6 September 2010
Sir David Tweedie
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
Dear Sir David
ED 2010/3 Defined Benefit Plans
The Group of 100 (G100) is an organization of chief financial officers from Australia's largest business enterprises with the purpose of advancing Australia's financial competitiveness. The G100 is pleased to provide comments on the Exposure Draft.
In the G100 submission on the Discussion Paper we supported the retention of the corridor approach. Since the corridor approach is well understood and established practice little benefit will be served by proscribing its use as part of a short-term project prior to undertaking a more comprehensive review of accounting for long-term employee benefits.
Our responses to the questions raised in the ED are provided in the context that while still supporting the retention of the corridor approach, the proposals are likely to proceed.
The ED proposes that entities should recognize all changes in the
present value of the defined benefit obligation and in the fair value of
plan assets when they occur. (paras 54. 61 and BC9-BC12). Do you agree?
Why or why not?
The G100 agrees that all changes in the present value of the defined
benefit obligation and the fair value of plan assets should be
recognized in the period in which they occur. However, we are concerned
about where the effect of those changes is reflected in the performance
statement and how they are described in order to differentiate between
operational and non-operational factors.
Should entities recognize unvested past service cost when the related plan
amendment occurs? (paras 54, 61 and BC13).
The G100 believes there should be consistency between the requirements in
different IFRSs. For example, IFRS 2 'Share-based Payment' requires increases in
benefits within the vesting period to be allocated over the period of service
until vesting occurs. It is not clear why a different approach is proposed in
respect of plan amendments.
Should entities disaggregate defined benefit cost into three components:
service cost, finance cost and remeasurements? (paras 119A and BC14-BC18) Why or
The G100 does not agree with proposals to identify the components of defined
benefit costs. We do not believe that the components as described will provide
useful information for decision making nor help users to understand why changes
have occurred during a period. The G100 is concerned that the separation of the
service cost component and the finance/interest cost will not appropriately
reflect and display the employee remuneration costs incurred by the entity.
service cost component exclude changes in the defined benefit obligation
resulting from changes in demographic assumptions? (para 7 and BC19-BC23). Why
or why not?
The G100 supports the proposal that the effect of changes in demographic
assumptions not be included in the determination of the service costs as factors
such as changes in mortality rates, staff turnover and early retirement
incentives are not directly related to employee performance and should be
included as a measurement adjustment.
ED proposes that the finance cost component should comprise net interest
on the net defined benefit liability (asset) determined by applying the
discount rate specified in para 78 to the net defined benefit liability
(asset). As a consequence, it eliminates from IAS 19 the requirement to
present an expected return on plan assets in profit or loss. Should net
interest on the net defined benefit liability (asset) be determined by
applying the discount rate specified in para 78 to the net defined
benefit liability (asset)? Why or why not? If not, how would you define
the finance cost component and why? (paras 7, 119B, 119C and BC23-BC32).
The G100 does not agree with the proposed approach to the treatment of the expected return on plan assets. We believe that although there is reliance on assumptions in determining the expected return on plan assets that does not preclude the use of the current approach. For example, in accounting for defined benefit plans assumptions relating to the expected return on plan assets form part of a raft of assumptions. Assumption made include those relating to future wage and salary levels, price inflation and actuarial assumptions. We consider that the robust nature and overall effect of making these assumptions deals appropriately with concerns about the degree of subjectivity involved. Further, subjectivity and judgmental elements are already addressed in paragraph 120 A(1) relating to providing a description of the basis used to determine the overall expected return on assets and the proposals to provide information about key actuarial assumptions. The G100 does not believe that the proposed change will enable users to assess the likely amount and timing of future cash flows because the economic benefit expected to be achieved on the plan assets is not adequately reflected in profit and loss.
For example, where the expected return on plan assets is higher than the discount rate (which will be the common case particularly in Australia) the profit and loss contains a bias towards overstating the cost of employee benefits because the return on plan assets will be consistently understated. In addition, the level of contributions expected to be required will be less than the employee benefit expense recognized in the profit and loss. This is likely to be confusing/misleading to users and the profit and loss will not be a reliable indicator of the amount and timing of future cash flows.
The proposals also extend the inconsistency/non-comparability issue arising in the paragraph 78 requirement to use market yields on high quality corporate bonds of similar term and currency. The implication of paragraph 78 is that Australian entities must use Commonwealth government bond rates which are lower than the corporate bond rates being used in international markets. This places Australian entities at a competitive disadvantage to their peers in, say, the United Kingdom and Europe who are able to use a higher discount rate.
The G100 believes that in view of these concerns the existing approach
should be retained pending a more comprehensive review of accounting for
defined benefit plans.
