INTERPRETATION OF [DRAFT] FRS
MULTI-EMPLOYER PLANS
Comments to be received by 9 June 2004
INVITATION TO COMMENT
The Council on Corporate Disclosure and Governance (CCDG) invites comments on any aspect of
this draft Interpretation Multi-employer Plans. It would particularly welcome answers to the questions
below. Comments are most helpful if they indicate the specific paragraph to which they relate, contain
a clear rationale and, where applicable, provide a suggestion for alternative wording.
Comments should be submitted in writing so as to be received no later than 9 June 2004 preferably
by email to: accounting_stds@acra.gov.sg or addressed to:
Council on Corporate Disclosure and Governance
c/o Accounting and Corporate Regulatory Authority
10 Anson Road #05-01/15
International Plaza
Singapore 079903
Fax: 6225 1676
Question 1
In your experience, are participants in defined benefit multi-employer plans able to obtain the
information necessary to apply defined benefit accounting? If not, what causes the information not to
be available? How do such entities monitor and manage the risks involved in their participation in the
plan?
Question 2
Does application of defined benefit accounting by participants in multi-employer plans provide useful
information compared with the disclosure of substantial information about the plan as required by
paragraphs 30(b) and (c) of FRS 19?
Question 3
The consensus requires a participant in a multi-employer plan to apply defined benefit accounting by,
if possible:
(a)
measuring the plan in accordance with FRS 19 using assumptions that apply to the plan as a
whole; and
(b)
allocating the plan so that the entity recognises an asset or liability that reflects the extent to
which the surplus or deficit in the plan will affect its future contributions.
Do you agree that this is an appropriate way for a participant in a multi-employer plan to apply defined
benefit accounting? If not, how should defined benefit accounting be applied?
Question 4
The appendix to the draft Interpretation sets out a proposed amendment to FRS 19, narrowing the
scope of the definition of state plans and requiring them to be accounted for as defined contribution
plans. Plans that are excluded from the definition of state plans will be multi-employer plans.
Do you agree with the narrowed scope of the definition of state plans?
Do you agree that state plans defined as proposed should be accounted for as defined contribution
plans?
INTERPRETATION OF [DRAFT] FRS X
Multi-employer Plans
Interpretation [draft] FRS X Multi-employer Plans ([draft] INT FRS X) is set out in paragraphs 1-21.
[Draft] INT FRS X is accompanied by an amendment to FRS 19 and a Basis for Conclusions. The
scope and authority of Interpretations are set out in the CCDG Preface to the Interpretation of
Financial Reporting Standards.
Reference:

FRS 19 Employee Benefits
Background
1
This [draft] Interpretation provides guidance on the requirements in FRS 19 Employee
Benefits relating to multi-employer plans. A multi-employer plan is defined as a plan (other
than a state plan) that:
(a)
pools the assets contributed by various entities that are not under common control;
and
(b)
uses 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 concerned.
2
Paragraph 29 of FRS 19 states that where a multi-employer plan is a defined benefit plan an
entity should account for its proportionate share of the defined benefit obligation, plan assets
and cost associated with the plan in the same way as for any other defined benefit plan.
3
Paragraph 30 of FRS 19 states that when sufficient information is not available to use defined
benefit accounting for a multi-employer plan that is a defined benefit plan, an entity should
account for the plan as if it were a defined contribution plan and give some additional
disclosures.
4
Paragraph 32 of FRS 19 goes on to state that 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 if:
(a)
the entity does not have access to information about the plan that satisfies the
requirements of FRS 19; 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.
Issue
5
The issues addressed in this [draft] Interpretation are:
(a)
when do plans meet the definition of a multi-employer plan?
(b)
how should a participant in a multi-employer plan apply the requirements in FRS 19
relating to defined benefit plans?
(c)
when might the information necessary for defined benefit accounting not be
available?
(d)
how should state plans be treated?
Consensus
When do plans meet the definition of a multi-employer plan?
6
To meet the definition of a multi-employer plan, the contribution and benefit levels must be
determined without regard to the identity of the entity that employs the employees concerned.
