TAX NEWS - DECEMber 2009

Prepayments of a minimum funding requirement - amendments to IFRIC 14

On 26 November 2009, the International Financial Accounting Standards Board (IASB) issued Prepayments of a Minimum Funding Requirement which amends IFRIC 14 IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction.


Why did IFRIC 14 need to be amended?

The amendment was made to remove an unintended consequence when an entity is subject to minimum funding requirements (MFR) and makes an early payment of contributions to cover those requirements.

If a pension asset cannot be recovered by a refund, its carrying value is restricted to the amount recoverable through reduced future contributions. When an entity is subject to MFR for future service, the amount recoverable is currently defined as the present value of:

a) Future current service costs (net of employee contributions), less
b) The part of the future MFR that relates to future service (as distinct from the part of the MFR that relates to past service).

It follows that if (b) exceeds (a), then no asset may be recognised. In some jurisdictions, the MFR are set on much more prudent basis than the IAS 19 measure of service cost, with the result that so far no asset was recognised.

The problem identified in practice relates to the ability, in some jurisdictions, to prepay the future MFR. Such a prepayment result in an increase in plan assets, with IAS 19's restriction then applying to the higher surplus. If it is the case that no asset can be recognised, the attendant loss is recorded in the period the prepayment is made.

The amendment requires entities to treat the benefit of such an early payment as a pension asset. Subsequently, the remaining surplus in the plan, if any, is subject to the same analysis as if no prepayment had been made.


Business impact

The changes to IFRIC 14 require entities sponsoring defined benefit plans to assess whether prepayments have been made that now need to be re-assessed for their impact on recoverability on pension assets. Entities applying the corridor to recognise actuarial gains and losses may also need to take into account the potential interaction between corridor and the recoverability of plan assets.