Service Cost: The G100 agrees that as a cost of consuming employee services the service cost component of defined benefit cost should be included as part of employee cost in determining operating profit.
Net Interest: The G100 questions whether it is appropriate to treat the unwinding of the discount as a finance cost of the entity in these cases and not as part of the employee cost. We believe that this cost is more appropriately classified as part of employee remuneration than as a finance cost. However, if the proposal is proceeded with it is suggested that a distinction be drawn between those finance costs incurred on borrowings etc and those identified as part of the process of determining the present value of liabilities.
Remeasurements: The G100 agrees that the effect of remeasurements should be
presented as an item of OCI because these amounts do not directly relate to the
operating profit of the entity. Fluctuations in long-term value due to
remeasurements can be quite volatile and if included in determining operating
profit are likely to distort the underlying performance of the entity's
The G100 agrees with these proposals. However, it would be useful if guidance
were provided to explain how to distinguish between routine and non-routine
settlements. This would also facilitate the preparation of the narrative
disclosure on non-routine settlements.
states that the objectives of disclosing information about an entity's defined
benefit plans are:
The G100 supports a principles-based approach to determining disclosure
requirements and considers that the proposed objectives of disclosure are
appropriate. However, having stated the objectives/principles the extent to
which detailed disclosure requirements are set should be minimized. This
approach is consistent with that proposed by the G100 in its 'Less is More'
To achieve the
disclosure objectives, the ED proposes new disclosure requirements, including:
The G100 considers that having specified the objectives of disclosure it should be sufficient for the proposed new disclosure items to be included as guidance as to the type and nature of disclosures that would normally be made in meeting the objectives. As such, the specific disclosures, which except for a requirement for sensitivity analysis, are reasonable and should not be mandated.
The G100 believes that excessive emphasis is being placed on proposed
disclosures to provide sensitivity analysis of specific items. We believe that
the benefits of such disclosures to users are not justified by the costs and
efforts required in their preparation and in explaining their significance and
meaning to users.
The ED proposes additional disclosures about
participation in multi-employer plans. Should the Board add to, amend or delete
these requirements? (paras 33A and BC67-BC69). Why or why not?
The G100 believes that the proposed disclosures should be included by way of
guidance/illustration of applying the disclosure objectives/principles rather
than as mandated disclosures.
|Q11.||The ED updates, without further reconsideration, the disclosure requirements for entities that participate in state plans or defined benefit plans that share risks between various entities under common control to make them consistent with the disclosures in paras 125A-125K. Should the Board add to, amend or delete these requirements? (paras 34B, 36, 38 and BC70). Why or why not?|
|Q12.||Publish what you pay disclosQ12 Do you have any other comments about the proposed disclosure requirements?|
The ED also proposes to
amend IAS 19 as summarized below:
Do you agree with the proposed amendments? Why or why not? If not, what alternative(s) do you propose and why?
The G100 agrees with the proposals to:
IAS 19 requires entities to account for a defined benefit multi-employer
plan as a defined contribution plan if it 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. In the Board's view, this would apply to many plans
that meet the definition of a defined benefit multi-employer plan. (paras 32(a)
Please describe any situations in which a defined benefit multi-employer plan has a consistent and reliable basis for allocating the obligation, plan assets and cost to the individual entities participating in the plan. Should participants in such multi-employer plans apply defined benefit accounting? Why or why not?
Multi-employee and industry plans are not common in Australia. The G100
understands that participation in these plans involves contractual
agreements/legislation and considers that the accounting should reflect those
agreements. However, it is common for companies to establish group-wide plans
and for subsidiaries to participate in these plans.
Publish what you pay disclosQ15 Should entities apply
the proposed amendments retrospectively? (paras 162 and BC97-BC101). Why or why
The G100 considers that compliance with the proposed changes would constitute a
change in accounting policy as described in IAS 8 'Accounting Policies, Changes
in Accounting Estimates and Errors' and should be accounted for as such.
In the Board's
Do you agree with the Board's assessment? (paras BC103-BC107). Why or why not?
The G100 believes that the failure to address the discount rate requirements, in addition with the proposal to combine expected return on assets and interest cost will result in a lack of comparability of defined benefit plan expense and defined benefit obligations.
Do you have any other
comments on the proposals?
Yes. The G100 supports the proposal to treat all long-term employee benefits such as long service leave in a similar way to defined benefit plans. It is anticipated that this treatment will provide enhanced comparability and consistency of treatment and will reduce the volatility of operating profit because the effects of changes to actuarial and economic assumptions will be reflected in OCI.
Group of 100 Inc