This means that there must be some sharing between the participants in the plan of the
actuarial risks associated with their current and former employees. In other words,
participation in a multi-employer plans creates different assets and liabilities for the
participating employers from those that would arise for those employers if they had single
entity plans.
7
As paragraph 33 of FRS 19 states, multi-employer plans are distinct from group administration
plans (sometimes called multiple employer plans), which are merely an aggregation of single
employer plans and which do not expose the participating employers to the actuarial risks
associated with current and former employees of other entities.
How should a participant in a defined benefit multi-employer plan apply
the requirements in FRS 19 relating to defined benefit accounting?
8
Defined benefit accounting in accordance with FRS 19 requires an entity to measure the
assets and liabilities in the plan and to determine the resulting components of the defined
benefit cost.
9
To apply defined benefit accounting to a multi-employer plan it is necessary to measure the
liabilities in the plan on the basis of assumptions that apply to the plan as a whole. So, for
example, the measurement of the plan liabilities shall reflect salary expectations, staff
turnover, life expectancy etc for the whole membership, not the specific entity. The plan
assets shall be measured at fair value and the assumptions required for the expected return
on assets shall apply to the plan as a whole. (Guidance on when the information necessary to
do this is available is given in paragraphs 16 and 17 below).
10
Having measured the plan as a whole*, the entity shall then determine whether there is a
consistent and reliable basis of allocation of the plan across the participants. Guidance on
when this can be done is given in paragraph 18.
11
The amounts allocated to the entity for the components of cost shall be recognised in
accordance with the requirements of FRS 19. In particular, the options for deferred
recognition of actuarial gains and losses are available. The assumptions made for this
purpose about the average remaining service lives may relate to the entity alone or to the plan
as a whole.
12
Information may be available to determine the surplus or deficit in the plan but not to analyse
the change in the surplus or deficit into the cost components required by FRS 19 for single
entity plans. If this is the case, the entity shall determine whether there is a consistent and
reliable basis of allocation of the surplus or deficit across the participants. If there is such a
basis of allocation the entity shall recognise its share of the surplus or deficit in the balance
sheet and shall recognise the total change in value of the entity’s share of the surplus or
deficit immediately in profit or loss.
*
Assuming that the necessary information to do so is available (see paragraphs 16 and 17 below).
When might the information necessary for defined benefit accounting
not be available?
13
As noted above, paragraph 30 of FRS 19 states that when sufficient information is not
available to use defined benefit accounting for a multi-employer plan that is a defined benefit
plan, an entity should account for the plan as if it were a defined contribution plan and give
some additional disclosures.
14
In the context of paragraph 30, ‘is not available’ means ‘cannot be obtained’. An entity shall
make every practicable* effort to apply defined benefit accounting to multi-employer plans in
which it participates.
15
Paragraph 32 of FRS 19 states that 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 if:
(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.
How to interpret paragraph 32(a) of FRS 19
16
An entity shall not assume that, simply because it is a participant in a multi-employer plan, it
does not have access to the information referred to in paragraph 32(a) of FRS 19. Sources of
such information include statements from the plan to individual entities or accounts for the
plan as a whole. When necessary, roll forward techniques may be used to estimate
information as at the balance sheet date. If the information given by the plan is not on the
same measurement basis as required by FRS 19, it may be possible either to adjust the
information given to estimate the FRS 19 measurement basis, or for new measurements to be
performed on the basis of raw data.
17
When an entity is a dominant participant or one of a few participants in a plan, it should
generally be assumed that the necessary information can be obtained. Given this, it will be
rare for such participants not to be able to give substantial information about the plan in
accordance with paragraph 30(c) of FRS 19, even if they are unable to determine a consistent
and reliable basis for allocation. When the entity is one of many participants whose interest in
the plan is small relative to the plan as a whole, obtaining the information may be more
difficult.
How to interpret paragraph 32(b) of FRS 19
18
*
The objective of the allocation of the plan to participating entities is for an entity to recognise
an asset or liability that reflects the extent to which the surplus or deficit in the plan will affect
its future contributions. Where possible, the allocation shall be based on terms of the plan
including those terms relating to the responsibility to fund shortfalls or the ability to benefit
from overfunding. For example, the allocation may be based on an amount reflecting any
penalty for withdrawing from the plan. If it is not possible to determine from the terms of the
plan the extent to which the surplus or deficit in the plan will affect future contributions, there is
no consistent and reliable basis for allocation.
