plan has agreed under
contract a schedule of contributions with the participating employers in the plan that will eliminate the deficit over the next five years. The entity's total contributions under the contract are CU8 million.
The entity recognises a liability for the contributions adjusted for the time value of
money and an equal expense in profit or loss.
(a) In this Standard monetary amounts are denominated in 'currency units (CU)'.
Multi-employer plans are distinct from group administration plans. A group administration plan is merely an aggregation of single employer plans combined to allow participating employers to pool their assets for investment purposes and reduce investment management and administration costs, but the claims of different employers are segregated for the sole benefit of their own employees. 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 such plans do not expose the participating entities to actuarial risks associated with the current and former employees of other entities. The definitions in this Standard require an entity to classify a group administration plan as a defined contribution plan or a defined benefit plan in accordance with the terms of the plan (including any constructive obligation that goes beyond the formal terms).
In determining when to recognise, and how to measure, a liability relating to the wind-up of a multi-employer defined benefit plan, or the entity's withdrawal from a multi-employer defined benefit plan, an entity shall apply IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Defined benefit plans that share risks between entities
under common control
Defined benefit plans that share risks between entities under common control,
for example, a parent and its subsidiaries, are not multi-employer plans.
An entity participating in such a plan shall obtain information about the plan as a whole measured in accordance with this Standard on the basis of assumptions that apply to the plan as a whole. 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.
Participation in such a plan is a related party transaction for each individual group entity. An entity shall therefore, in its separate or individual financial statements, disclose the information required by paragraph 149.
State plans
An entity shall account for a state plan in the same way as for a
multi-employer plan (see paragraphs 32-39).
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) that is not subject to control or influence by the reporting entity. Some plans established by an entity provide both compulsory benefits, as a substitute for benefits that would otherwise be covered under a state plan, and additional voluntary benefits. Such plans are not state plans.
State plans are characterised as defined benefit or defined contribution, depending on the entity's obligation under the plan. Many state plans are funded on a pay-as-you-go basis: contributions are set at a level that is expected to be sufficient to pay the required benefits falling due in the same period; 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, state plans are normally defined contribution plans. However, when a state plan is a defined benefit plan an entity applies paragraphs 32-39.
Insured benefits
An entity may pay insurance premiums to fund a post-employment
benefit plan. The entity shall treat such a plan as a defined contribution plan unless the entity will have (either directly, or indirectly through the
plan) a legal or constructive obligation either:
to pay the employee benefits directly when they fall due; or
to pay further amounts if the insurer does not pay all future
employee benefits relating to employee service in the current and prior periods.
If the entity retains such a legal or constructive obligation, the entity shall treat the plan as a defined benefit plan.
The benefits insured by an insurance policy need not have a direct or automatic relationship with the entity's obligation for employee benefits. Post-employment benefit plans involving insurance policies are subject to the same distinction between accounting and funding as other funded plans.
Where an entity funds a post-employment benefit obligation by contributing to an insurance policy under which the entity (either directly, indirectly through the plan, through the mechanism for setting future premiums or through a related party relationship with the insurer) retains a legal or constructive obligation, the payment of the premiums does not amount to a defined
contribution arrangement. It follows that the entity:
accounts for a qualifying insurance policy as a plan asset (see
paragraph 8); and
recognises other insurance policies as reimbursement rights (if the
policies satisfy the criterion in paragraph 116).
Where an insurance policy is in the name of a specified plan participant or a group of plan participants and the entity does not have any legal or constructive obligation to cover any loss on the policy, the entity has no obligation to pay benefits to the employees and the insurer has sole responsibility for paying the benefits. The payment of fixed premiums under such contracts is, in substance, the settlement of the employee benefit obligation, rather than an investment to meet the obligation. Consequently, the entity no longer has an asset or a liability. Therefore, an entity treats such payments as contributions to a defined contribution plan.
Post-employment benefits: defined contribution plans
Accounting for defined contribution plans is straightforward because the reporting entity's obligation for each period is determined by the amounts to be contributed for that period. Consequently, no actuarial assumptions are required to measure the obligation or the expense and there is no possibility of any actuarial gain or loss. Moreover, the obligations are measured on an undiscounted basis, except where they are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.
Recognition and measurement
When an employee has rendered service to an entity during a period, the
entity shall recognise the contribution payable to a defined contribution
plan in exchange for that service:
as a liability (accrued expense), after deducting any contribution
already paid. If the contribution already paid exceeds the
contribution due for service before the end of the reporting period, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.
as an expense, unless another IFRS requires or permits the
inclusion of the contribution in the cost of an asset (see, for example, IAS 2 and IAS 16).
When contributions to a defined contribution plan are not expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service, they shall be discounted using the discount rate specified in paragraph 83.
Disclosure
An entity shall disclose the amount recognised as an expense for defined
contribution plans.
