Fletcher Building Limited
810 Great South Road,
Penrose
Private Bag 92114
Auckland, New Zealand
Ph: 64 9 525 9000
www.fletcherbuilding.com
6 September 2010
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Sir/Madam,
We are pleased to submit our comments on the Exposure Draft ED/2010/3 Defined
Benefit Plans.
Overall comments
We support the IASB’s goal in providing clear guidance on accounting for defined
benefit plans. We believe that the right balance has been achieved with what is
recorded in the Income Statement and what is recorded in Other Comprehensive
Income.
Our key concern is the proposed disaggregation within the Income Statement. We
believe that the service costs and net interest on the net defined benefit
liability/(asset) should be aggregated and recorded within employee costs as this is
in substance what they represent.
We also have concerns over the proposed measurement of the net interest on the
net defined benefit liability/(asset) being determined by high quality corporate
bonds or in the absence of these government bonds. We believe that the most
appropriate discount rate to use is the earnings rate on the plan’s assets.
We believe the proposed disclosure requirements will be extremely onerous and
costly to prepare and do not represent information currently used by management
or the board. We believe the current disclosures are sufficient.
Finally, we believe that the test on recognising an asset in the ED is too high
requiring an “unconditional right”. We note that the ED is inconsistent as to its
treatment of plan assets and liabilities and believe that this will result in
unrecognised or off balance sheet assets. We do not believe this is consistent with
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the IASB’s emphasis in bringing assets and liabilities back on balance sheet, such
as for leases and special purposes entities. On this basis we believe that the test
in the ED is inconsistent with other standards and should be updated to be
consistent, i.e. recognise a refund if it meets the probable criteria.
Response to questions for respondents
We have included as follows our responses to the specific questions that are
relevant to our business.
Question 3 and 6 – Disaggregation
We agree with disaggregating remeasurements into an individual component and
that is appropriate to be recorded in Other Comprehensive Income.
We agree that it is appropriate to record service cost and net interest on the net
defined benefit liability/(asset) in the Income Statement. However, we believe that
in substance the expenses/income relate to satisfying an employee obligation. As
such we do not believe it is appropriate to disaggregate these costs between
employee costs and interest costs, rather they should all be included in employee
costs. We also feel that it is inconsistent to disaggregate the Income Statement
items when the Balance Sheet items are aggregated. If we go back to the concepts
of netting and the right of set off, these items in the Income Statement all have the
right of set off and are integrally linked so should be aggregated consistently with
the Balance Sheet items.
In addition, we believe it is misleading to include the return on the plan assets in
financing costs. This implies that all the investments are returning interest, rather
than equity instruments which return dividends. We believe that this classification
will be confusing to investors and does not reflect the underlying transactions that
have occurred.
Question 5 – Defining the finance cost component
We do not believe that net interest on the net defined benefit liability/(asset) should
be determined by high quality corporate bonds, or in the absence of these
government bonds. We believe that the most appropriate discount rate to use is
the earnings rate on the plan’s assets. We note that IAS 26 Accounting and
Reporting by Retirement Benefit Plans is silent on how to calculate the discount
rate, however we understand that most plans use their earnings rate. We believe
that this gives the most appropriate answer and indeed a true and fair view.
Another concern we have is by using a high quality corporate bond rate we may
end up using a rate higher than the earnings rate on the plans assets. We believe
that this would be wrong and would understate the plan’s liabilities. We note that
our plan’s assets are not all invested in high quality corporate bonds, or
government stock, therefore we do not agree that we should use an earning rate on
an individual class of assets.
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In addition, in New Zealand we do not have a deep market so have to use the
government bond rates. The earnings rate in our New Zealand plan is higher than
the government bond rate. The impact of the proposed approach is that we will be
understating our income by using a lower rate of return and overstating our
expense/liability by using a lower discount rate. We effectively are penalised twice
under the proposed approach.
