Background: IFRIC 14 - Class Notes

IFRIC 14 – Class notes
BACKGROUND
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. Asset ceiling is defined 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 (MFR) exists. MFRs 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, an MFR may limit the ability of the entity to reduce
future contributions.
ISSUES
Following issues have been addressed in this IFRIC:

1. when refunds or reductions in future contributions should be regarded as available.
2. how an MFR might affect the availability of reductions in future contributions.
3. when an MFR might give rise to a liability.
1) AVAILABILITY OF A REFFUND 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 realize it at some point during the life of the plan or when the plan liabilities are settled. An entity
shall determine the maximum economic benefit that is available from refunds, reduction in future
contributions or a combination of both.
Economic benefit available as refund

The right to refund
A refund is available to an entity only if the entity has an unconditional right to a refund. It can exist
whatever the funding level of a plan at the end of the reporting period. However, 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 recognize an
asset.
Measurement of the economic benefit

1. 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, 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. [Note: It impliedly means that if a fixed certain amount of cost will be deducted then it must
be discounted using the same discount rate as used for DBO and plant assets]
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IFRIC 14 – Class notes
2. 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
realizable only at a future date.
Economic benefit available as a contribution reduction

If there is no MFR 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.
2) EFFECT OF MINIMUM FUNDING REQUIREMENT ON REDUCTION IN FUTURE CONTRIBUTIONS
If there is an MFR relating to future service, the economic benefit available as a reduction in future
contributions is the sum of:
(a) Prepayment in respect of MFR contributions relating to future service; and
(b) Estimated future service cost for each period over the shorter of the expected life of the plan and the
expected life of the entity less MFR contributions required for future service ignoring prepayment in
(a) above.
Limit for (b)
While discounting the amounts in (b), if the MFR contributions required for future service exceed
the future service cost in any year, then it will be taken as a negative for discounting purpose.
However, the total present value of (b) can never be less than zero.
3) WHEN A MINIMUM FUNDING REQUIREMENT MAY GIVE RISE TO A LIABILITY
If an entity has an obligation under an MFR to pay contributions to cover an existing shortfall on the
minimum funding basis in respect of past service, then:
(a) If MFR contributions payable will be available as a refund or reduction in future contributions after
payment
No liability shall be recognized. (in simple words no accounting needed for this obligation)
(b) If MFR contributions payable will NOT be available as a refund or reduction in future contributions
after payment
To the extent that the contributions payable will not be available after they are paid into the plan, the
entity shall recognize a liability when the obligation arises.
Exam note:
- If there is existing plan surplus
Find asset ceiling adjustment for existing surplus separately and determine liability for MFR
contribution separately. Then combine both adjustments to determine final net adjustment.
- If there is existing plan deficit
First find updated plan balance after making MFR contribution (only for the purpose of
working), then determine liability adjustment on that updated balance.
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Background: IFRIC 14 - Class Notes

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IFRIC 14 – Class notes

Following issues have been addressed in this IFRIC:

1) AVAILABILITY OF A REFFUND OR REDUCTION IN FUTURE CONTRIBUTIONS

Economic benefit available as refund

Measurement of the economic benefit

Nasir Abbas FCA Page 1 | 2

Economic benefit available as a contribution reduction

2) EFFECT OF MINIMUM FUNDING REQUIREMENT ON REDUCTION IN FUTURE CONTRIBUTIONS

(a) Prepayment in respect of MFR contributions relating to future service; and

3) WHEN A MINIMUM FUNDING REQUIREMENT MAY GIVE RISE TO A LIABILITY

Nasir Abbas FCA Page 2 | 2

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