Paragraph 5 of FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors (pending issuance by the CCDG)
states that ‘applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do
so’.
How should state plans be treated?
19
State plans shall be treated as defined contribution plans in accordance with paragraphs 3638 of FRS 19, as amended by the Appendix to this [draft] Interpretation.
Effective date
20
An entity shall apply this [draft] Interpretation for annual periods beginning on or after [1
January 2005]. Earlier adoption is encouraged. If an entity applies this [draft] Interpretation
for a period beginning before [1 January 2005], it shall disclose that fact.
Transitional provisions
21
At the date of the beginning of the earliest comparative period in the financial statements in
which the [draft] Interpretation results in defined benefit accounting being applied to a plan for
the first time, an entity shall measure and recognise the net employee benefit asset or liability
under the plan in accordance with FRS 19 as interpreted by this [draft] Interpretation, except
that no actuarial gains or losses shall remain unrecognised. The change to any previously
recognised net employee benefit asset or liability shall be recognised as an adjustment to
opening retained earnings. The transitional provisions in FRS 19 do not apply.
Appendix
Amendment to FRS 19 Employee Benefits
The amendment in this [draft] appendix shall be applied for annual periods beginning on or after [1
January 2005]. If an entity applies this [draft] Interpretation for an earlier period, the amendment shall
be applied for that earlier period.
A1
Paragraph 36 of FRS 19 Employee Benefits shall be amended to read as follows:
36.
A2
Paragraph 37 of FRS 19 shall be amended to read as follows:
37.
A3
An entity shall account for a state plan as a defined contribution plan.
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. Some plans established by an entity provide both compulsory
benefits, which are a substitute for benefits that would otherwise be covered under a
state plan, and additional voluntary benefits. Such plans are not state plans.
Paragraph 38 of FRS 19 shall be amended to read as follows:
38.
State plans are defined benefit or defined contribution in nature based 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. Furthermore, in the rare cases when a state plan
is a defined benefit plan, an entity is unlikely to be able to obtain the information
necessary and make the allocations necessary to apply defined benefit accounting.
However, if the state plan is a defined benefit plan, the information required by
paragraph 30(b) and (c) shall be disclosed.
Basis for Conclusions
This Basis for Conclusions accompanies, but is not part of, the draft Interpretation.
BC1
This Basis for Conclusions summarises the considerations in reaching a consensus. Greater
weight was given to some factors than to others.
BC2
The concern that the paragraphs in FRS 19 on multi-employer plans have been interpreted to
allow all participating entities in multi-employer plans an automatic exemption from defined
benefit accounting was asked to be addressed. The uncertainty over when the definition of
multi-employer plans is met and how defined benefit accounting should be applied to such
plans was noted.
BC3
It was agreed that a draft Interpretation that proposes guidance on when a plan meets the
definition of a multi-employer plan, how defined benefit accounting should be applied to such
plans and, in the light of that guidance, when the necessary information might not be available
be published. However, it was agreed that the information necessary for defined benefit
accounting for state plans operated by national or local government would be available so
rarely that those plans should always be treated as defined contribution plans. It was agreed
that the amendment to FRS 19 set out in the Appendix be proposed.
The definition of a multi-employer plan
BC4
The definition of a multi-employer plan in FRS 19 requires the contribution and benefit levels
to be determined without regard to the identity of the entity that employs the employees
concerned. It was agreed that the objective of the definition is to distinguish multi-employer
plans, in which the actuarial risks (including investment risks) are shared across participants,
from other situations in which administration or investment management may be shared but
participants’ risks are the same as in a single entity plan. This latter situation is sometimes
referred to as a ‘multiple employer’ plan.
Applying defined benefit accounting to multi-employer plans
BC5
Multi-employer plans are plans that share risks across participants. This means that the asset
or liability that arises from a multi-employer plan will differ from the asset or liability that would
arise from a single-entity plan.