Where required by IAS 24 an entity discloses information about contributions to defined contribution plans for key management personnel.
Post-employment benefits: defined benefit plans
Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service.
Recognition and measurement
Defined benefit plans may be unfunded, or they may be wholly or partly funded
by contributions by an entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and from which the employee benefits are paid. The payment of funded benefits when they fall due depends not only on the financial position and the investment performance of the fund but also on an entity's ability, and willingness, to make good any shortfall in the fund's assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with the plan. Consequently, the expense recognised for a defined benefit plan is not necessarily the amount of the contribution due for the period.
Accounting by an entity for defined benefit plans involves the following steps:
determining the deficit or surplus. This involves:
using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the current and prior periods (see paragraphs 67-69). This requires an entity to determine how much benefit is attributable to the current and prior periods (see paragraphs 70-74) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will affect the cost of the benefit (see paragraphs 75-98).
discounting that benefit in order to determine the present value of the defined benefit obligation and the current service cost (see paragraphs 67-69 and 83-86).
deducting the fair value of any plan assets (see paragraphs
113-115) from the present value of the defined benefit obligation.
determining the amount of the net defined benefit liability (asset) as the
amount of the deficit or surplus determined in (a), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling (see paragraph 64).
determining amounts to be recognised in profit or loss:
current service cost (see paragraphs 70-74).
any past service cost and gain or loss on settlement (see
paragraphs 99-112).
net interest on the net defined benefit liability (asset) (see paragraphs 123-126).
determining the remeasurements of the net defined benefit liability
(asset), to be recognised in other comprehensive income, comprising:
actuarial gains and losses (see paragraphs 128 and 129);
return on plan assets, excluding amounts included in net interest
on the net defined benefit liability (asset) (see paragraph 130);
and
any change in the effect of the asset ceiling (see paragraph 64), excluding amounts included in net interest on the net defined benefit liability (asset).
Where an entity has more than one defined benefit plan, the entity applies these procedures for each material plan separately.
An entity shall determine the net defined benefit liability (asset) with sufficient regularity that the amounts recognised in the financial statements do not differ materially from the amounts that would be determined at the end of the reporting period.
This Standard encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation before the end of the reporting period. Nevertheless, the results of that valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period.
In some cases, estimates, averages and computational short cuts may provide a reliable approximation of the detailed computations illustrated in this Standard.
Accounting for the constructive obligation
An entity shall account not only for its legal obligation under the formal
terms of a defined benefit plan, but also for any constructive obligation that arises from the entity's informal practices. Informal practices give rise to a constructive obligation where the entity has no realistic alternative but to pay employee benefits. An example of a constructive obligation is where a change in the entity's informal practices would cause unacceptable damage to its relationship with employees.
The formal terms of a defined benefit plan may permit an entity to terminate its obligation under the plan. Nevertheless, it is usually difficult for an entity to terminate its obligation under a plan (without payment) if employees are to be retained. Therefore, in the absence of evidence to the contrary, accounting for post-employment benefits assumes that an entity that is currently promising such benefits will continue to do so over the remaining working lives of employees.
Statement of financial position
An entity shall recognise the net defined benefit liability (asset) in the
statement of financial position.
When an entity has a surplus in a defined benefit plan, it shall measure
the net defined benefit asset at the lower of:
the surplus in the defined benefit plan; and
the asset ceiling, determined using the discount rate specified in
paragraph 83.
A net defined benefit asset may arise where a defined benefit plan has been
overfunded or where actuarial gains have arisen. An entity recognises a net
defined benefit asset in such cases because:
the entity controls a resource, which is the ability to use the surplus to
generate future benefits;
that control is a result of past events (contributions paid by the entity
and service rendered by the employee); and
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 asset ceiling is the present value of those future benefits.
Recognition and measurement: present value of defined
benefit obligations and current service cost
The ultimate cost of a defined benefit plan may be influenced by many variables,
such as final salaries, employee turnover and mortality, employee contributions and medical cost trends. The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of time. In order to measure the present value of the post-employment benefit obligations and the related
current service cost, it is necessary:
to apply an actuarial valuation method (see paragraphs 67-69);
to attribute benefit to periods of service (see paragraphs 70-74); and
to make actuarial assumptions (see paragraphs 75-98).
Actuarial valuation method
An entity shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost.
The projected unit credit method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) sees each period of service as giving rise to an additional unit of benefit entitlement (see paragraphs 70-74) and measures each unit separately to build up the final obligation (see paragraphs 75-98).
Example illustrating paragraph 68
A lump sum benefit is payable on termination of service and equal to
1 per cent of final salary for each year of service. The salary in year 1 is CU10,000 and is assumed to increase at 7 per cent (compound) each year. The discount rate used is 10 per cent per year. The following table shows
how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions.
For simplicity, this example ignores the additional adjustment needed to
reflect the probability that the employee may leave the entity at an earlier or later date.
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