Pensions and Post-Retirement
Benefits
IAS 19 vs.
APB 12, FAS 43, 87, 88, 106, 112, 146
and related guidance
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1
Overview of Accounting for Defined Benefit Plans
Under IFRS
Funded Status
Reconciliation
Components of Net
Periodic Pension Costs
Defined Benefit Obligation
<FV of Plan Assets>
Funded Status
+/- Unamortized actuarial gains/losses
+/- Unamortized unvested past service
costs
+/- Unamortized transition amount
Initial amount of liability on BS
+Asset Ceiling Test (if needed)
Final amount of liability on BS
+ Service cost
+ Interest cost
- Expected return on plan assets
+/- Amortization of actuarial gains/losses
(the amounts outside the corridor over
the remaining service lives)
+/- Amortization of past service costs
(usually straight-line over remaining
vesting period, or recognize
immediately if vested)
+/- Recognition of unamortized actuarial
gains/losses and past service costs
upon curtailment or settlement
- Amortization of transition amount
Net periodic pension costs
Case Study 9
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2
Defined Benefit Plans
Frequency of Actuarial Valuations and Measurement Date
U.S. GAAP
IFRS (IAS 19.77)
IAS 19 does not mandate the
frequency of actuarial
valuations
It does however require the
results of valuations to be
updated (as of the balance
sheet date) for material
changes since the last
valuation
Actuarial valuations are
required annually
Measurement date of plan
assets and obligations to be at
balance sheet date
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3
Defined Benefit Plans
Discount Rates
IFRS (IAS 19.78)
Discount rates are determined
by reference to market yields
at the balance sheet date on
high quality corporate bonds
In countries where there is no
deep market in such bonds
use the yields of governmental
bonds
In either case use bond rate
with a currency and term
consistent with the currency
and term of the post
employment benefit obligation
U.S. GAAP
Discount rates should reflect
the rates at which pension
benefits could be effectively
settled (settlement rates)
It is appropriate to look to
available information about
rates implicit in current prices
of annuity contracts in which
an insurance company
unconditionally guarantees to
provide specific pension
benefits to specific individuals
for a fixed consideration or to
high-credit-quality bonds
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Defined Benefit Plans
Post retirement liability and Asset Ceilings
IFRS
Post Retirement Liability
No requirement to record
funded status on balance sheet
U.S. GAAP
Post Retirement Liability
Recognition of funded status
as a net asset or net liability
Recognition of actuarial
gains and losses, prior
service costs, transition
amount in AOCI
Asset Ceiling (IAS 19.58)
Amount of prepaid pension cost
is limited (i.e., asset ceiling)
Asset Ceiling
Amount of net asset is not
restricted
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5
Defined Benefit Plans
Prior (Past) Service Costs
IFRS (IAS 19.96)
U.S. GAAP
Recognize past year service
cost on a straight-line basis
over the average remaining
service period until the
amended benefits become
vested
To the extent that the benefits
are already vested at the time
of the plan amendment, an
enterprise should recognize
past year service costs
immediately
Based on the expected future
years of service of
participants active at the date
of the amendment who are
expected to receive benefits
under the plan (closed
employee group)
Suggested approach is frontend loaded amortization in
proportion to the future
benefits. However, straightline is also allowable
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Defined Benefit Plans
Actuarial Gains and Losses
IFRS (IAS 19.92-95)
Choice of recognition
Corridor approach
Immediately in current period
cost
Directly to retained earnings
(not subject to recycling)
U.S. GAAP
Choice of recognition
Corridor approach
Immediately in current period
cost
Policy must be consistent for
all DB plans of the entity
Unamortized amount included
in AOCI subject to recycling
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Defined Benefit Plans
Multi-employer Plans
IFRS
Account for participation in a
multi-employer plan as a
defined contribution plan if
specific identification of plan
assets/liabilities not possible
Recognize asset/liability if
contractual agreement for
allocation of surplus/deficit
Net periodic pension cost for
group plans = that under
agreement, or contributions if
no agreement
U.S. GAAP
Participants in a multiemployer defined benefit plan
account similarly to a defined
contribution plan
Multiple employer plans
accounted for as defined
benefit plans
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Other Postemployment Benefits
IFRS
Under IAS 19 the principles that
apply to pension and other
postretirement benefits apply
equally to benefits payable after
employment but before
retirement
Announced voluntary
redundancy is provided to the
extent of expected take-up (IAS
19.140)
U.S. GAAP
FAS 112 requires
postemployment benefits to be
accrued over the employee's
service period if all of criteria for
postemployment liabilities are
met (see FAS 112); if these are
not met—accounting is based on
FAS 5
Regarding measurement
methodologies practice often
analogizes to FAS 87 and 106
Voluntary employee severance is
provided only when the employee
accepts the terms of the offer
(FAS 88 and FAS 146)
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FOR INTERNAL USE ONLY.
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