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Home » Books » IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

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IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

IAS 19—The Limit on a Defined Benefit
Asset, Minimum Funding Requirements
and their Interaction


In July 2007 the International Accounting Standards Board issued IFRIC 14 IAS 19—The
Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. It was
developed by the Interpretations Committee.
In November 2009 IFRIC 14 was amended to address prepayments of future minimum
funding requirement contributions.
Other Standards have made minor consequential amendments to IFRIC 14. They include
IFRS 13 Fair Value Measurement (issued May 2011), IAS 19 Employee Benefits (issued
June 2011) and Amendments to References to the Conceptual Framework in IFRS Standards (issued
March 2018).

IFRIC Interpretation 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction (IFRIC 14) is set out in paragraphs 1–29. IFRIC 14 is
accompanied by illustrative examples and a Basis for Conclusions. The scope and
authority of Interpretations are set out in the Preface to IFRS Standards.

IFRIC Interpretation 14
IAS 19—The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction


References


• IAS 1 Presentation of Financial Statements
• IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
• IAS 19 Employee Benefits (as amended in 2011)
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets


Background


Paragraph 64 of IAS 19 limits the measurement of a net defined benefit asset
to the lower of the surplus in the defined benefit plan and the asset ceiling.
Paragraph 8 of IAS 19 defines the asset ceiling as ‘the present value of any
economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan’. Questions have arisen about
when refunds or reductions in future contributions should be regarded as
available, particularly when a minimum funding requirement exists.
Minimum funding requirements exist in many countries to improve the
security of the post-employment benefit promise made to members of an
employee benefit plan. Such requirements normally stipulate a minimum
amount or level of contributions that must be made to a plan over a given
period. Therefore, a minimum funding requirement may limit the ability of
the entity to reduce future contributions.
Further, the limit on the measurement of a defined benefit asset may cause a
minimum funding requirement to be onerous. Normally, a requirement to
make contributions to a plan would not affect the measurement of the
defined benefit asset or liability. This is because the contributions, once paid,
will become plan assets and so the additional net liability is nil. However, a
minimum funding requirement may give rise to a liability if the required
contributions will not be available to the entity once they have been paid.
In November 2009 the International Accounting Standards Board amended
IFRIC 14 to remove an unintended consequence arising from the treatment of
prepayments of future contributions in some circumstances when there is a
minimum funding requirement.


Scope


This Interpretation applies to all post-employment defined benefits and other
long-term employee defined benefits.
For the purpose of this Interpretation, minimum funding requirements are
any requirements to fund a post-employment or other long-term defined
benefit plan.

Issues


The issues addressed in this Interpretation are:
(a) when refunds or reductions in future contributions should be regarded
as available in accordance with the definition of the asset ceiling in
paragraph 8 of IAS 19.
(b) how a minimum funding requirement might affect the availability of
reductions in future contributions.
(c) when a minimum funding requirement might give rise to a liability.


Consensus
Availability of a refund or reduction in future
contributions


An entity shall determine the availability of a refund or a reduction in future
contributions in accordance with the terms and conditions of the plan and
any statutory requirements in the jurisdiction of the plan.
An economic benefit, in the form of a refund or a reduction in future
contributions, is available if the entity can realise it at some point during the
life of the plan or when the plan liabilities are settled. In particular, such an
economic benefit may be available even if it is not realisable immediately at
the end of the reporting period.
The economic benefit available does not depend on how the entity intends to
use the surplus. An entity shall determine the maximum economic benefit
that is available from refunds, reductions in future contributions or a
combination of both. An entity shall not recognise economic benefits from a
combination of refunds and reductions in future contributions based on
assumptions that are mutually exclusive.
In accordance with IAS 1, the entity shall disclose information about the key
sources of estimation uncertainty at the end of the reporting period that have
a significant risk of causing a material adjustment to the carrying amount of
the net asset or liability recognised in the statement of financial position. This
might include disclosure of any restrictions on the current realisability of the
surplus or disclosure of the basis used to determine the amount of the
economic benefit available.


The economic benefit available as a refund


The right to a refund
A refund is available to an entity only if the entity has an unconditional right
to a refund:
(a) during the life of the plan, without assuming that the plan liabilities
must be settled in order to obtain the refund (eg in some jurisdictions,
the entity may have a right to a refund during the life of the plan,
irrespective of whether the plan liabilities are settled); or

(b) assuming the gradual settlement of the plan liabilities over time until
all members have left the plan; or
(c) assuming the full settlement of the plan liabilities in a single event (ie
as a plan wind-up).
An unconditional right to a refund can exist whatever the funding level of a
plan at the end of the reporting period.
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.
Measurement of the economic benefit
An entity shall measure the economic benefit available as a refund as the
amount of the surplus at the end of the reporting period (being the fair value
of the plan assets less the present value of the defined benefit obligation) that
the entity has a right to receive as a refund, less any associated costs. For
instance, if a refund would be subject to a tax other than income tax, an entity
shall measure the amount of the refund net of the tax.
In measuring the amount of a refund available when the plan is wound up
(paragraph 11(c)), an entity shall include the costs to the plan of settling the
plan liabilities and making the refund. For example, an entity shall deduct
professional fees if these are paid by the plan rather than the entity, and the
costs of any insurance premiums that may be required to secure the liability
on wind-up.
If the amount of a refund is determined as the full amount or a proportion of
the surplus, rather than a fixed amount, an entity shall make no adjustment
for the time value of money, even if the refund is realisable only at a future
date.