BC6
In particular, it was noted that because the plan assets are pooled and the contribution levels
are set without regard to the identity of the entity that employs the employees concerned, the
entity’s share of the plan assets and the entity’s share of the plan liabilities will only by chance
equal the plan assets and plan liabilities that arise directly from the entity’s own contributions
and service by the entity’s own employees. Further, it was noted that, because the benefit
levels are also set without regard to the identity of the entity that employs the employees
concerned, assumptions specific to the employees of the entity are not relevant in measuring
the plan liabilities.
BC7
It was concluded, therefore, that the multi-employer plan should be measured based on
assumptions that apply to the plan as a whole. The entity should then determine its share of
the plan assets, plan liabilities and cost components based on the terms of its participation.
BC8
It was noted that an entity may be able to obtain information to determine the surplus or deficit
in the plan but not to analyse the change in the surplus or deficit into the cost components
required by FRS 19 for single entity plans. It was agreed that, if this were the case, better
information would be given by the entity recognising its share of the surplus or deficit as an
asset or liability (assuming that the entity can determine its share (see paragraphs BC12 and
BC13)) and the total change in value of its share of the surplus or deficit in profit or loss than
would be given by defined contribution accounting.
Availability of the exemption from defined benefit accounting
How to interpret paragraph 32(a) of FRS 19
BC9
It is accepted that there may be difficulties in obtaining the necessary information. For
example, the plan may not prepare a valuation of the defined benefit obligation on a basis
consistent with the measurement requirements of FRS 19. However, it was emphasised that
an entity should not automatically assume that simply because it participates in a multiemployer plan it cannot obtain the necessary information. It was observed that a participating
entity in a multi-employer plan will need information for the proper supervision of the plan, to
assess whether the plan is being operated within its mandate and whether it should take
action to manage the level of risk that may arise through its participation in the plan. This
information will include information about the plan assets and obligation that may be sufficient
to provide the data needed for the application of defined benefit accounting. Nonetheless, it
was noted that in some cases the information might need to be enhanced through additional
requests for data from the plan management.
BC10
It was believed by some that the information necessary to apply defined benefit accounting in
accordance with FRS 19 will so rarely be available that it would be better to replace the
requirements relating to multi-employer plans with an absolute exemption from defined benefit
accounting for participants in multi-employer plans. This would be consistent with US GAAP.
BC11
However, others believe that some participants in multi-employer plans can obtain the
necessary information, particularly larger, more dominant, participants. On balance, it was
concluded that there is benefit in issuing an Interpretation that clarifies the information that
participants in a multi-employer plan need to obtain to apply defined benefit accounting and
emphasises that the exemption from defined benefit accounting is not automatic.
How to interpret paragraph 32(b) of FRS 19
BC12
It was concluded that the allocation of the plan to the participating entities should give rise to a
liability (or an asset) for the entity that reflects the future contributions that it will have to pay to
the plan relating to past service (or the future benefits that it will obtain from the plan through
refunds and reductions in future contributions).
BC13
It was noted that, in principle, the basis for calculating the entity’s contributions, both for the
current period and also for any adjustments to future contributions relating to past service, will
be set out in the terms under which the entity participates in the plan. However, it was noted
that there may be cases in which there is considerable uncertainty in the terms of the plan as
to how surpluses will be used or deficits funded, to the extent that no reliable and consistent
basis for allocation exists. As with the availability of the necessary information, some believe
that this will so often be the case that the current requirements relating to multi-employer
plans would be better replaced by an unqualified exemption from defined benefit accounting
for participants in multi-employer plans.
BC14
Again, on balance it was concluded that there is benefit in issuing an Interpretation that
clarifies the objective of the allocation of a plan between participating entities.
BC15
In some cases, the entity’s share of the surplus or deficit as determined by its terms of
participation will change frequently. Those cases, where there might be no consistent and
reliable basis for the allocation of the plan was considered. It was concluded that there might
be little predictive value in the defined benefit amounts arising in such circumstances.
Nevertheless, it is believed that the reflection of the entity’s frequently changing share of the
defined benefit plan represents the economic costs and risks of the entity’s participation in the
plan.