Question 9 – Disclosures
We agree that removing the five year summary is appropriate. However, we
believe that the proposed additional disclosures are extremely onerous and the
information that will be required is not collected currently, will not be used by
management for decision making and we would need to engage the actuaries to
complete this information for us at additional cost.
In particular the sensitivity analysis would be extremely complex for a group such
as ours where we have a number of plans across a number of countries. As they
all have different corporate bond/government bond rates, different salary growth
projections and different mortality rates we do not see how we could provide any
meaningful sensitive analysis on these plans.
We believe the disclosure requirements across all standards currently are an issue
and that it has led to less useful information in the financial statements for the
readers. If disclosures are required a more suitable approach would be to mirror
that of IAS 8 – Operating Segments, whereby disclosures should be based on what
is provided to senior management and the Board.
Question 13 (a) – IFRIC 14 Limit on a defined benefit asset
We have concerns over IFRIC 14, paragraph 12, being incorporated into the ED. It
states that a refund is available to any entity only if the entity has an unconditional
right to a refund assuming the gradual settlement of the plan liabilities over time
until all members have left the Plan. If the entity’s right to a refund of a surplus
depends on the occurrence or non-occurrence of one or more uncertain future
events not wholly within its control, the entity does not have an unconditional right
and shall not recognise an asset.
We believe that the test on recognising an asset in this IFRIC is too high requiring
an “unconditional right”.
This is inconsistent with the Framework for the
Preparation and Presentation of Financial Statements paragraph 83 where it states
that an item that meets the definition of an asset is recognised when it is “probable”
that any future economic benefit associated with the item will flow to or from the
entity; and the item has a cost or value that can be measured with reliability.
We are in the situation with our New Zealand plan that it must be funded to a
minimum of 115% under its Trust Deed which obviously results in a significant
surplus. As at 31 March 2010 the actual funded ratio was 122.6%.
The company is not entitled to obtain refunds during the life of the plan. On final
settlement and winding up of the plan the company is however the last remaining
beneficiary and under the Trust Deed any unexpended balance must be paid to the
company. This settlement is subject to the written consent of the Government
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Actuary (GA). We believe that the written consent of the GA is a technical
requirement and cannot be unreasonably withheld, provided the GA is convinced
both the Trustees and the company have properly discharged their fiduciary duties,
which we believe we can establish.
We believe that many other plans may be subject to such government oversight
and the ED’s test may prohibit plans from recognising valid assets. We note that
when an entity is determining the asset, paragraph 115C(b) anticipates statutory
requirements in the jurisdiction of the plan. Given this, we believe there is some
inconsistency between this paragraph and paragraph 115D which discusses the
unconditional right.
We note that the ED is inconsistent as to its treatment of plan assets and liabilities
and believe that this will result in unrecognised or off balance sheet assets. We do
not believe this is consistent with the IASB’s emphasis in bringing assets and
liabilities back on balance sheet, such as for leases and special purposes entities.
On this basis we believe that the test in the ED is inconsistent with other standards
and should be updated to be consistent, i.e. recognise a refund if it meets the
probable criteria.
When determining the measurement of the net asset there is a number of choices;
- Apply an arbitrary percentage against the net asset for conservatism, but this
cannot be justified.
- Discount the net asset, however it has already been discounted.
- Apply a probability weighting of outcomes. This approach has merit but given
the long timeframe of the settlement it may be difficult to do in practice.
- Recognise the net amount.
We would propose to recognise the net asset, as it has already been calculated
conservatively using a lower discount rate. In addition, at this stage, there has
been no discussion amongst the trustees and the company concerning future
options regarding the surplus.
A decision may be made in the future to increase payments to the beneficiaries to
ensure they share in the surplus. If this was to occur, the liability would increase
through the Statement of Other Comprehensive Income when a decision had been
made. We believe this treatment is appropriate.
If you have any queries or require clarification of any matters in this submission,
please contact me.
Yours sincerely,
John
John Hames
Group Controller
Fletcher Building Limited
CC FRSB
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