The economic benefit available as a contribution reduction


If there is no minimum funding requirement for contributions relating to
future service, the economic benefit available as a reduction in future
contributions is the future service cost to the entity for each period over the
shorter of the expected life of the plan and the expected life of the entity. The
future service cost to the entity excludes amounts that will be borne by
employees.
An entity shall determine the future service costs using assumptions
consistent with those used to determine the defined benefit obligation and
with the situation that exists at the end of the reporting period as determined
by IAS 19. Therefore, an entity shall assume no change to the benefits to be
provided by a plan in the future until the plan is amended and shall assume a
stable workforce in the future unless the entity makes a reduction in the
number of employees covered by the plan. In the latter case, the assumption
about the future workforce shall include the reduction.

The effect of a minimum funding requirement on the
economic benefit available as a reduction in future
contributions


An entity shall analyse any minimum funding requirement at a given date
into contributions that are required to cover (a) any existing shortfall for past
service on the minimum funding basis and (b) future service.
Contributions to cover any existing shortfall on the minimum funding basis in
respect of services already received do not affect future contributions for
future service. They may give rise to a liability in accordance with paragraphs
23–26.
If there is a minimum funding requirement for contributions relating to
future service, the economic benefit available as a reduction in future
contributions is the sum of:
(a) any amount that reduces future minimum funding requirement
contributions for future service because the entity made a prepayment
(ie paid the amount before being required to do so); and
(b) the estimated future service cost in each period in accordance with
paragraphs 16 and 17, less the estimated minimum funding
requirement contributions that would be required for future service in
those periods if there were no prepayment as described in (a).
An entity shall estimate the future minimum funding requirement
contributions for future service taking into account the effect of any existing
surplus determined using the minimum funding basis but excluding the
prepayment described in paragraph 20(a). An entity shall use assumptions
consistent with the minimum funding basis and, for any factors not specified
by that basis, assumptions consistent with those used to determine the
defined benefit obligation and with the situation that exists at the end of the
reporting period as determined by IAS 19. The estimate shall include any
changes expected as a result of the entity paying the minimum contributions
when they are due. However, the estimate shall not include the effect of
expected changes in the terms and conditions of the minimum funding basis
that are not substantively enacted or contractually agreed at the end of the
reporting period.
When an entity determines the amount described in paragraph 20(b), if the
future minimum funding requirement contributions for future service exceed
the future IAS 19 service cost in any given period, that excess reduces the
amount of the economic benefit available as a reduction in future
contributions. However, the amount described in paragraph 20(b) can never be
less than zero.

When a minimum funding requirement may give rise to a
liability


If an entity has an obligation under a minimum funding requirement to pay
contributions to cover an existing shortfall on the minimum funding basis in
respect of services already received, the entity shall determine whether the
contributions payable will be available as a refund or reduction in future
contributions after they are paid into the plan.
To the extent that the contributions payable will not be available after they
are paid into the plan, the entity shall recognise a liability when the obligation
arises. The liability shall reduce the net defined benefit asset or increase the
net defined benefit liability so that no gain or loss is expected to result from
applying paragraph 64 of IAS 19 when the contributions are paid.
[Deleted]


Effective date


An entity shall apply this Interpretation for annual periods beginning on or
after 1 January 2008. Earlier application is permitted.
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 26. An entity shall apply those amendments
for annual periods beginning on or after 1 January 2009. If an entity applies
IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for
that earlier period.
Prepayments of a Minimum Funding Requirement added paragraph 3A and
amended paragraphs 16–18 and 20–22. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2011. Earlier
application is permitted. If an entity applies the amendments for an earlier
period, it shall disclose that fact.
IAS 19 (as amended in 2011) amended paragraphs 1, 6, 17 and 24 and deleted
paragraphs 25 and 26. An entity shall apply those amendments when it
applies IAS 19 (as amended in 2011).


Transition


An entity shall apply this Interpretation from the beginning of the first period
presented in the first financial statements to which the Interpretation applies.
An entity shall recognize any initial adjustment arising from the application
of this Interpretation in retained earnings at the beginning of that period.
An entity shall apply the amendments in paragraphs 3A, 16–18 and 20–22
from the beginning of the earliest comparative period presented in the first
financial statements in which the entity applies this Interpretation. If the
entity had previously applied this Interpretation before it applies the
amendments, it shall recognize the adjustment resulting from the application
of the amendments in retained earnings at the beginning of the earliest
comparative period presented.

Approval by the Board of Prepayments of a Minimum Funding
Requirement issued in November 2009


Prepayments of a Minimum Funding Requirement (Amendments to IFRIC 14) was approved for
issue by the fifteen members of the International Accounting Standards Board.
Sir David Tweedie Chairman
Stephen Cooper
Philippe Danjou
Jan Engström
Patrick Finnegan
Robert P Garnett
Gilbert Gélard
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
James J Leisenring
Patricia McConnell
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

 

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