6 September 2010

Sir David Tweedie
Chairman
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
UNITED KINGDOM.

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.

Q1. 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.
 
Q2. 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.
 
Q3. Should entities disaggregate defined benefit cost into three components: service cost, finance cost and remeasurements? (paras 119A and BC14-BC18) Why or why not?

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.
 
Q4. Should the 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.
 
Q5. The 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.
 
Q6. Should entities present:
  1. service cost in profit or loss?
  2. net interest on the net defined benefit liability (asset) as part of finance costs in profit or loss?
  3. remeasurements in other comprehensive income?
  4. (paras 119A and BC35-BC45). Why or why not?

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 operations.
 
Q7.
  1. Do you agree that gains and losses on routine and non-routine settlement are actuarial gains and losses and should therefore be included in the remeasurement component? (paras 119D and BC47). Why or why not?
  2. Do you agree that curtailments should be treated in the same way as plan amendments, with gains and losses presented in profit or loss? (paras 98A, 119A(a) and BC48).
  3. Should entities disclose (i) a narrative description of any plan documents, curtailments and non-routine settlements and (ii) their effect on the statement of comprehensive income? (paras 125C(c), 125E, BC49 and BC78). Why or why not?
    4.

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.
 
Q8. The ED states that the objectives of disclosing information about an entity's defined benefit plans are:
  1. to explain the characteristics of the entity's defined benefit plans;
  2. to identify and explain the amounts in the entity's financial statements arising from its defined benefit plans; and
  3. to describe how defined benefit plans affect the amount, timing and variability of the entity's future cash flows. (paras 125A and BC52-BC59). Are these objectives appropriate? Why or why not? If not, how would you amend the objectives and why?
    4.

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' project.
 
Q9. To achieve the disclosure objectives, the ED proposes new disclosure requirements, including:
  1. information about risk, including sensitivity analyses (paras 125C(b), 125I, BC60(a), BC62(a) and BC63-BC66);
  2. information about the process used to determine demographic actuarial assumptions (paras 125G(b) and BC60(d) and (e);
  3. the present value of the defined benefit obligation, modified to exclude the effect of projected salary growth (paras 125H and BC60(f);
  4. information about asset-liability matching strategies (paras 125J and BC62(b); and
  5. information about factors that could cause contributions to differ from service cost (paras 125K and BC62(c).

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.
 
Q10. 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?

See responses to Q8 ' Q10.
 
Q12. Publish what you pay disclosQ12 Do you have any other comments about the proposed disclosure requirements?

See responses to Q8 ' Q10
 
Q13. The ED also proposes to amend IAS 19 as summarized below:
  1. The requirements in IFRIC 14 IAS 19 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', as amended in November 2009, are incorporated without substantive change. (paras 115A-115K and BC73).
     
  2. 'Minimum funding requirement' is defined as any enforceable requirement for the entity to make contributions to fund a post-employment or other long-term defined benefit plan. (paras 7 and BC80).
     
  3. Tax payable by the plan shall be included in the return on plan assets or in the measurement of the defined benefit obligation, depending on the nature of the tax. (paras 7, 73(b), BC82 and BC83).
     
  4. The return on plan assets shall be reduced by administration costs only if those costs relate to managing plan assets. (paras 7, 73(b), BC82 and BC84-BC86).
     
  5. Expected future salary increases shall be considered in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefits in later years. (paras 71A and BC87-BC90).
     
  6. The mortality assumptions used to determine the defined benefit obligation are current estimates of the expected mortality rates of plan members, both during and after employment. (paras 73(a)(i) and BC91).
     
  7. Risk-sharing and conditional indexation features shall be considered in determining the best estimate of the defined benefit obligation. (paras 64A, 85(c) and BC92-BC96).

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:

  1. incorporate the requirements of IFRIC 14 'IAS 19 ' the limit on a Defined Benefit Asset ' Minimum Funding Requirements and their Interaction' which is consistent with the objective that interpretations are transferred to the relevant Standards when the source standard is being amended. However, it would be useful if the term 'enforceable' were explained or defined. For example, in addition to legislative and trust deed requirements in Australia actuaries are required to advise the regulator, the Australian Prudential Regulatory Authority, if the level of funding falls below a specified level which gives rise to a 'constructive funding requirement';
     
  2. clarify the treatment of taxes payable on contributions. The treatment of contributions tax has been a lively issue in Australia and it is preferable that the treatment be specified in an IFRS rather than local interpretations being developed;
     
  3. specify the treatment of costs relating to the management of plan assets and other administrative costs. However, practical difficulties may arise in separating these types of costs;
     
  4. the treatment of expected future salary increases;
     
  5. the treatment of mortality assumptions;
     
  6. clarification in respect of the treatment of those schemes involving risk sharing and conditional indexation.
Q14. 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) and BC75(b).

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.
 
Q15. Publish what you pay disclosQ15 Should entities apply the proposed amendments retrospectively? (paras 162 and BC97-BC101). Why or why not?

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.
 
Q16. In the Board's assessment:
 
a. the main benefits of the proposals are:
  i. Reporting changes in the carrying amount of defined benefit obligations and changes in the fair value of plan assets in a more understandable way;
 
  ii. Eliminating some presentation options currently allowed by IAS 19, thus improving comparability;
 
  iii. Clarifying requirements that have resulted in diverse practices;
 
  iv. Improving information about the risks arising from an entity's involvement in defined benefit plans.
 
b. the costs of the proposal should be minimal, because entities are already required to obtain much of the information required to apply the proposed amendments when they apply the existing version of IAS 19.

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.

 
Q17. 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.

Yours sincerely
Group of 100 Inc

 

Peter Lewis
National President